Business

Public sector efficiency: A billion-dollar challenge

Published

2 months ago

October 9, 2023

Admin

ISLAMABAD:

It is quite topical nowadays that most public sector institutions are operating in the red with piles of debt and plenty of inefficiencies in their operating models. This is just one part of the story.

The real point to ponder is not the financial aspect but the efficiency loss and resulting opportunity cost. The efficiency loss of public sector enterprises in Pakistan is a serious issue that affects the country’s economy and fiscal stability. According to some estimates, only eight public-sector enterprises lose an estimated Rs250 billion annually. The number may go up to Rs1000 billion per year if all state-owned enterprises (SOEs) are taken into account. These enterprises include power companies, railways, airlines, steel mills, and others that provide essential public goods and services. It is well documented that the financial performance of such SOEs has remained unsatisfactory due to various factors such as mismanagement, corruption, political interference, overstaffing, and lack of competition. However, the efficiency losses have not been estimated at all.

The government of Pakistan has initiated various reforms to improve the efficiency and profitability of these enterprises, such as privatisation, governance reforms, restructuring, and performance-based contracts. However, these reforms face many challenges and resistance from different stakeholders, such as employees, unions, political parties, and civil society groups. Therefore, the government needs to adopt a comprehensive and coherent strategy to address the root causes of inefficiency and loss in the public sector enterprises. Some possible measures include:

– Developing a clear ownership rationale for each enterprise based on its strategic importance, market failure, social welfare, and fiscal risk.

– Establishing an independent and professional board of directors for each enterprise that can oversee its management and operations without political interference.

– Implementing a transparent and merit-based recruitment and promotion system for the employees of the enterprises that can ensure accountability and performance.

– Introducing a competitive and market-based pricing mechanism for the goods and services provided by the enterprises that can reflect their true costs and benefits.

– Enhancing the regulatory and oversight role of the relevant ministries and agencies that can monitor the performance and compliance of the enterprises with applicable laws and standards.

These measures can help improve the efficiency and profitability of the public sector enterprises in Pakistan and reduce their fiscal burden on the national budget. They can also contribute to the economic growth and social development of the country by providing quality and affordable public goods and services to the citizens.

Now, to the second part of the story: how to assess the efficiency losses and mitigate them accordingly.

There are various qualitative and quantitative methods and approaches to measure the efficiency of public sector enterprises, particularly the yield of resources, such as human resources, deployed.

An efficient enterprise would be one that produces the maximum possible outputs given its inputs, or one that produces a certain level of output with the minimum amount of inputs. The process of trying to measure a public sector enterprise’s efficiency can therefore be broken down into three steps. First, its inputs and outputs need to be defined and measured. Secondly, it is necessary to define what is feasible – in other words, what outputs could be achieved for any given set of inputs. Finally, the enterprise’s actual inputs and outputs are compared with the set of feasible inputs and outputs. At this stage, one of two questions can be asked: ‘Is it feasible to achieve superior outputs, given the set of inputs being used?’ or ‘Is it feasible to use fewer inputs to achieve the same outputs?’. The way the first two steps are carried out will typically be highly influential on the outcome of the third. If we apply this approach to the public sector enterprises in Pakistan, I doubt if even a few of these would be eligible to be termed as efficient, probably with the exception of the likes of OGDC.

Rather than the traditional approaches of subsidising or privatising state-owned enterprises, we need to ascertain whether allocative efficiency is being attained in these through a comprehensive efficiency assessment or audit. While there is no “ideal” or “standard” performance in the production of government services, especially where competitive conditions obviously do not exist, the most that can be achieved is to develop management and information systems that mirror as closely as possible conditions that will maximise efficiency.

There is a need for a paradigm shift in looking at the rationale and operating modalities of public sector enterprises. While the rationality of public service provision is strong enough to keep these in the public sector, there is no harm in opting for an efficiency approach in designing the structure, operations, and service delivery of such enterprises.

