Ali Salman

State-of-the-art private sector-led iron ore project couldn’t be able to take off

ISLAMABAD: This is not only the crushing story of a mining entrepreneur in Pakistan. It is also the untold story of how a state eats into businesses its citizens create.

It has been 13 years since Adnan Ghauri, our mining entrepreneur, has been fighting for his rights in Pakistani court system. He is waiting for the execution of a decree of Rs400 million awarded in his favour when he filed a suit against Pakistan Steel Mills (PSM) in 2007.

The story started with his father, Engineer Majid Ghauri, obtaining a prospective licence for exploration of iron ore in Dilband, Balochistan in 1998, following an indication by the Geological Survey of Pakistan, which encouraged the risk-taking entrepreneur to venture into mining business.

The prospective licence was converted into a lease for 25 years – a lease for 54,000 acres of land.

Back then, a French expert advised that the iron ore available in Balochistan was of significantly better quality than that available in France. It was estimated that only one rock in Dilband area had iron ore reserves of 70 million tons.

The feasibility indicated annual production of 400,000 tons of iron ore from the area. According to estimates, Pakistan has around 1,497 million tons of low to high-quality iron ore available.

After making necessary preparation and investing in research and technical support, the newly formed mining company started extracting iron ore.

It entered into a contract with PSM in July 2004 and set up a crushing plant next to it to facilitate the supply of iron ore.

PSM was, and still is, the only steel mill in the country with blast furnace technology – all others are only re-rolling mills, ie they recycle scrap. PSM entered into a contract to buy 120,000 tons of iron ore from the Dilband project.

PSM, after placing an order, repudiated its contract, and started importing iron ore from Iran, which was three times expensive than the local ore. It forced the mining company to foreclose and sell its properties to repay bank loans.

The company went into court and arbitration and got a decision making the arbitration award rule in its favour, which is yet to be implemented.

The company went out of iron ore mining business eventually, though its directors have continued to operate in different segments, including local assembly of special purpose vehicles, used for drilling water wells and mineral exploration.

While the Dilband project was a private investment, the government had set its eyes on entering the mining business. Not soon after mining operations started in Dilband, Balochistan government started its own mining company.

Many years after this, company officials would complain to the high-ups as to how a private entrepreneur could perform the same operation at a fraction of the cost.

In the case of private sector, the entrepreneur would live in a container, would travel in a used vehicle and would eat simple food.

In the case of a government department, the lunch would be supplied in boxes by a five-star hotel in Quetta, many cars would be bought in advance and a proper residential compound would be built first – before business may commence, or actually regardless of the business.

Various parts of the work were given to private parties on the usual government contract terms. That is how a government would conduct a business.

Many years later, this story was repeated in Punjab, which saw the setting up of a mining company instead of offering proper incentives to the private sector for entering into this business.

The government, instead of becoming a facilitator to the private sector, has become its competitor. The result is that despite having vast reserves of iron ore, Pakistan has not exploited them so far.

A Planning Commission paper cites lack of a business-friendly regulatory framework in the mineral sector as an obstacle to attracting investment. The sad part of the story is that the first state-of-the-art private sector-led project of iron ore was never allowed to take off. It was killed by state institutions.

Like every story, there are lessons here. First, the contract enforcement in Pakistan is unreliable, which discourages risk-taking businesses in particular. Second, government entry into the business is harmful for itself, for its people and for businesses. It not only denies opportunities that an entrepreneur can create, it also denies itself potential revenue that it can earn through taxes, and spend this money to improve institutions.

Third, we need better laws. Outdated policies and regulations, which create more obstacles than facilitation, should be repealed.

As this story suggests, while the government is busy getting rescue packages from the likes of International Monetary Fund and World Bank, it is not paying enough attention to fixing the institutions which matter for businesses and entrepreneurs.

The government may survive fiscally but the party will be over soon while the wealth locked in our people, and in our land, will remain locked.

The writer is the founder and executive director of PRIME Institute, an independent free market think tank based in Islamabad

Published in The Express Tribune, February 22^nd, 2021.

Ali Salman

PSM has received staggering Rs334b from taxpayers’ money over past 15 years

ISLAMABAD:

Over the last 15 years, Pakistan Steel Mills (PSM) has got a staggering sum of Rs334 billion from Pakistani taxpayers.

Financed by the public, it has suffered accumulated losses of Rs189 billion since 2009, received Rs90 billion in bailouts and Rs55 billion in salaries since 2005. For the last 11 years, it has generated zero profit.

After peak capacity utilisation of 93% in 2007, it plunged and never crossed more than 15% of utilisation. While it has more than 9,000 employees, its contribution to the industrial development of Pakistan has been nil over the last five years. The mill was shut down in 2015.

At the outset, the Pakistan Tehreek-e-Insaf (PTI)-led federal government deserves accolades as it has not only revived the privatisation programme but is also undertaking probably one of the most difficult transactions ie PSM sell-off.

The most important rationale for privatisation, in the cases where private sector substitutes exist and trade is open, such as PSM, is to cut down wasteful expenditures and losses, which eat into taxes.

