This article was published as Cover Story
in Daily Pakistan Today on Sunday 2nd February 2014
Link in columns section: http://www.pakistantoday.com.pk/2014/02/01/comment/privatisation-cure-or-castration/
Privatization: Cure or Castration
By: Omer Zaheer Meer
Privatization is coined as a solution to many economic woes facing Pakistan’s economy. It has been hailed as a solution to the woes facing PMLN’s government. The privatization commission has even shortlisted 31 institutions to “sell”. On the face of it, the arguments appear to be sound and make sense. It’s pointed out that a government’s primary function is to run the state affairs and should facilitate the businesses instead of running them. The “white elephants” in the shape of public sector enterprises (PSE) are costing the national exchequer billions of Rupees annually which can be saved and spent on public welfare.
However once we start to dig deeper the situation is not as glossy as it may appear at first. First of all a successful privatization exercise has some pre-requisites like a conducive environment with investors’ confidence, a strong government able to enforce the agreements, proper selection of non-vital PSE’s and a fair process carried out in a transparent manner. Sans this, privatization cannot turn-around the state of PSE’s or the economy. Past experiences are a testament to this.
Once again the incumbent PMLN government is focused on privatization but unfortunately is ignoring the vital pre-requisites. The faulty selection of profitable and strategically vital entities, the extreme haste in the proceedings, missing policy guidelines, a lack of clarity and transparency in processes, non-conducive investment atmosphere and a less-than-desirable track record all warrants caution in examining the proposed solution of privatization.
Amidst the noise of overhauling loss-leaders several profitable institutions are also earmarked for privatization, which besides funneling billions to the treasury are also providing products/services at cheaper rates to the public as compared to the private sector in the international market.
One such example is the Oil and Gas Development Company Limited (OGDCL) which generated a profit of approximately PKR 91 billion in last fiscal year while providing the gas at 40 to 50% of the prices offered by private sector in international market. Another example is Pakistan State Oil (PSO) generating an after-tax net profit of approximately PKR 12,558,000,000 in the year ended 30th June 2013, a 39% increase from the previous financial year. Privatizing such institutions would not only lead to loss of billions to the exchequer but also an increase in the comparatively cheaper prices currently offered to the masses.
A case in point is the handing over of PTCL control to Etisalat by the Musharraf regime in which a minority shareholder effectively got all of PTCL for a paltry sum to be paid in installments still partially outstanding. What is iconic is the fact that Etisalat itself is a PSE of UAE. This means that while as per the proponents of privatization “state cannot run vital services”, however it is believed that a foreign state owned enterprise can come to Pakistan and do the same. And just to analyze how effectively has this privatization venture gone we should realize that the same PTCL which was generating profits of billions of PKR but is now reporting heavy losses despite increased tariffs and with a falling standard of customer service often complained about. Similarly KESC which was sold on the hopes of a turnaround with substantial investments expected in infrastructure by the private party. Unfortunately it has instead become a much bigger white elephant requiring continuous rescue by the government while the new private owners continue to remit their profits abroad. Their failure to even invest in the necessary infrastructure maintenance has lead to undue load-shedding over and above that necessitated by load-management. Not only has the government of Pakistan lost revenues from healthier dividends and resulting taxes, it has also lost by falling share prices of its remaining stake in these entities. The public has suffered a deteriorating service and higher prices.
To put things in perspective let us also recall the privatization of MCB to Mian Mansha’s group, undoubtedly amongst the strongest business conglomerates in Pakistan. The deal was done at a fraction of the fair value of the tangible assets of MCB let alone considering the value of the brand and goodwill. Obviously such moves do not boost confidence particularly when the same group’s head attends important government policy meetings is said to be interested in getting “good” deals on more national assets at the cost of the nation.
It has been reported that the incumbent government sent a letter to IMF claiming a consensus of all political parties and parliament to privatize the national institutions. This obviously points towards the pressure emanating from the terms of the IMF package accepted by Pakistan and explains the haste. This undue urgency leading to lack of planning should be avoided. The government needs to ensure it is not selling off profitable and strategically vital PSE’s in the name of privatization for short-sighted capital injections at the cost of long-term stability and revenues. Furthermore institutions providing vital services to the masses should not be on the wish-list of the potential sell-offs either.
As for those entities generating losses like PIA we need a proper plan of action. One leading argument for privatization is that since the private sector is driven by profit, the efficiency and performance of institutions is supposed to improve in private hands. Unfortunately the past record of privatization in Pakistan does not support this argument. Be it PTCL or KESC, not only their profits but the standard of services too has fallen in private hands. Also it brings up an interesting question as to why the government cannot introduce checks and balances along with incentives to ensure a turnaround they expect from private entities. Moreover, in developed countries strict legislation has been introduced to ensure avoidance of the common pitfalls of privatization, protecting the interests of all shareholders and safeguarding the continuation of service(s). Same needs to be done in Pakistan to address the issues already facing us from past public-private venture which effectively handed over whole PSE’s for a paltry minority stake in ownership.
Some economists supportive of the privatization point out the previous failed attempts at turnaround but conveniently ignore the major reason of undue interference, political appointments and misappropriation by government officials. The success stories of the last major successful turnaround of a loss-making steel mill into a profit generating venture are also conveniently swept under the carpet. They also choose to forget that if enterprises like PIA are privatized, which have the highest ratio of employees per aircraft of 500 compared to international standards of fewer than 150; it will still lead to layoffs and resulting backlash. Ideally a better option will be to establish an independent and empowered restructuring institution (RI) to overhaul PSE’s, which if handled properly will make the process less painful compared to a private venture while ensuring cost-effective quality services from a revenue-generating asset of the nation.
All that is required by the RI is to place competent professionals of utmost integrity at the top positions based solely on merit to run the PSE’s, introduction of a system of appropriate checks and balances run by professionals whose life is driven by measuring performance against goals, spurring motivation and ensuring excellence via improved performances. If for some reasons a privatization is deemed mandatory then a hurried privatization without a proper policy, appropriate selection of PSE’s and laws safeguarding the national interests as well as protecting the masses should be avoided as it will only lead to less efficiency by investors with conflicting interests, more unemployment, resulting lawlessness, inflation, loss of revenues and government bailouts.
The author is a leading economist, a qualified chartered accountant and anti-money laundering expert with international exposure who is helping reshape businesses at Millennium Law Company. He can be reached on Twitter and www.myMFB.com @OmerZaheerMeer or firstname.lastname@example.org