Posts Tagged ‘Privatization’

Privatization and its Conundrums

March 28, 2016

By Anjum Altaf and Nadeem ul Haque

Should PIA, a State Owned Enterprise (SOE), be privatized or not? It is poorly run, losing a great deal of money, and a drain on the budget. But what does that have to do with PIA being a SOE? Therein lies the real question and some answers to our particular predicament in Pakistan.

If one were to line up all potential services with the smallest in scale at one end to the biggest at the other, readers would likely agree that the smallest (say, tea stalls at a railway station) are better provided privately and the largest (say, national defense) by the public sector. The reasons are not hard to fathom – bureaucracies are not good at adapting to rapid changes in market conditions and consumer preferences; markets cannot exclude those unwilling to pay for a service like national defense.

In between these two extremes, almost all services beyond a minimum scale can be provided equally well by both public and private sectors – ownership matters less than arrangements for management. It might surprise some that the most efficient utilities in the world are in Singapore, all operated by SOEs. The example of airlines itself proves the point – readers can easily look up public and private airlines that are equally successful. In fact, if PIA were to be sold it would most likely be to one of the state-owned Middle East airlines demolishing immediately the argument that an airline cannot be run efficiently by the public sector.

This should bring us to the crux of the issue – it is not that an airline cannot be run efficiently by the state; what is being implied is that it cannot be run by the state in Pakistan. This should immediately raise the question WHY? Why is the Pakistani state unable to run an airline efficiently?

Here one should not be distracted by the argument that has become the implicit rationale for privatization of SOEs in Pakistan – that the public sector is dishonest. This is an invalid basis for deciding how a service is to be provided – one cannot legitimately compare the reality of one sector with the ideal of another. The private sector has an equal share of dishonesty – from the local milkman who mixes water in milk to the shady pharmaceutical companies marketing adulterated drugs, to the global corporations regularly charged with fraud.

This opens up a set of issues. Once the airline is privatized what would be our position on the provision of ancillary services like airport facilities and traffic control and allocation of routes? Wouldn’t these also need to be privatized because otherwise they would remain in incompetent hands and negatively affect the efficiency of the privatized airline?

And if our governments are actually dishonest or incompetent, or both, as alleged, how can we be sure that they would be honest or competent in the process of privatizing a SOE? Isn’t it a fact that almost every attempt at privatization in Pakistan has been dogged by scams? And how wisely would it use the proceeds?

We also know that all services involving human safety need to be regulated. How can we expect a dishonest and incompetent state to regulate efficiently when it is not able to operate efficiently? Wouldn’t powerful private interests subvert the regulatory apparatus to further their interests just as private firms buy out state agents to jigger their electricity bills? Should regulation also be privatized?

We reach a dead end if there are no credible answers to these questions. The logical implications of using the argument of state dishonesty and incompetence for privatization are momentous leading straight to the conclusion, absurd as it might sound, that the state itself ought to be privatized. It would be much more efficient to give the management of Pakistan to the state of Singapore.

Having identified the big question at issue we can return to the relatively minor one of PIA. Airlines operate in a market open to competition and therefore the service can be offered privately without difficulty. Networked services like railways, electricity, gas, and water, on the other hand, are natural monopolies and much more difficult to privatize although examples exist where this has been managed.

At the level of pure theory and in an ideal world, the private sector maximizes profits within a set of externally imposed rules that prevent it from cheating; the public sector maximizes public welfare at least cost in a framework of accountability that prevents it from abuse of power.

Without honest regulation and public accountability neither sector will deliver – we are at best indulging in a second-order debate. Even if PIA is privatized, the state will retain control over huge assets that it would continue to mismanage. The problem that motivated the privatization of PIA will not go away unless we face up to the real conundrum of the incompetent state and do something about it.

This opinion appeared in Dawn on March 27, 2016 and is reproduced here with permission of the authors.

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Social Services: Asking the Right Questions

August 19, 2013

By Anjum Altaf

It is remarkable that the governments of Pakistan and India have not been able to ensure essential social services for citizens – public health and education are in shambles. As a consequence, ill health and illiteracy mar the lives of millions – a human capital deficiency that diminishes the potential of all. The resources diverted to sustaining an ailing population are no longer available for productive investment.

This is not a far-fetched claim. Think of individuals who have to spend a good part of their income to buy treatment – they would have that much less left to invest in their own nourishment or in their children’s education.

