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crucial issues in privatization

Crucial issues in privatisation | Mahmud Ahmed

The privatisation programme is currently narrowly focused on the disinvestment of government shares in profitable state-owned and privatised enterprises.

This approach, says a SPDC study, does not lead to any change in management and has no impact on production and employment. The major short-run favourable effect is on the balance of payments and public finance. The sale of UBL and PPL shares to foreign buyers has led to ‘some improvement’ in the foreign exchange reserves position.

The proceeds from the sale of the shares help retire debts and reduce the cost of debt servicing. “In some ways,” says the author of the study, Dr Hafiz A. Pasha, the approach is one of “selling family silver to repay debts” and reduce the cost of debt servicing.

However, the report on ‘The Privatisation Programme’ notes that the subsequent effects are negative. The repatriation of dividends or encashment of shares affects the balance of payments position. Also, by selling shares, the government forgoes the future stream of dividend incomes, especially true in the case of profitable companies like OGDC and PPL, which account for 56pc of the total flow of dividends to the government from state enterprises.

The salient features of the report are as follows. Consumer gains in the current privatisation mode are ambiguous. If higher efficiency translates into lower prices, consumers may benefit. As opposed to this, there is a risk of formation of cartels and exercising of monopoly power, as currently witnessed in the cement and banking sectors.

For example, the margin between the return on advances and on deposits was lower at about 5pc before the large-scale privatisation of banks in the 1970s, as compared to 7pc currently. Privatised banks are also more risk-averse. Only 31pc of their assets are in the form of credit, and as much as 50pc are in government securities, whereas nationalised banks devoted 55pc of their assets to credit and only 27pc to investment in risk-free government Treasuries and bonds.

‘Gains from privatisation hinge crucially on the presence of autonomous, effective and alert regulatory agencies, free from any political influence and with quasi-judicial powers’

Similarly, in the decade of 1970, the share of nationalised banks in the agricultural credit was over 13pc, against 5pc only in the case of privatised banks currently.

The report quotes from an observation of Dr Tahir Pervez, former chief economist of the planning commission, that in the past privatisation process, “transparency had been weak and the regulatory mechanism ineffective and extremely politicalised”.

Dr Pervez recalls the findings of an Asian Development Bank study which assessed the performance of privatised units. Of them, only 20 units appeared to be performing better in manufacturing, and 16 out of 38 units were performing worse.

And Dr Hafiz Pasha stresses that “one of the biggest lessons is that gains from privatisation hinge crucially on the presence of autonomous, effective and alert regulatory agencies, free from any political influence and with quasi-judicial powers. This will protect monopolistic behaviour and emergence of cartels and protect consumer interests”.

On the other hand, but for a few initial steps taken by the government to improve the performance of PIA and Pakistan Railways, the restructuring of loss-making state enterprises has taken a back seat.

The government has also done little to improve the efficiency of the power sector through replacement, modernisation of old plants and transmission systems, and cutting down billing losses. The power sector accounts for 80pc of the losses of state-owned enterprises. This state of circular debt in the power sector makes it unlikely to easily attract strategic investors in Gencos or Discos.

While the privatisation policy is a part of the first chapter on ‘Economic Revival’ in the PML-N manifesto, the PML-government is following the footsteps of the Musharraf regime, which used privatisation as a way of promoting foreign direct investment and shoring up foreign exchange reserves.

The study stresses that the interest of employees needs to be protected; a proper severance package must be offered. In addition, a portion of shares being sold must be allocated to the employees, either individually or collectively, subject to payment of the reserved price.

This proposal, if accepted, might bring one-time benefit to the employees while depriving many of them of their lifetime source of livelihood. The deal may not convince many that privatisation should move ahead going by similar offers to workers in the past in case of privatised units. Some better ways need to be found to compensate for the loss of jobs like training in new trade skills so that they can find new jobs or seek self-employment in businesses being created by a diversifying economy

After stating the views of proponents and opponents of the privatisation programme, the report quotes the point of view of the pragmatics: privatisation should be avoided in the case of “natural monopolies and of strategic assets like natural resources”.

Published in Dawn, Economic & Business, February 23rd , 2015

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