If a private sector entity reports losses year after year, it is closed. However, when a government entity reports losses, it is given more budget. This is what has happened in the case of PSM. It is almost as if failure has a reward.

According to a report, by privatising PSM, the government would be saving Rs700 million each month. That money can alternatively be utilised for more productive purposes such as healthcare, education, job creation and investment in water and energy sectors that can yield long-term benefits for the people and the economy.

The government has approved a retrenchment package of Rs20 billion to lay off half or over 4,500 PSM employees to help them. It will ease the recurring financial burden on the government and make the enterprise viable for privatization.

This comes out to be Rs2.3 million per person on average. This money will not last long and by merely being employed by PSM over the years without doing any actual work, these employees may have become unemployable. Therefore, their logical action will be to go for collective action and gather political support for their survival. This situation certainly deserves a careful analysis. People rightly cite the ongoing pandemic and raise concerns about the timing of these layoffs.

However, there cannot be a perfect time for these decisions. Pakistan is under severe pressure from the International Monetary Fund (IMF) to cut down wasteful expenditures. Perhaps, the government should consider maximisation of benefits under the retrenchment package and can customise payments according to the capabilities.

Those employees who are willing and able to work in the industry should be provided with adequate training to increase their employability. Employees with some entrepreneurial attitude can be provided with cash grants to start a business.

And the bitter reality will be that many of these employees may just have to accept the golden handshake.

Will the closure of PSM affect the steel industry? The answer is clearly no. Closure of a factory, which is already shut for the past five years, can hardly be noticed. While PSM produced losses after losses, the private sector was busy in investing in the sector and producing more steel. We have developed a reasonable base for production of steel in the country over the last 10 years.

Whether the sustained losses of PSM and the rise of private sector investment are related is an empirical question and deserves serious research. I recall that Federal Planning Minister Asad Umar always claimed that once in power, the PTI would run state-owned enterprises efficiently through better corporate governance and professional management.

He was always opposed to privatisation. Consistent with his claim, he led the formation of Sarmaya-e-Pakistan Limited (SPL) when he became finance minister.

However, economic compulsions have led the government in a different direction. With PSM transaction, privatisation is back. SPL is gone. It is high time that the PTI rectifies its theory also.

The writer is founder and managing trustee of PRIME, an independent think tank based in Islamabad

Published in The Express Tribune, February 1^st, 2021.

Ali Salman

While public debt is important, the country must not be lost in these numbers

ISLAMABAD:

In November 2016, the federal government was in a happy mood. Pakistan had successfully graduated from an International Monetary Fund (IMF) programme.

China-Pakistan Economic Corridor (CPEC) investments were looking good and gross domestic product (GDP) growth rate was on an upward trajectory.

When PRIME think tank organised its third National Debt Conference exactly four years ago, the speakers including Dr Ashfaque Hasan Khan along with co-author Dr Hafiz Pasha made some disturbing projections.

Presenting in 2016, they projected that Pakistan’s external debt would swell to $110 billion (from $73 billion then) in 2020, the country will be spending at least 40% of its revenue on debt servicing and it will go for another IMF programme in 2018-19. This conference and its proceedings were covered in the media.

Fast forward to November 2020. Pakistan’s external debt stands at $113 billion, the country is spending 41% of its revenue on debt servicing and guess what? Pakistan entered into an IMF programme exactly as per the projection in fiscal year 2018-19.

One projection, however, proved wrong – in 2019-20, Pakistan spent just 17.20% of its foreign exchange earnings on external debt servicing, instead of the projected 40%.

But another projection was right on the money. It was projected that the country’s external debt-to-exports ratio will be 441%. Currently, it stands at 438%.

Unfortunately, these projections were ignored by the then government and I can recall the public rebuke by the then finance minister, who rejected this analysis. Did it help?

Where are we now?

The public debt-to-GDP ratio has crossed 87%, thus violating the constitutional limit of 60% defined in the Fiscal Responsibility and Debt Limitation Act 2005.

To be fair, the federal government does not have many options now. The Economic Coordination Committee (ECC) has approved increase in electricity tariff by 17% and gas tariff by 14% in line with the IMF programme. The cabinet has stalled this given the rising momentum of the opposition.

Despite the shock therapy of foreign exchange regime, which was a step in the right direction, exports have continued to be sticky around $21-24 billion. The government may set whatever targets in the new trade policy framework, these are unlikely to be achieved.

The only hope for Pakistan is a continued and increasing flow of remittances. However, this channel is also coming under pressure due to the changing global political economy, particularly around Iran and Israel.

Additionally, no one is sure how to explain rising remittances in a global economic meltdown in the midst of a worst possible pandemic. I recall that a senior economist used the term remittance plus for this phenomenon.

Roshan Digital Accounts are proving helpful and thousands have already opened their accounts. However, this will only help in improving the current account, which is already in surplus, thanks in part to suppressed imports.

Also, as argued by economist Beenish Javed in her report, the present government has done well by stopping borrowing from the State Bank of Pakistan (SBP). However, this report clearly establishes that debt sustainability indicators have deteriorated.

There is the Medium-Term Debt Management Strategy FY20-23 in place. As a good economic policy document, it is built on three assumptions as targets – GDP growth, inflation and fiscal balance.