What holds for individuals holds for countries as well. A recent study examines what has been termed the calorie consumption puzzle in India – real rural household incomes and expenditures have risen but malnutrition remains higher than in most sub-Saharan African countries that are poorer and slower growing.

Empirical analysis reveals that rapidly rising expenditures on essentials like health care, education, and transport absorb all the increases in total expenditures leaving money available for food unchanged. And expenditures on non-food essentials are rising because of declining supply of social services by the state – private substitutes being more expensive.

The consequences are visible – over 40 percent of children born in the Subcontinent suffer from stunting.

This gross negligence of the state prompts two questions. The first asks why the state has failed to ensure essential services. Many explanations do the rounds – incompetence, absence of political will, and lack of resources being the most popular. Any serious examination renders these implausible. A simpler explanation is that the provision of services remains a low priority for the state and the absence of effective political action has failed to raise the priority – in effect, ‘don’t ask, don’t get.’ We remain trapped in an equilibrium marked by empty state rhetoric and ineffective political action from or on behalf of citizens.

Take as an example the provision of clean water, something everyone knows is vital for good health and whose self-provision diverts household time and income from more productive uses. For years the state has promised clean water and for years citizens have acquiesced in the status quo.

Those who ignore the first question jump immediately to the second – How could services be better provided? Given the disillusion with the state, the answer almost inevitably is the private sector. The debate then gets hopelessly entangled in the ideological pros and cons of privatization.

Asking who should provide social services is misleading because it is an incomplete question. An example should help grasp the point. We often hear the question ‘What is the best diet?’ Any competent dietitian would caution that the appropriate question is ‘What is the best diet for each unique person?’

The same holds for privatization. The wrong question is ‘Who should provide a particular service?’ The right question is ‘How a service might best be provided under existing conditions?’ It is the context that is central – as it varies, so should the answer.

It is here that we run into a major problem that plagues our public policy – borrowing the ‘best practice’ of the day from the West and expecting the same results free from contextual constraints.

A brief history of the provision of water in London should illustrate the importance of context. Till the end of the 19th century, multiple private companies served various parts of the city. They were nationalized at the beginning of the 20th century and the state assumed responsibility for service provision. Towards the last quarter of the century the service was privatized again.

At the very least, one could conclude that there was no single solution deemed best for all times. Each alternative provided a solution good for the moment but gave rise eventually to issues that could not be resolved within the system itself. There were objective conditions that dictated changes in the modes of service delivery.

Summarizing drastically and emphasizing just one dimension for illustrative purposes, the evolution was as follows: There was local private response to localized heterogeneous demand; inevitably private providers cut corners to maximize profit leading to consumer complaints; the inability to regulate forced the state to take over operations; after an interval, bureaucratic inefficiencies led to deteriorating service, higher tariffs, and investment needs; privatization was the solution to overcome these. The major differences between stages one and three were that private firms had grown into global corporations, technological advances had made effective regulation possible, and the state had developed the competence to regulate the private sector.

We can ask the obvious question: Does the state in Pakistan and India that is unable to provide services itself have the wherewithal or the incentives to regulate effectively a profit-oriented private sector not comprised of angels? If not, would the cure not be worse than the disease?

It is not that there are no solutions; there are just no off-the-shelf ones that can be borrowed readily from other places. The bottom line is that the public needs to demand good service and policy makers need to comprehend the realities on the ground. They need to know the local conditions – social, economic, political, legal – to determine what is likely to work or not and they need to be faced with real consequences for poor performance.

Ideological hopes and preferences are not enough; neither are technological fixes. The political process needs to drive demand, educated analysis is required to respond to it, and accountability is necessary to provide the impetus for improvement. All three are weak at this point.

Anjum Altaf is Dean of the School of Humanities and Social Sciences at the Lahore University of Management Sciences. This op-ed appeared in Dawn on August 18, 2013 and is reproduced here with permission of the author.

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The Atomization of Society

June 12, 2013

By Anjum Altaf

One of my insights into Pakistan’s socioeconomic evolution was due inadvertently to my father when, as a student of economics, I encountered his changed post-retirement pattern of time use.

It was the nature of the change that was surprising. I saw him rise early to monitor the water level in the rooftop storage tank, climb down to check the underground one, turn on the electric motor, then switch it off after an appropriate interval. Often the motor would malfunction and he would arrange to have it fixed. Less frequently, someone would be called to clean the tanks.

