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The recent privatisation of Pakistan International Airlines (PIA) has generated significant buzz, with some celebrating it as a definitive end to the national carrier’s long-standing fiscal drain. However, a stark reminder from renowned Pakistani-American economist and Princeton Professor, Atif Mian, cautions against premature celebrations: the transaction alone doesn’t automatically stop the fiscal bleeding.
Mian, sharing his insights on atifmian.com, highlighted a crucial detail often overlooked: while a consortium led by AHCL has acquired a 75% stake in PIA for Rs135 billion (exceeding initial government targets), the government retains the holding company, along with a staggering Rs650 billion in legacy net liabilities.
“Put differently, the government walks away with about Rs55 billion in value from the transaction, but it also keeps roughly Rs650 billion of legacy obligations. Netting the two leaves a balance-sheet hole of about –Rs600 billion,” Mian wrote. He further emphasized, “The minus sign matters. And even at a conservative 10% average cost of capital, servicing that legacy burden implies roughly Rs60bn a year in financing costs. The government will continue to pay for the dysfunctions of the past – privatisation or not.”
This means the Rs600 billion burden, approximately, will continue to be a significant annual drain on national resources, irrespective of PIA’s change of ownership.
A Nuanced View: Not Just Rearranging Deckchairs
Despite these daunting figures, Mian stresses that the deal should not be dismissed as mere cosmetic surgery. While a cynic might see it as ‘rearranging the deckchairs,’ Mian firmly believes: “This deal is a step in the right direction.”
He elaborated on two key benefits:
- Removing Debt-Overhang: The privatisation strips the operating airline of its crippling legacy debt, allowing it to function under new management with a renewed incentive to perform.
- New Management Incentives: Fresh leadership can now focus on efficiency and profitability without the burden of past financial mismanagement.
Lessons for the Future: Beyond the Rs600 Billion
Addressing the persistent Rs600 billion liability still on the government’s books, Mian offered two vital lessons:
- Avoid the Sunk-Cost Fallacy: “Past mistakes should not prevent better choices today.” Stripping the airline of its legacy debt and enabling it to operate in a more normal market environment was the right strategic move, even if it doesn’t instantly erase the old bill.
- Government as an Economy Shareholder: The government, through the tax system, remains an indirect shareholder in the broader economy. A healthier, growing aviation sector will lead to higher payrolls, increased sales, and eventually, greater tax revenues, which can, over time, help pay off the Rs600 billion. “The best case after privatisation is therefore not that the Rs600 billion vanishes, but that a healthier aviation sector grows fast enough to help pay it off over time,” he explained.
The Bigger Picture: Beyond Ownership Change
Mian concluded with a crucial warning: Pakistan’s history with privatisation (e.g., banking) shows that while ownership changes occur, sustained growth has often been elusive. This doesn’t mean privatisation is a failure, but it underscores a deeper truth: ownership changes are not a substitute for a broader environment that actively rewards investment, competition, and productivity.
Without nurturing such an ecosystem, Mian cautions, “privatisation becomes a transaction, not a transformation.” The journey to a truly transformed aviation sector and a stronger economy requires more than just selling off assets; it demands fundamental structural reforms and an environment conducive to sustainable growth.
Source: Original Article
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