The implementation of the strategy is conditioned on achieving these targets. It is no-brainer that the growth rate has gone southward while inflation and fiscal deficit have gone north.

As these targets remain far-fetched and unattainable, the Debt Management Strategy becomes a meaningless document.

However, this does bring home important points. Ultimately, while public debt is important, we should not be lost in these numbers. The underlying characteristic of any economy is the growth as well as its source and composition. Growth can sustain responsibly assumed debt. Similarly, a government which can cut down wasteful expenditures can contain the deficit which becomes a reason for borrowing.

We have lost Rs2.3 trillion in the energy sector alone in the last 10 years and continue to lose Rs2 trillion a year through state-owned enterprises and other inefficiencies.

Money printing is bad as it eats up purchasing power and it is a good sign that the government is not doing it. But borrowing from domestic banks is worse, as it displaces the private sector and yields risk-free profits for fat bankers at the cost of taxpayers. It is these issues that an open debate on national debt can shine a light on.

Debate matters but it is not happening. We were asked to stop organising the National Debt Conference in 2018 after the fifth conference. While the debate was cut off, the debt rise did not rest.

It is true that a dialogue on public debt does not directly solve the problem but silencing the debate can only make matters worse. Sadly, this has happened. Perhaps, it is time to revive the debt conference. Are there any takers?

The writer is the founder of PRIME Institute, an independent think tank based in Islamabad

Published in The Express Tribune, November 30^th, 2020.

Ali Salman

To change this, there is need to share stories of wealth creation without subsidy

ISLAMABAD: “Pakistan is a capitalist country with a socialist mindset.” This was aptly stated by a politician a couple of years ago, who is now part of the present government.

I was reminded of this statement when I read this headline recently attributed to the National Accountability Bureau (NAB) chairman. The chairman is reported to have said “NAB was pursuing cases of people who did not have a penny in the 1980s but owned multi-storey buildings today.”

In January 2019, Prime Minister Imran Khan said that Pakistan in the 1970s “went wrong because we had a socialist mindset, which became a deterrent to wealth creation”.

Speaking to Turkish businessmen then, PM Imran continued that though the socialist governments stepped down in subsequent decades, the mindset prevailed among the bureaucracy.

The recent statement of the NAB chairman shows that the socialist mindset prevails today. He is not alone of course. Our academia and media, which together shape the public opinion, are of socialist mindset, while practically following a capitalist model.

Media owners, for example, know quite well how to make money, whether from government ads or from preferring the rating over anything else. To be fair, one would be too naive to equate this behaviour with capitalism. This can be pure commercialism. But here I am using capitalism to offer a contrast.

What is wrong with not having a penny 40 years ago and owing multi-storey buildings today? Why we have largely a negative connotation about wealth in this society?

Part of the answer lies in what the prime minister mentioned. It was the nationalisation drive of the 1970s and the accompanying socialist rhetoric of the Pakistan Peoples Party which created this perception.

Part of the answer lies in our religious interpretations. It is commonly perceived that being poor is a virtue, which goes against the sayings and practice of the Prophet Muhammad PBUH, himself a successful merchant.

Part of the answer lies in the nexus between businesses and the government. This nexus was founded in the 1960s and has only deepened since then.

Today, we witness the manifestation of this nexus in markets such as sugar, wheat, electricity and housing. In markets, where such a nexus is non-existent, we see no problems. For example, in the domestic clothing markets, even the poorest of the poor in our country can afford some kind of clothing.

As compared to shelter and food, the access to clothing is not perceived as a problem. A government footprint in the form of subsidies for the textile sector exists but that is largely directed at the international market. The domestic market of clothing is open.

In order to change the socialist mindset, we need to share stories of our entrepreneurs, especially those who have created wealth without government subsidy.

We need to explain the process of wealth creation to the public. Those who create wealth in a productive manner, also create jobs and products. They are our heroes. They can be our small neighbourhood store owners and can be owners of large factories.

Inevitably, wealth creation leads to wealth distribution. For example, the entry of a new firm in a market, while assuming the market size remains the same, redistributes the pie wider. In many cases, new entrants, through their innovation, expands the market size.

It should be acknowledged that access to capital does give an advantage over those who do not have this access. All said and done, return on capital and return on labour may not converge in the long run.

However, paths to wealth creation through innovation and creative destruction always remain open and do not require capital as a prior condition. For that to happen, we need social arrangements which can provide a minimum level of education, health care and infrastructure for all.

Needless to say that general peace and easy taxation, as Adam Smith argued, remain critical. Pakistanis are great entrepreneurs. They are also reckless rent-seekers. In search for a better society, we ought to create room for creative destruction and entrepreneurship.

This may exhibit in favourable laws for street vendors. This may be done by abolishing all forms of subsidies. This may also be demonstrated through removing trade barriers.

We cannot do all at once. But in order to change our mindset, we need to take these actions. Capitalism may have a negative connotation for many, but certainly having more socialists than capitalists in a country does not augur well for future generations.

The writer is founder of PRIME Institute, an independent think tank based in Islamabad

Published in The Express Tribune, November 9^th, 2020.