PSE’s losses — the other factors

Corruption is not the only disease that ails PSEs

Demanding efficiency, agility and profitability from public sector enterprises (PSEs), is like dreaming of having apples from an orange tree. Sounds ridiculous doesn’t it? But while most of the criticism is directed against the rampant corruption in PSEs, there is little discussion on basic reasons of the failures of these enterprises.

Before attempting to provide a broader perspective, at the very outset let me make it clear that the following is not to deny or condone the corruption in the PSEs. In this limited space I would like to talk about several other factors that are ailing PSEs and yet are either ignored or underplayed by the media and the parliamentarians.

The trouble is most of the discussion is confused. As corruption makes a juicy story and gets sexy headlines, other factors which weigh more heavily on the balance sheet are not factored in while talking about the PSEs losses and subsidies.

Why the governments of developing countries have not privatized or otherwise reformed these enterprises? A World Bank Vice President Michael Bruno had answered this question well in the mid 90s: “Reform entails political costs. Because politics is integral to reform, a study of reforms in public ownership cannot exclude political analysis.”

For instance at the one end the public wants cheaper and uninterrupted electricity, subsidized gas, wheat and sugar etc. On  the other hand we want all the PSEs managing these utilities and commodities to make a profit, stop taking subsidies from the government and be run efficiently. Interestingly while we are living in an ocean of market economy, our desires are socialistic. Unfortunately the twain does not meet.

Let’s take the example of our desire to have cheaper electricity. The corruption and mismanagement stories that hit the headlines are just the tip of the problem. In the first place the low income people who consume less electricity, that is up to 300 KV are subsidised. The part of this subsidy comes from a higher tariff for the bigger consumers and a part from the government. The size of subsidy for the low income is increasing every year. In the last five years the village electrification has gone up from 1600 villages to 60000 villages. Nobody can grudge the electrification of more villages or for that matter provision of natural gas to the people who live in remote areas. But then when the middle and upper class people crib about higher tariff they should remember, that a minute ago they were complaining that the poor are not getting utilities. Taking electricity or gas to remote areas, maintaining the distribution and transmission system and collection of bills, in a country with no law and order, costs a huge amount to the utility companies. Another important factor is the non-payment of dues by tribal areas, most of the rural areas, even the government organisations from a police station to mosques and madaris. This amount has to be built-in into the electricity tariff along with the high financial cost.

It is politically expedient to place the unemployed in PSEs as an alternate of unemployment allowance. This results in higher management cost and as any HR expert knows over-staffing creates inefficiency. Now after provisioning for all these problems, add to it the theft and corruption factor icing and you have the full story about the utilities, circular debt and rising utility prices. I have not touched the obvious pricing factors like rising furnace oil prices, depreciation, profits of the private sector and the declining share of hydel electricity in the energy pie.

Now a brief overview of public sector commodity trading companies. The TCP is much in discussion these days. Everybody knows that trading in commodities requires agility and on the spot decisions. A PSE has to follow the rules that have been made to check corruption, provide a level playing field to the private sector that trades with them and to ensure that commodities are bought and sold at a profit. At the face of it this looks as the right policy. But the problem is that the quick decisions required in commodity trading are not possible where the whole process takes around 117 days. And if the lowest bidder defaults the process has to begin all over again. That is what has happened recently.

Government’s intervention to subsidise the poor cannot be disputed. But in any economy such subsidies should not be hidden, they should be transparent and given directly instead of burdening the PSEs. In a market economy the government has to get out of business, and then only the issues like selling steel to the favourites at lower rates, over-staffing PSEs with people without merit, making political compromises on pricing the utilities and commodities would be stopped. This would save the country around Rs250 billion a year and also cut inflation which is the most cruel tax on the people.


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