To Privatise or not?
In the 70s, Pakistan followed a policy of nationalisation. The core reason for the radical decision was the perception that national wealth was accumulated in the hands of a few families which had made the economic cycle dysfunctional. Later it was realized that the policy was flawed and nationalization of key economic and social sectors did not serve the country well. This was supported by the fact that the fiscal deficit in 1987-88 reached 8.5 percent of GDP which left no fiscal space for the government.
A glance at Pakistan’s economics would reveal that in 2009-10, losses in government-owned enterprises such as the Pakistan Railways, Pakistan Steel, PIA, Utility Stores, TCP, NHA, Passco and Pepco, reached a total of Rs 245 billion. According to media reports, Pakistan Railways (PR) faces a financial deficit of around Rs 40 billion due to corruption, non-replacement of locomotives and losses incurred by running loss-making passenger trains, while Rs 21 billion was being spent on wages and pensions. The need for privatization of such inefficient public-sector organisations can hardly be over-emphasised.
If the government is serious about running these state-owned entities, it needs to overhaul them from top to bottom but it cannot possibly spend such hefty amounts in an economy that is already in such dire straits. Privitisation is, therefore, the only choice. Well-managed privatization can bring back key investment, the way it happened in India in the 90s. Since 1991 when India privatised major companies, India’s average per capita income growth has been four to five per cent per year while poverty has been declining ever since and has fallen below 25 percent.
Privatization can be very effective if it is transparent, legal and applied across a level playing field.
The philosophy of privatization stems from the role of state in economic life. The thinking of the international financial institutions and free market economists is that the state should confine itself to regulation only and the operation and ownership of industrial enterprises and utilities should be left to the private sector. However, there is an opposite view that in those states that start late in the race of development; the public sector has to play a vital role in accelerating the pace of economic growth. As is in developing countries, the private sector is shy, inexperienced and not equipped to embark on rapid industrialization.
It is also commonly believed that private sector units are more efficient than public sector units. This is not true across the board. In a study which made a comparison between public industrial enterprises and private firms producing similar goods, the conclusion was that changing the ownership of industry from public to private is neither a necessary nor a sufficient condition for more efficient operation of specific industrial enterprises. On the other hand, it is often correctly claimed that due to political interference and over-staffing, the efficiency of the public sector units is reduced.
A key objective of privatization is to encourage direct foreign investment. The direct foreign investment in profitable public units is not likely to be beneficial for the economy, as against the benefit of an initial purchase price, one has to calculate the recurring remittance of profit in foreign exchange for years to come. Direct foreign investment therefore should be attracted by policy and design into new and risky ventures rather than through the purchase of profitable enterprises.
Privatization is a complex exercise with multifaceted implications and must be conducted through an absolutely transparent process with full legal safeguards and watertight procedures.
An essential condition for the success of privatization is that the economy should be deregulated and unnecessary restrictions and procedures for industrial enterprises should be done away with. Privatization should therefore be part of a process to strengthen the private sector by giving it assets as well as improving the regulatory framework for their operation