Wednesday, 9 July 2014

The Problem with Aid

The aid establishment has grown on the basis of 2 assumptions
1. That there is a capital shortage in poor countries and
2.  That these countries lack the ability to make policy either because of knowledge or information shortfalls.

The world has changed and these 2 assumptions are now untenable. Capital markets are flush with cash and they are eager to push it on to poor countries. The internet and globalization has made knowledge easily accessible to all. Most countries now have all manner of expertise. They are all exporting experts to the west.

Despite these developments aid continues to grow. Financial flows are small. Now aid establishment is retailing policy advice, capacity building and technical assistance.

While reports and consultants are surrounding poor country policymakers making them feel good, talent from those countries is being released to do outstanding work in the west. Yet their governments would rather have aid than bring back talent. And aid seems to be set to facilitate flight of human capital.

The aid establishment is now huge. Bilaterals and multilaterals included we are talking of about 30 offices in Islamabad. All of them have officials who need to justify their presence. For that they have to show an agenda and work. They are playing to their bosses out there and have only a limited interest in the welfare of Pakistan. They have large sums at their disposal and agendas.

Meanwhile, our government’s human resource policies are such that no competent well-educated Pakistani can find gainful, responsible and respectable employment at home. The only option for such talented people is to leave the country. Those who for personal reasons are compelled to stay in the country, they have to be employed by the aid establishment, reporting to junior aid officials and following their agendas.
We all agree that governance is one of our biggest problems in Pakistan. Yet this system of aid perpetuates poor governance. Ministers are treated like royalty by the aid establishment. They are addressed as “Excellency” and given a lot of courtly ceremony. They are wined and dined on international trips that can hardly stand the test of scrutiny. They are invited as chief guests to conference/ceremonies. They are given the pulpit at various events to make empty repetitive speeches. In short, ministers are distracted from their real work and rewarded for keeping the status quo.
The many donor bureaucracies now dwarf country administrations. The latter in any case have been stripped off their human capital and live with outmoded systems and technology, thanks to continued postponement of reform. Consequently, ministries have no ability to develop policy and other initiatives or to react to the various demands that face them. This suits donors who have agendas that need to be served. The less the opposition the better!

The various aid offices and consultants ply ministers with more reports and proposals than the ministry has capability to understand. Serves both parties well but it does postpone reform and hence keeps our administration on a perpetual decline in terms of their capacity. It is not surprising to see all our governance systems are deteriorating.

The continuous supply of consultants, technical assistance, training and conferences puts donors fully in charge of the agenda. When they say we need to measure poverty, everyone turns to it. They spend millions of dollars measuring poverty and arranging conferences for discussing poverty. They pivot to Trade with India, the whole country starts discussing that.

Quite unintendedly, the aid enterprise operates as if it were “dumping” on our intellectual enterprise. Donor advice to cut the deficit while demanding increases in several heads from environment to social safety nets, the government has no money for research in any area. Only donors have liberal funds for research which they use for their agenda. In this environment, the entire intellectual effort of the country works for the donors.

No money is available for local problem solving. For example, in Pakistan there is a consensus that civil service reform is critical for improving governance. Yet because the donors opposed this, the subject has never had any funding for research or conferences or ministerial presentation. The entrenched civil service resists discussion on this reform and donors wittingly or unwittingly oppose the reform.

Our think tanks and universities are depleted of serious research and public intellectuals as the aid enterprise only funds low quality agenda based consulting. Such consulting also is stratified where the meaty contracts go to firms overseas that have symbiotic (often questionable) relationship with aid. Local intellectuals and firms are virtually hired as research assistants by the contracting firms sitting in distant capitals collecting huge overheads and fees.

Perhaps the biggest unintended consequence of the aid enterprise is that the current arrangements are killing the intellectual enterprise in all countries. In this regime, chances of developing a Brookings or a McKinseys in a poor country are minimal. The best option for talent is to migrate.

Angus Deaton has rightly noted that state capacity which is so critical to development suffers the most with aid. Add to that the rapid deterioration in intellect and problem solving capacity of the country and continuing failure to develop becomes somewhat clearer.  