Over time the pipes to and from the tanks acquired a byzantine complexity with various valves catering to the vagaries of the public supply. A hand pump sprouted in the backyard as a last resort and its water sent for regular testing.

Water consumed a big part of our daily conversation. As a social scientist I was intrigued: What was going on? Privatization was a fad at the time and I could sense that the management of household water had become a private responsibility. But this was not really privatization – as I reflected I realized this was the beginning of the atomization of Pakistan’s urban life.

Privatization and atomization differ in the scale of their operations. A private provider can cater to an entire city; atomization occurs when each household turns into its own supplier.

Conceptually, and in terms of efficiency, this is a huge difference. As an economist, I wondered what the real cost of atomized water provisioning was over and above the tariff that was charged for the intermittent and unreliable public supply.

I published my conclusions in a 1994 paper titled The Economics of Household Response to Inadequate Water Supplies. Not surprisingly, I found that the aggregate costs of atomized water provision exceeded those of a modern water supply system even when I ignored many expenses – for boiling impure water, imputed value of household labor, redundancy costs of induced perversities like installation of suction pumps, costs to the environment, etc.

Over time I have observed the phenomenon of atomization becoming the defining feature of urban life in Pakistan. First it was security with people taking on the responsibility of protecting their assets and their persons. Then it was electricity with the investments in individual power supplies.

As with water, any objective analysis of service provisioning would show that the real costs per unit of atomized provisioning exceed the tariffs at which modern collective supplies can be viably operated by public or private suppliers. People are actually paying more than the higher tariffs they protest.

It is not that people are irrational. In subsequent work I found that households rejected higher tariffs for promised better supplies because they did not believe in the promises – they had lost faith in the possibility of efficient service delivery.

The atomization of society is thus the flip side of the failure of the state in Pakistan where the public sector is grossly inefficient as a service provider and hopelessly ineffective as a regulator of private suppliers. Part of the problem is well known – the use of the public sector for patronage and the unaccountability of regulatory staff.

Equally important, the system design is inappropriate in our context. The role of a monopoly provider is unavoidable for networked services (like water and electricity) where competition is difficult to introduce. But a monopoly provider is not well suited to deliver services at the retail level where variations in demand and income streams are much larger than in developed countries and the rule of law is weak.

Intelligent solutions are possible as I saw subsequently in East Asia. Monopoly providers supply bulk metered quantities to neighborhood blocks with private concessionaires responsible for subsequent retail operations. The performance of various concessionaires is subject to public disclosure to monitor egregious variations in cost or quality of service. Neighborhood committees ensure collective pressure for quick dispute resolution.

This design is not alien to Pakistan where the Orangi Project in Karachi has shown for sewerage that the mix of public bulk infrastructure and private tertiary operations offers a viable model.

Work in rural areas has helped me understand better the natural evolution of service provisioning. Take water: when all households are poor the need is served by the common village well; when a few become better-off, the sensible solution is for them to install private boreholes. However, there is a tipping point – when most households can afford private boreholes, upgrading at the individual level is no longer economically optimal. A central piped supply becomes more cost effective with the few households unable to afford the service subsidized from overall savings.

We are witnessing a perverse ruralization of urban life with affluent households resorting to self-provisioning. It is ironic because most rural localities, in the Punjab at least, have passed the tipping point and are ready for central provision, something I documented in a 1993 paper Rethinking Rural Water Supply Policy in the Punjab, Pakistan.

Transforming cities into giant villages is madness. A way back to sanity in the provisioning of urban public services is possible. What are needed are appropriate system design and the selection of competent managers. But neither is possible without strong and informed demand from citizens.

Learning from experience I tell students that the knowledge we generate as researchers should be directed not to policymakers but to citizens to create an informed lobby for better services. All we need now is to invent a language in which we can communicate with the men and women in the street. Test yourself: Translate Millennium Development Goals into a local language and see how far you can carry the conversation.

Anjum Altaf is Dean of the School of Humanities, Social Sciences and Law at the Lahore University of Management Sciences. This op-ed appeared in Dawn on June 11, 2013 and is reproduced here with permission of the author.

Millennium Development Follies is a companion post that illustrates how we fail to communicate with our own citizens.

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