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Privatisation Pros & Cons!

Privatisation Pros and Cons

A controversy about the privatisation of Pakistan’s State-Owned Enterprises (SOEs) has been brewing from the very onset of this (PML-N) government taking office. Regrettably, the uncertainty about the fate of our public sector organizations compounds with each passing day and ‘uncertainty’ as we know in the corporate world is any organization’s worst enemy.

In its typical autocratic style, the PML-N government is wanting to embark upon perhaps the country’s biggest ever privatisation drive – some say with an estimated value in excess of Pak Rupees 1 trillion – and that too (once again) without first doing a proper homework on merits and de-merits of each transaction separately or sharing in a transparent manner the long term objectives cum post-sale projections of each entity selected for the alteration. Ironically, the Board of the Privatisation Commission (PC), which is already claiming victory on the front of ‘ensuring transparency’, is itself embroiled in controversy. The Chairman of the PC will be well served by realizing that a clean chit on transparency has to come from neutral observers and stakeholders and cannot be ‘self-proclaimed’.
Sadly, the concept of state’s role in the corporate arena and subsequently the selling and managing of state’s assets in an economy is a phenomenon that continues to be mismanaged in Pakistan since the 70s, if not earlier. All along, what the various managers (managing the national privatisation portfolio) failed to understand was that the scope of privatisation is not just limited to sale of state’s companies or assets. In fact the opposite is true. The real duty of the Ministry of Privatisation is to optimize government’s return on its assets while disposing-off un-desire able portfolios can at best be just one of the many functions it ought to be performing. In essence the PC should be overseeing Corporation Pakistan like a management board that uses multiple tools like: private-public partnerships, stock swaps, liquidation where necessary, international joint ventures, strategic portfolio build-ups, mergers and acquisitions, managing agency contracts, instilling professional management, market-share leveraging, etc to ensure that not only does the government overcome its overall deficit in its corporate affairs but also generates revenue from its interests. However, in doing so, it is imperative that the Commission behaves as a state and not as a private manager because in some cases the intangible benefits being driven from a governmental enterprise can far outweigh its financial underpinnings. In the developing world the role of SOE is not merely limited to profit making. Especially in a highly populated country like Pakistan, they also in addition tend to provide a sense of equilibrium in the domestic markets. If managed competently and used effectively they perform crucial national functions like helping to check inflation through supply side consistencies, providing employment, aiding growth, strengthening anti-trust legislations, ensuring equitable distribution of resources and opportunity, and through the sheer dint of their public-ownership sentiment they help in keeping the nation gelled together.

The past quarter of a century has seen several bursts of selling by the world’s governments, mostly but not always in benign market conditions. Those in the OECD, a rich-country club, divested plenty of stuff in the 20 years before the global financial crisis. The first privatisation wave, which built up from the mid-1980s and peaked in 2000, was largely European. The drive to cut state intervention under Margaret Thatcher in Britain soon spread to the continent. The movement gathered pace after 1991, when Eastern Europe put thousands of rusting state-owned enterprises on the block. A second wave came in the mid-2000s, as European economies sought to cash in on buoyant markets. But activity in OECD countries slowed sharply as the financial crisis began. In fact, it reversed. Bail-outs of failing banks and companies have contributed to a dramatic increase in government purchases of corporate equity during the past years. Now, one can elaborate here about how the faulty privatisation vision in the banking sector at home has led to a situation today where the central bank’s leveraging over our banking sector stands dangerously diluted and how our banking sector is currently so visibly ridden with the element of ‘conflict of interest’, but leaving this discussion for another time, the point to note for now is that the recent financial crisis has taught us a thing or two about the importance of state’s presence even in a free market mechanism. Further, we notice that there are quite a few privatisation experiences in Africa and Eastern Europe where the results have not been very encouraging. Instead of helping employment generation and alleviating poverty the sales merely created oligarchs, promoted rent seeking and concentrated wealth in a few hands thereby widening the gap between the rich and the poor. More dangerously, a wrong privatisation push or an unhealthy mix between the private and public sector market presence can end up seriously compromising the power of the regulator and the element of fair play. In a startling report released in 2012 by Kim Moody of UK’s Labor Party, he explains how the British Rail system, which was dismantled and sold off between 1993 to 97, became a mere profit-seeking operation with gross disregard to consumer satisfaction and safety. In the 30 years before privatisation British Rail saw only one fatal accident due to track failure, whereas, in just five years after privatisation there were five fatal accidents caused by signal failures and 39 track maintenance workers were killed between 1998 and 2004 due to lax safety. Indian Railways on the other hand makes a fine example on how a state-owned enterprise can be optimized in terms of service, revenue and employment opportunity.

The notion that the government should not be in the business of running businesses, though partially true, needs to be looked at from the prism of ‘history of economic management’. The history of the dawn of capitalism is full of ventures where governments took upon themselves to assume investment risks for services and product innovations that otherwise would either have just become non-starters or remained confined to only a few select areas or segments of people without yielding benefits to the overall national canvas or the mankind in general. In fact even today most of the multinationals in a way thrive on western governments’ backing and patronage and also if one looks deep down at India’s recently rising global corporate footprint, one notices that the success drives its roots from the notorious and infamous London Club of Indian businessmen that meets regularly at Mayfair and is facilitated in quite a few ways by the Indian Government!
Lately, though the crisis of Western liberal capitalism has coincided with a challenge of a different kind from the new aspirants in this great economic game. A tool itself used sometime back by the likes of East India Company: the rise of powerful new form of state capitalism in emerging markets. State capitalism tries to meld the powers of the state with the powers of capitalism. It relies on government to pick winners and promote economic growth by using capitalist tools such as listing state owned companies to ensure management’s accountability and by embracing globalization. Today they are flourishing in the world’s emerging dynamic economies and also striding out onto the global stage. State-owned companies account for 80% of the market capitalization of the Chinese stock market, more than 60% of Russia’s, and 35% of Brazil’s. They make up 19 of the world’s 100 biggest multinational companies and 28 of the top 100 among emerging markets. And here we are proposing to sell even our profit-making state owned enterprises and eroding national asset portfolio by selling stakes even in those entities whose stock prices are soaring and where professional management and private-sector oversight is already well entrenched?

No one could have phrased it better than Joseph Stigliz, “Asset should be a blessing, not a curse. They can be but it will not happen on its own. And it will not happen easily.” The challenge for the Privatisation Commission also lies in first finding ways and means to turn around our key public sector enterprises and in case a particular sale is necessary to then transparently share a comprehensive plan on how the sale will be a win-win for all stakeholders: the state, employees, buyers, market and the organization itself. Because, tomorrow if that transaction does not yield the desired results then the PC board can be held accountable. In a relatively small economic space, critical sectors like oil and communications tend to be the mainstay of an economy – Going by this, for example a corporation like PSO (Pakistan State Oil) would be too important to be doled out to foreigners or to a few individuals. History tells us that when the power of the state to exercise its writ on the markets gets excessively marginalized the main sufferer tends to be the common man.

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