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Debating Privatisation | Sakib Sherani

Debating Privatisation | Sakib Sherani

THE government has committed to privatising 16 state-owned entities (SOEs) under the current IMF programme. This is a continuation of PML-N’s economic policy of de-regulation, liberalisation and privatisation embarked upon since the early 1990s, under which a total of 167 entities have been sold off since 1990. In addition, billions of rupees have since been raised by different governments by dis-investment of shares through capital market offerings in a number of public-sector enterprises, with the largest transactions being those of OGDCL and HBL.

The resumption of the privatisation process after a hiatus of several years, largely due to the setback inflicted by the Supreme Court’s intervention in case of the sell-off of Steel Mills in 2007, followed by the lack of interest (on ideological grounds) by the PPP government to pursue this path, has generated a degree of pushback and debate regarding the merits of the policy and process.

This pushback is most evident in the case of the government’s preparation for selling off the national airline, PIA. The airline’s status has been changed via a presidential ordinance, in the backdrop of a firm commitment to the IMF to privatise PIA by end-June 2016. PIA, like most of the entities on the sell-off list, has been run poorly over the past few years, and has accumulated losses of Rs200 billion on its balance sheet. In sum, the entire public sector suffers a cumulative financial loss of around 2pc of GDP annually (or around Rs500bn), mainly on account of losses incurred by the state-operated power sector, Steel Mills, Railways and PIA. In fact, these are the ‘visible’ losses inflicted by the public sector. More transparent management practices, and forensic accounting, will in all likelihood reveal a much larger scale of losses. Accounting for hidden subsidies, and props such as overpricing and the stifling of competition, will capture the true cost of an inefficient and corrupt public sector.

Privatisation is a complex process with merits and demerits.

In the case of PIA, while a complex interplay of factors is thought to be behind its ‘“failure’, including this government’s open-skies policy and installation of cronies with open conflicts of interest, the overstaffing of the airline by successive governments as an employment policy tool has also played a major role. The appointment of conflicted management, politicisation, overstaffing, weak internal financial and operational controls, lack of accountability, the inability to hire (or reward) competent employees and fire corrupt or inefficient ones, combined with a general lack of oversight, are common themes across all SOEs. Perhaps the most pernicious source of inefficiency is the one emanating from the ‘soft budget constraint’ — ie the unlimited recourse to the public budget by loss-making SOEs on account of the fact that bankruptcy is not a credible threat to their management, unlike for private-sector firms.

However, inefficient behaviour and suboptimal outcomes are not a necessary corollary inherent in all public-sector ownership. Frequently cited examples of highly successful and professionally run state-owned corporations include the likes of Emirates, Qatar, and Etihad airlines (all wholly-owned by the state), or Singapore airlines (majority-owned). At the other end of the scale, in terms of size, is Sri Lanka’s Laksala, the state-owned organisation running a network of superb handicraft, gift and souvenir shops which are a revelation. In Pakistan’s own case, PIA was once a stellar airline, competing with the world’s best and achieving the pinnacle of success — all under state ownership.

At the other end of the spectrum, vesting ownership of SOEs in private hands through a process of privatisation does not necessarily guarantee the outcomes which are considered desirable or hoped for. The history of privatisation is also replete with unmitigated failures around the world (Latin America and the transition economies). From a state’s perspective, where distributional objectives are usually more important than profit maximisation, Russia’s privatisation programme of the 1990s, pushed by the US-controlled IFIs under a ‘shock therapy’ and ‘big bang’ ideology, produced massively wealthy and influential oligarchs, but failed to serve the citizens at large.

Closer to home, the privatisation of K-Electric (formerly KESC) has produced mixed results. While the level of customer service and delivery has visibly improved, taxpayers as well as the state have paid a price through hidden transfers and subsidies, and the costs of non-enforcement of the conditions of privatisation especially with regards to investment in Karachi’s electricity infrastructure. One area where the privatisation process appears to have met near-unambiguous success is in the case of state-owned banks in Pakistan. By and large, a previously moribund banking sector has become more efficient and profitable.

Success, or otherwise, of the privatisation process depends on the overriding objective set by the state. It could be revenue maximisation, or containing the loss to the budget. Another objective could be to reduce the footprint of the public sector, spur competition in the economy and foster the development of a vibrant private sector. In general, however, privatising ‘essential’ public services in the presence of market failure has not produced welcome consequences.

Whatever objective is set, only a transparent and competitive privatisation process can increase the chances of success. The potential for abuse is very high, where the government’s cronies and favourites are rewarded not just via a non-transparent and non-competitive ‘rigged’ process, but often, especially in the case of Pakistan, also by the absorption of large-scale liabilities by the public budget before the sale. The latter (injection of public funds) is not reflected in the entity’s sale price, which is sold in haste as a ‘distressed’ asset — amplifying the profits of the connected buyer.

In sum, while privatisation has its drawbacks, in Pakistan’s current setting of poor governance, high corruption and fiscal constraints, continuing with state ownership of many of the SOEs may not be feasible. To fulfil its potential, the privatisation process needs to be transparent and competitive, with the interests of taxpayers, and not just employees, protected.

Published in Dawn, December 25th, 2015

Source: http://www.dawn.com/news/1228625/debating-privatisation

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