Last week, the finance minister took a smart U-turn on petroleum prices by not passing the full benefit of oil prices fall to consumers, and he did it innovatively by adjusting the petroleum levy (PL) while fixing the GST at 17 percent. The upward limit of PL, in the budget presented by Miftah in April 18, increased to Rs 30 per liter for diesel (HSD) and petrol (Mogas) - earlier the limits were Rs 8 and Rs 10, respectively.
Asad Umar in opposition was against higher taxation on petroleum; but now being at the hot seat, the ground realities seem to have hit him hard. This will not only increase the overall tax collection but also has enhanced the federal government net revenue potential, as PL is not part of the divisible pool.
Petroleum prices in Pakistan are at discount to the neighboring oil importing countries. It is good to adjust the pricing to narrow the gap. It is a myth that petroleum consumption is inelastic; historic data suggest that petroleum consumption for transportation increases with low prices and vice versa.
The smart move is lauded by analysts and economists. He needs to take more such U-turns for the betterment of the country. A much-needed step is to deal with the ailing public sector entities (PSEs). Asad's view is to not privatise the loss-making companies as the government might not get the right price. The apparent plan is to reform the bleeding PSEs to profit-making entities and then decide on exiting, if at all.
The other reason for not going all out on privatizing the ailing companies is to safeguard the existing employees as private hands may end up being ruthless on the inefficient workforce in bleeding PSEs. That is not an optimal solution as the burden of non-performing few thousands PSEs employees is falling on to the rest of 200 million plus population. Why protect political appointees of the previous regimes at the cost of economy?
The idea floated by the PTI economic team is to have strong and effective independent boards to the likes of Khazana and other East Asian models. The thinking is to do asset stripping and use proceeds from better yielding assets to transform the ailing assets. On paper, this seems a superb idea; but living in a country with host of capacity and governance issues, it may be a pipedream. And seeing the performance of PTI government in the past five months, the chances of failure are much higher than success.
The argument presented for transforming the ailing PSEs is that in many countries, in the last few decades, public sector entities have thrived - like the case of China, Middle Eastern and East Asian economies. In virtually all of these economies, authoritarian regimes led to the success of the PSEs with many rules and regulations compromised in the process.
The weak and fragmented democracies in countries like Pakistan have huge governance challenges in managing the businesses in government domain. That is why in India and some Latin American countries, for example, it is hard to find successful examples of government running businesses. The cherry on top, is the accountability fear in Pakistan that has and will continue to hinder quick and smooth decision-making imperative for running a successful business.
The model of government running businesses is an old socialist thinking and the nationalization spree of 1970s had failed miserably in Pakistan. There are numerous examples of sectors which thrived after privatisation and deregulation in 1990s and 2000s.
For example, 15 cement companies were privatised between 1992-2006, and the sector's dynamics have changed for the better ever since. In the 1980s, cement shortage used to be a norm and ever since the privatisation spree, cement supplies have been well ahead of the demand, and the sector is now exporting the surplus. Cement producing capacity has increased from 8.1 million tons in FY92 to 55.3 million tons in FY18 and is expected to reach 65 million tons in a couple of years.
The gains are not only in capacity enhancement, but the sector's cost efficiencies also improved in the process - in days of rising furnace oil prices, virtually all the companies, transferred their production to coal. The companies in days of higher capacities took the hit without any subsidy from the government. In sectors, where government is involved, excess capacity has to be replenished with government subsides - such as sugar and wheat.
The privatisation and deregulation of banks transformed the sector in Pakistan - the asset base which was used to be infected with willful defaults has now increased multifold with much lower bad loans ratios. There are numerous other successful examples in telecom, edible oil, automobile and other sector where privatisation not only transformed the existing companies but opened up the avenues of fresh investment in Greenfield projects.
The economic policies have to be dynamic and should be beyond egos of personalities. It makes sense to let go of the distribution companies in energy sector and white elephants such as PIA and Pakistan Steel Mills. The government needs to learn from the improvement in K-Electric where supply channels have improved substantially after the privatisation.
One of prime reasons for the energy mess is the poor governance of government owned energy distribution companies and their lack of ability to forecast demand and manage supplies. The previous government came up with an array of new power plants in a short time while the shortage was much less than what was perceived. The distribution companies did not invest enough in T&D networks and as a result, despite excess supply, energy load shedding is far from over.
The government is required to deploy the same strategy used for banking sector in early 2000s, for energy sector today. Privatise the distribution companies and deregulate the sector and make the regulator autonomous by building requisite capacity within.
In case of PIA and PSM, the government has to simply concede. Given the political realities of Pakistan and governance structures, these entities are beyond repair and should be privatised to lower the burden of fiscal leakages.
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