Mysteries of state profit

Profit is complicated, which is why everyone can not generate it. The choice of the word "generate" was deliberate, to emphasise to Pakistanis, that it is far easier to generate power than to profit from power generation. As a salesman will tell you "Selling is the only thing that contributes to profit. Everything else contributes to cost" - Zig Ziglar. And, selling is all about being perceptive and patient about human emotions, desire, wants and associated demand, virtues which themselves are in short supplies!
The immediate common sense question arising from the above paragraph can best be articulated as: if this is the natural order of profit, than with huge unmet demand power generation should be profitable and there should be no consequent gap in Pakistan?
Welcome to the mysteries of state profit. "The first responsibility of management is to make a profit, because if you don't make a profit than the company will go out of business. If that happens, the workers not only won't get a raise, they won't even have jobs! Your company must make a profit because when they do, everyone benefits" - Samuel Gompers.
In the above quotation substituting management with government, company with country, workers with population and wont even have jobs with unemployment, appropriately summarises the gist of this series on Profit, till now. Irrespective of the debate on similarities between a country and a corporation, the assertion that profit is necessary at all levels, is an absolute truth.
Sudden insight: writing on profit is almost as complicated as making profit, is another absolute truth. At the time of closing Part VIII, the intent was to deliberate upon key differences between private and state profits, the ultimate closure. Since then, realising that without touching upon the vagaries of state enterprises such a comparison would be an exercise in futility, thoughts were directed to the current topic.
"Profit is sweet, even if it comes from deception" - Sophocles. Continuing with the first mystery of state profit in the above example, power is the lifeline of economic growth, all the more reason to have excess supply as opposed to extended load shedding. Power is a cost of doing business, logically a supplier should sell electricity at a profit and an entrepreneur will only purchase if his output is profitable. Power is in substance a state business. Irrespective of what the free markets pundits theorise, huge initial outlay, right of access, political and cultural complexities are credible entry barriers for the private entrepreneur. While power generation is outsourced to the private sector, the complete supply chain remains the responsibility of the state, and going out on a limb, globally.
Nonetheless, with existing unmet demand why is it not profitable for the state to create supply? Apparently, political expediency inculcates the need for the state to subsidise power for the masses. Worse, burdensome subsidies or unwarranted load shedding are effective tools near to an election.
Unfortunately, ensuring supply at less than the cost renders the business unprofitable and coupled with reluctance in expanding or maintaining supply, the situation becomes untenable. The obvious casualties are profitable industries and economic growth. What is not so obvious is that eventually the nation has to always pay for what it consumes.
This principle that the nation has to pay for its caprice is a universal truth and hence is common for all our mysteries. The state can either magically create money which results in inflation or increase taxation to eventually pay for subsidies, which in both cases is synonymous with the populace paying for its wants. And be very clear, in a nation like Pakistan where almost 70% of taxes are indirect, everybody pays, even those who don't consume.
So if eventually everybody has to pay, why persist with this roundabout and spurious mechanism, which in substance is more harmful in the long run, remains a mystery. In the case of power, the circular debt stands at RS 400 billion, which we still have to pay for. Imagine how many power plants could have been established with this kind of funding. Imagine the confidence-shattering impact on investors contemplating setting up power generation.
Moving onto wheat, the support price, contrary to power subsidy, is directed towards the rural populace. The argument is that government intervention is necessary to protect the small farmers from the commodity traders as well as to meet the national objective of self sufficiency in wheat. Presented thus, nobody dares challenge the logic. However is this not reminiscent of Britain's Corn Laws which were criticised and repealed on the grounds that they enhanced profits and political power associated with land ownership? The key opposition by businessmen was that Corn Laws unnecessarily increased labour costs making the country unproductive in all other trades.
Today, with international prices at a low ebb and not projected to rise in the medium term, higher wheat support price increases the cost of bread in the cities, the hub of industrial production. Additionally, the cost of logistics, storage and waste ensure that any surplus is always exported at a loss. Interestingly, the state loses money-exporting wheat and also loses money-importing power, and the general populace pays for both!
Admittedly, crops are a special subject and require a long-term perspective especially considering self-sufficiency for security reasons. The mystery is whether the support price actually benefits the small farmers, or it is an optical illusion necessary for political slogans. Again, lets not forget, everybody is paying for this loss of profit, eventually.
Consider that during the financial year 2010-11, total earnings of Pakistan Railways (PR) amounted to Rs 18 billion including freight revenue of Rs 3.3 billion. All of us bore the cost of subsidising PR which was around Rs 40 billion. Prior to stoppage of Nato supplies, the annual trucking revenue, assuming 400 trucks daily at Rs 120,000 per truck, comes to around Rs 17 billion. The cost of road maintenance was at least Rs 25 billion, depending on who you trust. In view of these statistics, opposition to one of the conditions for ending the blockade, specifically that the PR handles 50% of the freight, is a mystery. Remember the nation, collectively is paying NHA for maintaining the road network in addition to subsidising PR.
Pakistanis as a nation love to talk, but texting? In 2010 Pakistani mobile users exchanged 175 billion text messages, about 5 per subscriber each day. Notwithstanding the contributions to the national exchequer, the sector's total revenue for 2011 was 22% of the total tax collection by the FBR, not considering hand set revenues. Mysteriously, while everyone cribs about the killing cost of living today, everyone still puts their money where their mouth is!
The PIAC, the national carrier's passenger revenue for 2010 was a record RS 95 billion and in the absence of necessary details the best judgement estimate of international travel revenue is say RS 40 billion. Compared with this, Emirates Airline and Etihad Airways together collected, again on a best judgement basis not less than USD 500 million during the same period, which was paid for in foreign currency. Emirates and Etihad are currently operating 47 and 23 weekly flights to Pakistan respectively.
The question is how many Pakistanis will travel in a rented Mercedes when they own a Toyota corolla? The answer is none for all sane Pakistanis. So why the nation as a whole is paying rent in foreign currency for luxurious travel of a few is a mystery?
The above discussion does not suggest, in any manner, rash actions, which rock the boat. In all cases public policy demands careful thought with an across-the-board long-term perspective, including but not limited to consumer choice. What it does purport to point out is that there are mysteries and riddles for the imaginative, out-of-the-box profit-makers to make the most of and in the process help the country.
Humbly, it is hoped that the necessity of this part is now evident and it is not considered as a "filler" episode! Taking cognisance of those who will at this stage point out the cons of state monopolies and cite numerous examples, the next part is expected to tackle that very subject, Insha Allah.