Fixing Pensions and Public Pay (Part II) | Reform That Works


This piece is part of a longer article carried by Profit on 30 July 2023. It is being reproduced here with minor edits as Part 2 of a series, Reform That Works, which uses the former minister’s experience in government to comment on reform possibilities for public sector in Pakistan. Part 1 can be found here.

Last time, I ended my commentary on our public sector pensions and pays challenges with the argument that reform in this area will help achieve some important objectives for the Pakistani economy, including a delivery-oriented public sector. In today’s post, I pivot from the medium-to-long-term complexity of public sector pensions towards a more current issue: pay.

Around 3 million individuals are permanent employees of the Government of Pakistan and the Provincial Governments (500,000 plus in KP; 700,000 in Sindh; 1,000,000 plus in Punjab; 250,000 in Balochistan; and around 600,000 in the Federal Government). If we include project employees and employees in autonomous institutions, we are talking roughly 5 to 6 million in total. Given that the total labour force is around 80 million, even accounting for a 700,000 strong army, the public sector employs less than 10% of the labour force.

In absolute terms, this is small.

But dig deeper, and we find a staggering number of people in roles that should not even exist, and certainly not as permanent employees who will draw a salary for 35 years and a pension for 20. For example, in KP, out of 565,000 permanent employees, one will find that roughly 200,000 employees are taken on in Class 4 roles: helpers, drivers, cooks, chowkidars, clerks, stenographers, private secretaries, and so on. By my estimate, this means that we employ well over a million plus people in such roles country wide. Nine out of ten are likely not needed.

The entire recruitment of lower grade employees has morphed into a patronage-based charade, not just for politicians but for senior and mid-level bureaucrats to try to push friends, relatives, and supporters as a favor. Such people are employed not because the operations of the state require their skills, but largely to oblige favoured citizens or voters with jobs. What results is a public sector where the productivity we get from ten employees may not be the same as five in the private sector; less generous people would say one or two.

Fixing public sector pay

What can we do to fix the public sector? As in many other areas, we have had studies, reports, and commissions galore. In our government, there were two attempts at doing this holistically through a Pay and Pensions Commission. The first commission worked too bureaucratically. The second one gave its proposals just as the government changed. Those proposals are now in cold storage again.

The answers are not rocket-science. There are changes required to criteria for recruitment, training, reward and accountability, promotion, rules of business and several other dimensions that will transform our civil services into a more modern government machinery. More specifically, here are six shifts that will help our wage bill challenge; by reducing it; by moderating increases; or by increasing productivity. They will also go a long way in supporting the overall agenda of civil service reform.

Dismantle Universal Pay Scales (UPS)

The belief of many in the public sector that we need to somehow equalize public sector pays, is misplaced. Today, all permanent employees are mapped on a single Universal Pay Scale between Grades 1-22 (BPS 1-22). The Basic Pay for all employees in one grade is within the same band, and the compensation structure is then distorted by a deluge of allowances that make the UPS meaningless anyway, as well as making employee pay structure very difficult to understand. In KP, we counted 106 allowances in the pay structure!

The UPS also implies that federal (PAS) and provincial (PMS) administrative officers, doctors, teachers, engineers in the same grade have the same market value. They don’t. A doctor has a very different market value to an engineer, a DMG officer to a high school teacher to a bank CEO, and a rocket scientist or a computer programmer have skill sets that are even rarer. We just can’t treat different professions the same.

The UPS also results in a vicious cycle where provincial employees compare their pay structure to federal employees and vice versa, and financial managers spend the entire fiscal year trying to parry requests for increase in allowances and to manage strike after strike by powerful employee unions, by doling out money they don’t have, to too many employees, in increments that will never satisfy the needs of employees.

The answer: progressively transition away from the UPS and the BPS 1-22 system to a structure within which provincial pay is decoupled from the centre and from each other, as well as from department to department, to enable autonomous pay structures to take root. Each department would keep the UPS until devising a pay scale in line with their budget and the market value of their professions. In the medium term, this would make pay much more in line with the market for all professions and allow for competitive recruitment policies to be enacted.

Move towards Pay-for-Performance

To compensate for the low basic pay of government officers, a deluge of allowances is added to basic pay. Some are substantial. For example, PAS and PMS officers get an executive allowance (150% of basic pay); doctors and engineers also get similar allowances in KP.

The allowance structure needs to be simplified and redone. Executive allowances, as well as functional top-ups to the basic salary can be converted into a performance-based variable allowance. The introduction of this could be in phases, but one can start with the post of the Secretary, who heads a department. One way of making this effective would be to force-rank peer groups on a six-monthly or annual basis. Every department could then roll out their own performance-based pay structure.

