Digging A Deeper Hole

By Amir Zia
Newsline
February 2011

The government’s interference in KESC will have devastating consequences for the future of foreign investment in the country

There appears an uneasy truce between the Karachi Electric Supply Company (KESC) management and the government-backed trade unions. KESC recently bore the brunt of the country’s worst labour violence in recent years, following the sacking of more than 4,000 non-core employees.

However, the government through an executive order, forced KESC management to reinstate these employees, but the thorny issue is far from over.

The signs are ominous. The defiant management has placed the shell of a charred car on top of the main entrance of its head office in solemn remembrance of January 20, when violent protesters went on a rampage, while police and paramilitary Rangers refrained from taking any action.

Dozens of computers, furniture, windows and glass doors of the buildings were smashed by the violent mob. Around 150 cars were damaged and three were set ablaze. At least 15 staff members – from directors to general managers and guards – were badly beaten. “We will never forget” reads a banner below the charred car.

But all this violence and the government’s controversial pressure tactics have failed to force the KESC management to abandon its restructuring plans for this loss-making entity, in which slashing the number of staff remains crucial to its financial health. KESC’s Chief Executive Officer, Tabish Gauhar, categorically stated that the management will launch the Voluntary Separation Scheme (VSS) once again to make KESC viable. But the trade unions, emboldened by their victory, appear ready to take up the gauntlet once again. Labour union leaders have been issuing stern warnings to the management that any new move to retrench workers will be forcefully blocked.

The way the battle lines are drawn between the management and the “non-core” employees – comprising drivers, peons, sanitary workers, security guards and bill distributors – poses a nightmarish situation for any commercial, industrial or business organisation. And the irony is that the government remains largely responsible for creating this mess.

The bitterness on the part of the management of the privately-run KESC, in which the leading Dubai-based private equity firm Abraaj Capital has more than 50% share and management control, is understandable. The government and state institutions simply failed to perform the basic function of providing security to a legitimate and important commercial and public service concern. In fact, the political parties in the ruling coalition – the Pakistan Peoples’ Party (PPP), the Muttahida Qaumi Movement (MQM) and the Awami National Party (ANP) – supported and endorsed the protestors through their respective labour wings. No wonder, the police and Rangers remained paralysed as flags of ruling parties fluttered during the violence.

For their own selfish political ends, all three parties in the ruling coalition have sent a negative message to potential investors across the world, portraying Pakistan as an unsafe place for investment and to do business. The government, through its actions, has proved that it is neither able to provide physical protection nor implement policies and fulfill commitments, even to those who have invested in Pakistan.

Here, we are not talking about the rule of law and security issues in the lawless Taliban and Al Qaeda-infested northern tribal region, but of Karachi – the country’s commercial hub. The crumbling state institutions and the government have failed to establish the writ of the state, even in big cities where in recent years one has witnessed frequent incidents of mob rule.

“The Privatisation Commission of Pakistan and the Board of Investment should now close shop,” says Dr Ashfaque Hasan Khan, a former advisor of the finance ministry. “What will they offer to potential foreign investors and how will they portray Pakistan as an attractive investment destination – through the attack on the KESC head office?”

But failure to provide security was not the sole slip-up of the PPP-led government. The bigger blunder was to pressure the KESC management to reinstate employees, rather than opting for a legal course to settle the labour dispute.

KESC, which booked 14.64 billion rupee losses in the last fiscal year, moved for retrenchment as part of the restructuring plan in which non-core functions have already been outsourced at a fraction of the cost, compared with the internal resources. KESC offered VSS to its non-core employees, which entitled them from Rs 600,000 to 5 million rupees benefit – depending on their seniority. But the political parties’-backed unions managed to convince employees – many of whom are political appointees and ghost workers – that they would be able to reverse this decision or get them higher benefits.

KESC CEO Gauhar was so appalled at the way some top government officials pressed for the reinstatement of workers that he asked them to renationalise the power utility. He refused to attend the press conference along with the government officials, when they announced the labour victory.

KESC management’s frustration is understandable. The government is unable to support them in taking action against defaulters and power thieves and it blocks any move to restructure the organisation – to make it leaner, efficient and viable. KESC’s power theft losses amount to 22%, or around 44 billion rupees of its total power supply.

The government’s interference in the human resource policy of a privately run company not only damages Pakistan’s already stalled privatisation programme and creates a gloomy investment climate, but also sanctions lawlessness and mob rule. The government, which has been paying lip service to privatisation and restructuring of the loss-making state-run organisations, has failed to match its walk with the talk, and the KESC management alone is not the only one facing the brunt of the self-serving policies of the ruling political parties. By supporting the illegal action of the KESC unions, the government has also sealed the fate of reforms in major public sector entities, which are bleeding the country’s financial system dry.

The populist approach will not allow eradication of the menace of overstaffing, political appointments and corruption in major state-run entities which needed a staggering fiscal injection of 250 billion rupees in subsidies in 2009/10. From Pakistan International Airlines to Pakistan Steel and Pakistan Railways – all suffer from this fundamental problem of overstaffing, which is one of the many factors keeping them in the red. Since the PPP government assumed power in early 2008, the problem of overstaffing has exacerbated, as thousands of employees have since been reinstated or given jobs in these loss-making institutions. The KESC affair proves that there is no way to stop this financial bleeding as the PPP-led government appears in no mood to take any unpopular decisions at this point in time.

This approach of running commercial and business organisations like charities and saddling them with unwanted staff have had a disastrous impact on the economy.

The government, rather than providing an enabling environment where businesses and investment can grow and create a genuine demand for workforce, is settling for stop-gap measures. These short-sighted policies will bite the country more in the mid- to long-run, with foreign direct and indirect investment taking a plunge and even local investors putting their plans on hold. To attract investment and put the economy back on the high growth trajectory, the government needs to ensure good and transparent governance, establish supremacy of the law and follow consistent policies. But the present democratic dispensation appears determined to follow a suicidal course.