To Pri­va­tise or not?

Enterprise - - Snapshot -

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

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