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Putting Pakistan up for sale
Publication Date : 13-10-2013
It is the biggest sale in Pakistan, but most Pakistanis can’t afford the purchase. Thirty-one state-owned enterprises (SOEs) including an airline, banks, utilities, and shipping corporations have been identified for privatisation. While the government has started the search for new owners for the mostly bankrupt entities, investors and workers wonder if privatisation will help turn these firms back to profitability.
Earlier this month, a coterie of ministers lead by Federal Finance Minister Ishaq Dar announced the government’s plan to privatise 31 SOEs. Another 34 SOEs will also soon be put up for sale. These divestitures are mandated by the International Monetary Fund (IMF), which has made any further release of funds conditional upon the Pakistani government getting out of running businesses and focusing instead on regulating them.
While Pakistanis do understand and appreciate the need to prevent SOEs from disturbing the markets, they also wonder if this transition will help create prosperity rather than subjecting thousands of households to a life of poverty as a number of jobs may disappear from the privatised SOEs. Furthermore, many wonder if privatisation always results in lean and profitable enterprises. A quick look at the recent experiences of privatisation in Pakistan and abroad suggest that execution matters to a great extent and has to be managed with much care.
Privatisation of SOEs in Pakistan started in the early 1990s when Mian Nawaz Sharif, in his first tenure as prime minister, initiated privatisation after the IMF made future transfers conditional upon divestiture. It started with the 10 per cent sale of Pakistan International Airlines (PIA) that netted 274 million Pakistani rupees (US$2.5 million). Between 1991 and 2010, 167 SEOs were transacted by the Privatisation Commission (PC) that generated approximately 476, 212 million rupees ($2 million).
Some independent studies of privatisation in Pakistan suggest that while the state was motivated for the right reasons, the execution left much to be desired. Given the poor quality of service by most SOEs, their privatisation has been welcomed by consumers, but opposed by the employees. Consumers are pleased with the prospect of professional and high quality service whereas workers are concerned that the new owners will try to improve ‘efficiency’ by reducing the labour’s strength.
Writing in the Pakistan Development Review in Spring 1999, Abdul Ghafoor and John Weiss observed that privatisation may ease short-term financial constraints, but it will not create miracles for Pakistan. “Even short-run financial benefits would be at substantial cost if the sector is not properly regulated and supervised,” they noted. Reviewing privatisation in the power sector, they revealed that governments always favoured the policy of partial privatisation that only privatised generation and distribution, but kept control over transmission. With 24 per cent system losses in the past, power producers cannot improve transmission because it has been controlled by the government.
Ghafoor and Weiss further argued that instead of worrying about the mutually exclusive choice between public or private ownership, one should search for the right mix of public versus private ownership.
John Cameron, writing in the Journal of the Asia Pacific Economy in 1997, argued for the systematic monitoring and evaluation of the privatisation process in Pakistan. He observed that privatisation had an impact on the quantity and quality of employment, real output, and fiscal/social policy. Weiss highlighted the need for data collection on the impact of privatisation in Pakistan. In the absence of data, it was not possible to determine the true impact of privatisation on employment.
“Any form of ownership is inevitably imperfect,” wrote Professors John Vickers and George Yarrow as they reviewed privatisation experiences in three countries. They rightly argued that the impact of privatisation depends on the “wider market, regulatory and institutional environments”. The government can mistakenly commit guarantees that, despite the divestiture, will keep the government on the hook. The private sector generating power in Pakistan was guaranteed a sale price and access to cheaper fuel by the government. When the fuel prices spiked, it made the state’s job to provide fuel at less than market rates impossible, shifting the blame for the power crisis on the government.
There are ways to implement privatisation of SOEs without causing massive layoffs and spike in prices of goods and services produced by the privatised units. The chequered history of privatisation in emerging economies reveals its potential to resuscitate sick industrial units. At the same time, there are several other examples where privatisation made matters worse.
The Pakistani government under Nawaz Sharif should certainly proceed with the venture. However, it should do so with a commitment to due process, transparency, and the desire to safeguard workers’ rights.