THE WRITER IS AN INTERNATIONAL ECONOMIST

Published in The Express Tribune, October 9^th, 2023.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.

Related Topics:billiondollar challenge efficiency public sector

Up Next

Unlocking Pakistan’s trade potential with Europe

Don't Miss

Time to increase returns for local USD holders

Click to comment

Business

‘Domestic debt restructuring will be painful’

Published

7 mins ago

November 28, 2023

Admin

ISLAMABAD:

As the government maintains silence about its next move after declaring its debt “unsustainable,” former central bank governor Shahid Kardar stated on Monday that Pakistan would need to be in the International Monetary Fund (IMF) to qualify for debt restructuring, and the process would be very painful.

Banks may need to take a hit on their principal loans, the central bank may need to relax prudent regulations to lower capital requirements, and high taxes might have to be imposed on cash withdrawals to prevent a run on the banks, according to Kardar.

He delivered a presentation on the prospects of debt relief during the third Pakistan Prosperity Forum organised by the Policy Research Institute of Market Economy (PRIME).

“Pakistan would have to be in the IMF programme to qualify for the debt restructuring,” said Kardar in response to a question.

The Ministry of Finance’s spokesperson did not respond to questions even after three days regarding whether the government has approached commercial banks for debt restructuring.

The servicing of external and domestic debts appears increasingly unsustainable, with Pakistan’s gross public debt now equal to 667% of revenues compared to the average of 214% for more than 20 comparators, according to Kardar. Kardar also pointed out that wasteful expenditures on low-priority and poorly designed projects have made the debt unsustainable. Prospects for recovery depend on progress in restoring debts to manageable levels.

“Debt restructuring is complex, there are no short-cut solutions, and the government would also face issues like foreign currency swap arrangements, deposits with the SBP, bonds with a large number of holders and covered by New York Laws,” said Kardar.

The former governor said that Pakistan may also not qualify for the G-20 Common Framework for Debt Treatment, meant only for heavily indebted countries. Kardar stated that being lower-middle-income, Pakistan may also not get relief under the G-20 framework. He mentioned that bilateral creditors seem reluctant to suspend debt servicing payments due to difficult financial conditions, fearing credit rating downgrades leading to a loss of access to capital markets.

Domestic debt restructuring

Although the Ministry of Finance has not responded to a question on the future course of action, Kardar highlighted the prospects and challenges of domestic debt restructuring.

The former governor said that if Pakistan seeks the write-down of external debt, foreign lenders would also ask in return for similar adjustments in domestic debt. He predicted that banks, being the largest lenders to a bankrupt borrower, will have to bear the burden of some pain.

Read: FM warns of unsustainable debt

Pakistan’s total public debt has already increased to Rs75 trillion or equal to three-fourths of its economy, with interest payments consuming the entire net federal income.

Kardar said that the “reduction or liquidation of domestic debt will require a gradual approach, involving a combination of significantly negative real interest rates, a moratorium and suspension of interest payments for some years, longer maturities, and some write-down of its face value.”

He said that a substantial reduction in the face value of the banks’ lending to the government would hit the capital base of banks, requiring loans to them at concessional rates. A short-term relaxation of the SBP’s prudential regulations on capital adequacy might be needed for domestic debt restructuring. The former governor suggested that, to prevent large cash withdrawals and a run on banks by depositors, the government might have to impose a hefty withholding tax. This would need to be supplemented by the government guaranteeing all deposits for a two to three-year period.

He said that one option could be a higher tax rate on bank incomes, but he stated that it was not a preferred option. Kardar also mentioned that there was not much space for external debt restructuring, as 48% of the debt is owed to multilaterals and is mostly at highly concessional rates. He added that China, which holds 31% of bilateral debt, was already rolling over repayments of $8 billion but was reluctant to accept losses on its lending portfolio.

The former central bank governor found many similarities between Pakistan and Sri Lanka, another country facing a severe debt crisis.

