INEFFICIENCY OF PUBLIC SECTOR FIRMS & ITS EFFECTS ON ECONOMY

There is a dire need to evoke awareness in the minds of the public and future managers regarding the impact of inefficiency of public organizations and its impact on economy

By ASHRAF H. AND CHOHAN K.H.
 Oct 10 - 16, 2005

Pakistan is a country blessed with colossal natural as well as human resources. However, the country has been unable to utilize its true potentials. Even after 58 years of independence the country is still included in the group of developing nations. It is not the paucity of resources, which is hindering in the way to prosperity rather the attitude both as an individual and as a nation is to be blamed. It is high time that one should analyze the attitudes and identify the sources of inefficiencies in order to take corrective measures to achieve prosperity and growth. There is a dire need to evoke awareness in the minds of the public in general and future managers in particular regarding the impact of inefficiency of public organizations and its impact on economy of Pakistan.

Pakistan came into being about 58 years ago but still more than 66% of its population has daily income of less than Rs. 100 (ref-1). The basic reason of the economic instability, as discussed earlier, is the poor performance of different state institutions particularly the public sector. There is a general misconception in the minds of most of the Pakistanis that corruption of political leaders alone is responsible for economic problems. There is another school of thought, which believes that perhaps the annual defense budget is a hindrance in progress of the country. No doubt that corruption of political leaders is also a factor contributing towards the problems, but when analysis is carried out, it is found that it constitutes a small proportion as compared to the damage caused by public sector organizations. Similarly, when we see the economic impact at macro level, the defense budget does not stand out as the only source of economic inefficiency. Basically, the poor performance of the public sector firms is to be blamed for current economic situation.

In order to highlight the economic performance of public sector organizations, data for financial year 2002-03 is used to do a simple comparison:

* The defense budget for FY 2003-04 was about Rs. 160 billion (ref-2).

* Swiss bank accounts for which Benazir Bhutto and Asif Zardari were convicted by Swiss court amounts to $ 13 million (Rs. 0.754 billion) ref-3.

* The line losses of WAPDA (Water and Power Development Authority) in the year 2003 amounted to Rs. 140 billion (ref 4).

* Nation had to pay Rs. 241.30 billion as interest on accumulated public debt in FY 2002-03 (ref-5).

* In the last quarter of year 2003 the "Non Performing Loans" (NPLs) amounted to Rs. 252 billion (ref-6).

* The public sector losses of government are hovering at about Rs. 100 billion per year (ref-7).

The performance of just one organization WAPDA when compared with other macro economic indicators is an eye opener. "Line losses of WAPDA amount to Rs. 140 billion per year" (General (r) Zulfiqar, ex-chairman WAPDA) (ref-8). The severity of this statement by chairman of WAPDA can be judged if this amount is compared with the annual defense budget of Pakistan for FY 2002-03, which was Rs. 160 billion.

The power generation organizations or firms operating in the energy sector play a major role in the development of any nation. Unfortunately, the inefficiency of WAPDA (Water and Power Development Authority) & KESC (Karachi Electric Supply Corporation) has cost the nation more than one can imagine. During the FY 2002-03, the losses faced by only these two power sector giants amounted to Rs. 78 billion (ref-9). The accumulated losses incurred by KESC by FY 2000-01 were increased to the level of Rs. 37.1 billion (ref-10). This excluded the losses written off by the government in the form of equity. According to General (r) Zulfiqar, ex-chairman WAPDA, the line losses of WAPDA were 25 percent in the year 2003 (ref-11). This means that for every 100 MW of power, WAPDA generates 125 MW.

During the FY 1999-2000, the government converted WAPDA's pending debt servicing liability of Rs. 36.4 billion into equity. Despite this generous move by the government, WAPDA's losses amounted to Rs. 8.5 billion in FY 1999-2000 (ref-12). WAPDA lost Rs. 54.87 billion purely due to underutilization of its facilities by the end of FY 2001-02. It has a total hydropower generation capacity of 5010 MW out of which only 2000 MW power has been generated (ref-13). During FY 2001-02 to FY 2004-05, government has injected a huge sum of Rs. 176 billion to WAPDA & KESC as subsidies (ref-14). That means government is providing subsidies to the two authorities on the average of Rs. 44 billion per year. The government has provided Rs54 Billion of hard earned foreign exchange to WAPDA for the sole reason of covering its losses (ref-15). Had WAPDA reduced its losses by employing different measures, it would not have been a burden on the government but instead it would have been giving revenues to the government. If only the losses of WAPDA and KESC during FY 2002-03, subsidies provided to the two by the government and under-utilization losses are calculated for the same year, it comes to an astonishing price tag of Rs. 176 billion for FY 2002-03. The figure-2 provides a good comparison of this annual loss with the annual defense budget.

When it comes to the transportation industry, the inefficiency of Pakistan Railway and Pakistan International Airlines (PIA) and the negative impact of the two on national economy is not a secret. The losses faced by Pakistan Railway in the FY 2002-03 had increased to whopping proportions of Rs. 27.9 billion (ref-16). This scenario is worsening each year and the government seems helpless in this situation. Pakistan International Airlines (PIA), which was once a profit earning organization, is also going in losses due to its inefficient functioning. The losses faced by PIA in the FY 2002-03 were Rs. 7 billion (ref-17). In other words, PIA has also become a liability on the government whereas it should have been helping the government in generating revenues.

One major reason of non-performance of the public sector is the poor planning or to be more precise, it is the absence of long term planning and hence inefficient management at all levels. This has far reaching impact on economy both at micro as well as macro levels. It is a well-known fact that due to poor planning and mismanagement the country has experienced large fiscal deficits over the last three decades and currently budgetary imbalance is one of the major macro economic problems, which the government is facing. Interest paid on foreign loans is also reflective of poor planning and management at the macro level due to which the nation is suffering. On December 8, 2004 senate was stunned to know that Pakistan paid a massive sum of $ 13.5 billion (about Rs. 800 billion) interest on its foreign loans during last ten years (ref-18). Nation had to pay Rs. 241.30 billion as interest on accumulated public debt in FY 2002-03. People of Pakistan witnessed another reflection of inefficiency of public sector or the government when a massive sum of Rs. 57 billion was placed under the head of "un-allocable" in the revised budget estimates of FY 2002-03 (ref-19). This is unprecedented in the country's economic history. Placement of such a huge amount under anonymous head is really a bad example of concealment of fiscal data.

In order to achieve national objectives and goals and to make public sector efficient, a culture of honesty and nationalism needs to be cultivated in the society. Today every person is very hardworking and efficient when it comes to his or her individual interests but the attitude of the same person changes in public sector scenario. That is perhaps the reason that majority of individuals are highly non-productive as part of any public sector organization and the same individuals display efficiency and hard work of highest order when it's a personal interest. As discussed earlier, there is also a need to institutionalize the strategic planning at national level. For this the country needs to have a pool of think tanks covering all fields of national as well as economic aspects. These think tanks should act as advisors to the government on all the policy matters. The system should be evolved in such a way that change of governments should not have any effect on long-term policies of the country. This long-term vision or policy is also required to be cascaded down to each public organization and all concerned should be made conscious of it. Hopefully, if successfully implemented, this will have a positive impact on the role of public sector departments/ organizations on the overall national economy.

Authors: Hammad Ashraf is currently working as Assistant Professor at National University of Sciences & Technology (NUST), Rawalpindi. hammad@nims.edu.pk

Lt. Col. Khalid Hussain Chohan, Tamgha-i-Imtiaz (Military) is currently serving Pakistan Army and has recently completed his MBA from NUST, Rawalpindi. chohankh@hotmail.com

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