Thursday September 29, 2022

Successive govts keep taking popular economic decisions

March 10, 2017

LAHORE: Successive governments have acted like an ostrich by putting their heads in sand on seeing danger, while other regimes were sure they would not be there to face the music as they took decisions that were economically destructive.

Sovereign guarantees for instance were given to the independent power producers (IPPs) with such clauses that bound the government from taking any punitive action against suppliers of power without referring the matter to the referee or international arbitrator.

The government continued deducting large sums from the IPPs on what it considered deviation of the suppliers from the agreement. They did not refer the matter to a referee or arbitrator, but instead tried to get stay order from lower courts just to delay the implementation of the agreement. They know well that higher courts would throw the case on the first hearing.

The government also failed to honour the sovereign commitment of making timely payments of the power supplied by the IPPs. Since the IPPs are mostly owned by Pakistanis with minor foreign shareholders, they avoided embarrassing the government by invoking the sovereign guarantees.

However, since now a sovereign guarantee has finally been invoked, the government would be an international defaulter if the IPPs do not withdraw the case in the international tribunal. It is worth noting that no government in Pakistan has ever won a case in arbitration filed by IPPs. The cost of fighting the case in international tribunals is very high.

The IPPs move prudently, and fight their cases through common attorney that charge around $100,000 per hour. The government must be paying the same amount to its team of lawyers. The IPPs will win the case as there is clear breach of agreement by the power purchaser. The amount of circular debt is piling along with the compound interest that government is bound to pay.

By fighting the case the government is just delaying the inevitable. They expect to pass the burden on to the next government after the elections in 2018. But what if the present regime is again given the mandate to rule?

The story of privatisation is also similar. The loss making public sector entities are losing over Rs700 billion annually. They are taking loans against sovereign guarantees and accumulating high interest as well. No one dares to privatise these white elephants.

Each government announces a revamping plan for the institute before privatising it. This means pouring further resources in the organisation, besides regular losses. It seems the government has yet not learnt its lesson from the past.

Privatisation of Habib Bank and United Bank was delayed on the pretext of revamping. After pouring billions of rupees annually for almost five years, both the entities were privatised at a cost that did not cover even the revamping cost. The regular losses were besides this loss.

This government tried to restructure Pakistan Steel Mills and Pakistan International Airlines (PIA). After three years of futile efforts, the losses in both concerns have increased and the operations have deteriorated.

The prudent way of privatisation would have been to handover these concerns to the highest bidder with the condition that its fixed assets would remain the property of the government for a period of 15 years, and would be handed over to the company if it succeeded in paying taxes equivalent to the value of fixed assets ascertained at the time of privatisation.

The same process should be adopted for privatisation of power sector companies. This way the government would be saving a huge amount of Rs700 billion that it finances annually to bear the losses of these entities.

By delaying the process, the government is simply ensuring that the net assets of all these companies would be much less than the liabilities. Then the government would have to pay cash to the buyer.

The PIA has at least reached that stage, as its assets are much lower than its liabilities. The past two governments have increased the national debt enormously. Pakistan needs governments that reduce the national debt and increase its assets. The practice of passing on the buck to the next government is proving very costly for the people.