He said that, like Pakistan, Sri Lanka also granted generous tax exemptions and booked a primary budget surplus in only three years since 1951. Sri Lanka, like Pakistan, financed its unsustainable fiscal deficits through foreign and domestic borrowings, resulting in its public debt jumping to 128% of GDP and interest payments being 72% of revenues.

For this fiscal year, the IMF has estimated Pakistan’s interest payments cost at 92% of the FBR’s revenues.

Published in The Express Tribune, November 28^th, 2023.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.

Business

PSX crosses 60,000 points milestone

Published

1 hour ago

November 28, 2023

Admin

Segregation of client assets is critical as brokers have been penalised for using client money illegally. PHOTO: AFP

KARACHI:

The Pakistan Stock Exchange (PSX) smoothly crossed the psychological barrier of 60,000 points during the early trading hours of Tuesday.

The gains came due to rich individuals and institutional investors making significant new investments in expectation of deep cuts in interest rates and the availability of stocks at low prices.

The PSX benchmark KSE-100 Index hit a new all-time high level of 60,745 points, rising by 1.56% or 934 points before mid-day from Monday’s close at 59,811 points. Penny stocks were the volume leader in the rally including textile, technology, food, bank and steel stocks.

Speaking to The Express Tribune, Arif Habib Limited Head of Research Tahir Abbas said: “The high expectation for a deep 7% cut in the key policy rate (interest rate) by the State Bank of Pakistan over the one-year agreed investors to take new possessions”.

“The central bank is expected to cut its key policy rate to 15% by December 2024 from record high 22% at present…ahead of a potential deceleration in inflation reading next year,” he added

Abbas mentioned that the interest rate cut expectations have made rich individuals and institutional investors relocate their investments to the stock market from fixed-income instruments these days.

Topline Securities CEO Muhammad Sohail said in a comment on X (formerly Twitter) that the PSX is breaking records and the development is “still not surprising.”

The market has gained 50% in only five months to over 60,000 points from 40,000 points. “This is the fastest 50% rise in a few months after 2004,” he wrote.

Read PSX hits fresh record, nears 60k milestone

“When you have an unbelievably low valuation, a price-to-earnings ratio of 3-4%, such recovery is not at all surprising,” Sohail further commented.

Abbas further said the listed companies have booked record high growth in profit of 46% in the first nine months ending September 2023 and added that “accordingly, dividend payments by them rose robustly by 42% in the same period. This is another factor that has attracted new investment at PSX”.

The market is expecting foreign currency inflows worth around $1.5-2 billion from multilateral creditors like the World Bank and Asian Development Bank soon after the IMF executive board approves the release of its second tranche of $700 million to Pakistan in December 2023.

This is another factor for the record-buying spree at PSX.

He anticipated the market reaching 75,000-80,000 points by the end of December 2024 considering all goes well including political stability in the country, economic growth, and global commodity prices remaining stable.

“The next six months seem stable at least”, he maintained.

Business

Completion of key projects increases water storage

Published

2 hours ago

November 28, 2023

Admin

LAHORE:

The completion of eight ongoing water and hydropower projects by Water and Power Development Authority (WAPDA) is set to significantly enhance Pakistan’s water storage capacity and hydel power generation. The carry-over water capacity in the country will increase from 30 to 45 days, with an additional 9.7 MAF water storage.

During a visit to WAPDA House, a delegation from PAF Air War College Karachi, led by Air Commodore Raja Imran Asghar, received a comprehensive briefing. The delegation comprised officers from Pakistan and allied nations.

Read: Water projects presented to Turkish consultants

The delegation learned about the climate change threats and water security challenges faced by Pakistan. WAPDA’s ongoing projects, such as Diamer Basha Dam, Mohmand Dam, and others, were highlighted as crucial for the water, food, and energy security of the country.

Published in The Express Tribune, November 28^th, 2023.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.