One Week - Two Bad Decisions

By Amir Zia
Sunday, January 30, 2011
The News

Govt send jitters through corporate and industrial world by taking two highly controversial decisions -- the reinstatement of employees at KESC, allowing import of used cars

These are uncertain and difficult times for industrialists, investors and businesspeople in Pakistan. It is not just the country’s tough economic challenges, energy shortages, rampant corruption and a grave law and order situation which are bogging them down. The “peoples’ government” appears determined to erase -by design or by default -what remains of the little confidence left on Pakistan’s wobbling economy.

During the past one week alone, the government sent jitters through the country’s corporate and industrial world by two highly controversial decisions. The first one pertained to the reinstatement of more than 4,000 non-core employees at the loss-making Karachi Electric Supply Company (KESC), while the second one was to allow the import of up to five-year-old used cars.

Both these decisions reveal how this crumbling economic system operates by threats, pulls, pressures, shadowy deals and even blackmail. Yes, in today’s Pakistan, interest groups are able to force the government to yield to even those demands, which stand contrary to commonsense and prudent business and management principles. The Pakistan Peoples' Party (PPP)-led government appears happy to bend rules and bring fundamental policy changes to appease pressure and interest groups at the cost of the long-term economic interests of the country.

The labour dispute at loss-making KESC is a case in point in which the government endorsed lawlessness rather than standing for the supremacy of law and justice.

Firstly, it failed to provide protection to the KESC management from the violence unleashed by trade unions, backed by labour-wings of the three ruling coalition partners -the PPP, the Muttahida Qaumi Movement (MQM) and the Awami National Party (ANP). Secondly, the government forced KESC’s private management to accept the reinstatement of workers through an executive order instead of ensuring that the dispute gets resolved legally. According to a KESC official, the government and the political parties “literally held us by the throat" and bulldozed this decision.

Most of the sacked employees were political appointees including drivers, peons, sanitary workers and bill distributors. The KESC says that their work has already been outsourced at a fraction of the cost compared with the amount spent on the internal staff. The retrenchment was part of KESC’s restructuring to make it lean and efficient -acceptable in every business model -to make it viable.

The government’s short-sighted approach in handling the affairs of KESC in which leading Dubai-based private equity firm, Abraaj Capital, has 50 percent shares and management control, is indeed a blow to Pakistan’s already stalled privatization programme and dismal investment climate.

The step taken in the name of “workersí welfare” in essence endorses and encourages mob rule, lawlessness and violence and ensures that this unprofitable organisation remains in the red. Pakistan's Privatization Commission and Board of Investment will find Pakistan even harder to sell and portray it as an attractive investment destination because of how the PPP-led government handled the KESC affair, which left its management defiant and angry. At one stage of negotiations, which ended with workers’ reinstatement, the KESC management even offered the government to re-nationalize this institution. The KESC Chief Executive Officer Tabish Gauhar refused to flank the government officials, who proudly announced the labour victory at KESC which last year posted a loss of around 14.64 billion rupees. A few days later, Gauhar vowed to again push for the retrenchment process.

By interfering in the human resource policy of a private-run company, the government has set a bad precedent, which justifies overstaffing, mismanagement and corruption. KESC is not alone in facing the brunt. The much talked about restructuring and reform process of the major public sector entities, which are bleeding the countryís financial system, will now become harder to implement. In fiscal 2009/10, the government provided a staggering 250 billion rupees worth subsidies to these entities, including the Pakistan International Airlines, Pakistan Railways, Pakistan Steel and PEPCO. The financial drain has no way to stop because the government lacks the commitment and will to carry out reforms. The KESC saga proves this.

Commercial and business organisations are not run as charities or provide employment by booking losses. It is the government’s role to create the right environment for private sector businesses where they can flourish. Once this is done, jobs get created automatically as businesses expand and new ones are established, increasing the demand for a workforce. To do this, the government needs to attract both foreign and local investors by transparent governance, establishing the supremacy of law and consistent policies.

Allowing the import of five-year-old used cars is the other bad decision, which is a blow to the manufacturing sector in general and auto-sector in particular. It shows how cartels and importers manage to orchestrate major policy-shifts, damaging the interest and future prospects of the local industry.

The government has relaxed car imports at a time when their sales are down. The auto-industry, having a capacity to produce around 275,000 units annually, is likely to produce 160,000 units in fiscal 2010/11 as high interest rates have made the availability of cheap auto-loans a thing of the past.

The government needed to protect this industry because it directly and indirectly provides around 1.4 million jobs and gives 34 billion rupees in customs duties and taxes annually. Allowing car imports is likely to badly hit this sector, which spent more than 20 billion rupees in expansion over the last four years, and may result in unemployment.

The government’s stand that the import of used cars will benefit the common man remains flawed. Media reports show that most of the 471 vehicles that arrived in Pakistan are of 1300cc and above.

The government’s argument that car prices remain high compared to the other regional countries is weak given the fact that the Pakistani rupee has eroded more than 35 per cent against the dollar since this government took power in 2008. According to the Pakistan Automobile Manufacturers Association, prices of car manufacturing materials surged sharply in 2009 and 2010 including that of steel, which rose by almost 26 percent, polypropylene by 51 percent, aluminum by 49 percent and copper by 82 percent.

“The government inability to understand the industry dynamics that requires stable policies and long planning cycles is striking,” the association said in a recent statement, which underlines the main flaw of this government and its financial managers. They have failed to give confidence to foreign and local investors and businesspeople because of their lack of vision, inconsistent policies, politics of expediency and lack of transparency which transforms their every move into a shadowy deal. One wonders whether Finance Minister Abdul Hafeez Sheikh and his team have any say in these policy decisions - and if the answer is yes, then it is a really poor performance.