Thursday, 3 July 2014

Privatization or Fire Sale (with Shahid Katdar)

With Shahid Kardar

Happy days have returned. The privatisation process has been resumed in earnest. So goes Islamabad’s self-congratulatory declaration on the Rs38 billion raised from the sale of its 20 per cent stake in UBL. The authors of this article, who probably have been the strongest proponents of the free market in recent decades and have generally pushed for a more market-based open economy, should then be equally happy. We, however, feel that privatisation, done wrongly, can have perverse results. To this end, we refer to this deal to illustrate the several questions that should be widely debated so as to inform the government’s privatisation policy.

As mentioned above, we have long advocated the adoption of a more deregulated, open, market-based economy. Privatisation is but one step in that direction.

Most public policy analysts would agree with the following principles of privatisation:
a) The divestment should improve the efficiency and profitability of the operations of the enterprises being sold;
b) The transaction should be conducted in an open and transparent manner with adequate preparation and time so as to get the best price for a public asset, i.e., adequate price discovery efforts are made. Moreover, the mode of sale should not result in a wealth transfer to the buyer;
c) Improve market competitiveness in general and in the sector in particular;
d) The receipts from privatisation should not be used to fund current fiscal needs since that is likely to slow down much-needed fiscal reforms.

With these principles in mind, we find it very hard to understand the reasons for the fire sale of UBL. It does not satisfy the first objective of improving market efficiency. UBL is already being managed privately and just the sale of an additional 20 per cent stake will not ipso facto lead to an improvement in the efficiency of the bank and thereby induce any difference in the UBL’s bottom line.

The sale of these shares has obviously augmented the government’s coffers (including that received in the form of foreign exchange of $310 million). Yet, the government does not seem to have any plans to retire debt so that it can be verified that the exchequer will recoup the lost dividend stream on these share through savings on debt servicing. Nor is it apparently going to invest the proceeds in projects that will generate income, which will be more than the loss of the above referred dividend earnings. Objective (b) has been enshrined in our law, which requires that privatisation receipts should not be utilised for financing the current expenditure. Yet, available evidence suggests that there is every reason to fear that the proceeds will be used to finance the current fiscal position, resulting in the transgression of the law as well as objective (b).

The government could argue that the sale proceeds will be used for funding its many mega projects. All this clever accounting will do is to facilitate a higher level of unproductive current spending. Given that many of these grandiose projects will generate low returns, and some may even require a continuing government subsidy to meet their costs of operations and maintenance, will such use of the funds not add to our future fiscal problems?
The government has announced that it will respect objective (b) requiring transparent transactions that will facilitate price discovery. Unfortunately, the process has raised a host of questions that need clarification.
1) Why was the pricing down at a discount? The market price was Rs170 per share and the price demanded for this large block was Rs158. The fact that the shares were sold at a lower price raises doubts about the intentions underlying this divestment.
2) The triumphant reports coming out of Islamabad are citing over subscriptions. In such cases, normally, price is bid up. But not here.
3) About eight buyers, including a government entity, the NIT, have acquired the shares. Some brokers, who have bought shares, suggest that they were buying them for someone else. It would be interesting to find out the identity of the final buyer and how long these shares are held. The street gossip is already hinting at where these shares have gone.
4) The market’s perception is that the transaction was rushed. It did not give bidders enough time. Time to an auctioneer’s hammer is important for bringing out the true value of a share.
5) The government was adamant to sell the block as a block. Since eight buyers emerged for a block, why did the government insist that the shares be sold as a block? Could not a different auctioning system (the one used, favoured only those with deep pockets) been employed to fetch a higher price?
6) When a stock market exists and existing shareholders have determined a price, why would the government conduct an off-floor transaction? The reason given to us is that the market was not big enough to handle such a large transaction. This claim needs to be researched and debated. In our view, there are marketing strategies that would allow such a transaction to be done on the floor to maximise value.

Finally, if this divestment results in the consolidation of the holding of the group that already has a major/majority stake, would that be in the public interest, especially if these shares, sold at a discounted price, end up with the current owners? If privatisation increases the concentration of bank ownership a mere handful of individuals could be controlling the money market and the pricing of loans and financial services. There is, therefore, reason to worry about the wisdom of such a privatisation policy.