This change, done correctly, would mean that increased bonuses could incentivize or reward improved work outcomes by employees. In a system with no real means of reward, that could be transformative.

Reimagine employee benefits

If there weren’t such resistance to change, government employees could get a much better benefits package than they do currently, at no additional cost, or in some cases, saving significant amounts of money.

Housing: less than 1% of public sector employees are provided with housing. The rest get a meagre housing allowance. Ironically, senior officials with their own accommodation get a bigger “housing subsidy” than the “house rent allowance” provided to employees renting from the market. A revised allowance structure would have a market-based House Rental Allowance that would be revised upwards every three years based on a market survey. All employees could be eligible for a low interest loan to purchase land and build their own house or apartment. The government would exit from the business of building housing for their employees. If any housing projects were really required, these could be done as Public-Private-Partnerships (PPPs).

Vehicle Monetization: there are around 20,000 vehicles in the possession of the KP government, and probably around 150,000 with governments across Pakistan. In KP alone, over Rs 2 billion a year is wasted on procuring new vehicles; up to another Rs 1 bln on maintenance; close to Rs 10 bln on fuel; this despite a so-called ban on the purchase of vehicles. The Punjab government recently procured vehicles worth Rs 2 billion for senior officials in one go. All this money could be put to better use, and a revised car monetization policy would minimize vehicles procured by the government (only to be done in departments such as the police that require pool cars); and all government servants could have access to a vehicle lease-to-own scheme as happens in large corporations. Lower grade employees could lease motorcycles. As a one off, the sale of vehicles to respective owners could generate over Rs 20 bln in KP alone, and between Rs 100 bln and Rs 200 bln nationally, while significantly reducing recurrent cost.

Medical Coverage: the very poor medical allowance given to government employees in no way provides any meaningful medical cover. At zero cost, this can be replaced by high end medical insurance, a top up to the existing Sehat Card. To finance this in KP, the Rs 15 billion spent on the medical allowance would be more than enough. The top-up medical insurance programme could have a one-time opt-out for employees, but it is highly unlikely anyone would take such an option. The new allowance would increase coverage from the basic Rs. 10 lakhs per family, to options of Rs 25 lakhs, Rs 50 lakhs, Rs 75 lakhs and Rs 1 crore per year per family. The programme would have medicine and OPD coverage on co-payment. Once rolled out, it could be scaled up as a top-up insurance programme that is offered to the public as well. The top-up insurance, because it would be funded, would also help to make the Sehat Card sustainable in the longer term. The work on this has all been done in KP, and is only pending implementation by a stable, long-term, elected government.

Embrace contractual employment and outsourcing

Why does everyone in government need to be a permanent employee? They don’t. The job of government is to provide service to citizens, not to be an employment factory for those with a sifarish. Contractual employment and the outsourcing of services allows for the government to bring in talent on demand, as well as to allow the private sector to execute services that cannot be run well under the traditional public sector.

Very few positions require permanent employees; certainly not as many as we think. We need nowhere near the number of new clerks, accountants, stenographers, computer operators, assistants, helpers, telephone operators, or watchmen that are employed every year by the state, for 35 years, and then given a pension for another twenty.

Many functions in government can be outsourced. Chunks of the health and education system can be run in an outsourced manner. The hiring of doctors through the public service commission needs to be complemented by contract hiring of doctors (already done in KP); alternatively, staff can be provided by a third-party provider; rules for hiring in autonomous entities can be revised to reflect best practices of both similarly-positioned bureaucracies outside of Pakistan, as well as those from our own private sector.

Everything else

Even if all of the above is put in motion, we will need ways to ensure that every person paid through the public exchequer provides productive services to the citizens under his/her charge. We may need to think of retraining hundreds of thousands of people, given they are already employed. We may need to consider voluntary golden handshake programmes. Rules to dispose of staff not needed or required will need to be made more practical. The culture of regularization of employees must be stopped.

Why hasn’t all of this been done, given the number of attempts to reform Pakistan’s civil service? Well, almost certainly because reform efforts have always been in the hands of the civil service themselves, and as they say, turkeys don’t vote for Christmas. We don’t have time though, and if Pakistan is to seriously embark on reform that strengthens its economy, civil service reform – and that includes public sector pay – will have to be at the top of the list. And it will have to be politician-led.

Taimur Khan Jhagra, Former Finance Minister, Government of Khyber Pakhtunkhwa


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