The ‘grand sale of the century’!
The clock has swung from ZAB’s extreme of ‘nationalise everything’ to an equally egregious ‘privatise everything.’ This time privatisation includes not only industrial enterprises but also regulatory outfits.
Last week the CCI gave the green signal for what Dr Hafeez Pasha describes as the ‘grand sale of the century.’
The white paper on “Economy under Bhutto” released by Gen Zia in 1979 had called ZAB’s nationalization as “ill-conceived, ill-prepared and inadequately analysed changes” which were “introduced in a hurry, with only short-term policy objectives in view”. The same could be said about the privatisation exercise currently being carried out under Nawaz Sharif.
There is a need to maintain a balance instead of moving like a pendulum from one extreme to another. Privatisation might be necessary in case of some enterprises but it would harm society in case of others.
Meanwhile there is a need to revisit the arguments given in favour of across the board privatisation.
It is maintained that bureaucrats are not trained to run the industries while politicians misuse state owned enterprises, turning them into sick units. They dole out lucrative jobs to cronies, oblige party workers and overburden the state owned enterprises (SOEs) with superfluous employees .This makes the enterprises inefficient and they start haemorrhaging the economy, The critics of state sector enterprises give the example of Pakistan Railways, PIA, Pakistan Steel Mills, PSO and power sector. There is no doubt that these units have turned into white elephants but to maintain that this was entirely on account of state ownership is telling only half the truth.
The privatision evangelists consider that state ownership of enterprises invariably leads to inefficiencies.
“It is not the government’s job to do business,” says Mohammad Zubair, chairman of the Board of Investment.
What the privatisation evangelists fail to see is that more than anything else the failures in Pakistan’s SOE’s are caused by bad governance rather than state ownership. Bad governance leads to corruption both in the case of state enterpirses and on the part of private entrepreneurs.
Why should we privatise, asks Farrukh Salim? Then he offers five reasons to support privatisation: private-sector owners behave differently from public sector managers, the private sector world over is more efficient, it is useful to isolate commercial entities from political interference, privatisation in a number of countries has resulted in higher economic growth and finally privatisation will bring in money to fill the government deficit.
What the privatisation evangelists fail to see is that more than anything else the failures in Pakistan’s SOE’s are caused by bad governance rather than state ownership. Bad governance leads to corruption both in the case of state enterpirses and on the part of private entrepreneurs.
Industrial efficiency requires an environment which besides competition promotes merit, rewards hard work and innovation and discourages cronyism. The environment of the sort is dependent on provision of adequate rules and regulations, oversight mechanisms, and strong and independent bodies to punish lawbreakers irrespective of their position or political connections. To put it briefly good governance and rule of law alone can ensure industrial efficiency. The developed countries practicing free market economy have this. So do China, India, Brazil, and Russia where numerous enterprises comprise SOEs.
India has turned the biggest Railway in the world into a state-run but thriving venture. Numerous large and small enterprises in China remain under government control, and is contributing to its over 15-year long era of high growth rates.
Interestingly in 2008, the Conservative government nationalized numerous banks in the UK while the private sector auto industry as well as some of the banks in the US had to be bailed out by Obama administration after they suffered heavy losses.
A look at the result of the earlier experiments in privatisation in Pakistan would bring out the reality.
Irrespective of whether it is the private sector or the state controlled sector, the crucial issue is that of governance and accountability. In the absence of these neither sector can perform satisfactorily.
Analysing the impact of privatisation in Pakistan in the 1990s, the Asian Development Bank pointed out in a 1998 report that only 22 per cent of the privatised units performed better than in the pre-privatisation period; 44 per cent performed the same whereas approximately a third (34 per cent) performed worse.
And how satisfactory is the privatization of the PTCL and the KESC? Concerns have been expressed about extensive labour layoffs and continued injection of public-sector resources into the privatised entities. Privatisation in the 1990s and the decade did not have favourable impact on the growth of the GDP, investment and employment, argues Dr Akhtar Hasan Khan, former federal secretary and author of ‘The Impact of Privatisation in Pakistan’.
Incidents were reported in the media showing that in a few cases units offered for privatisation were purchased for the valuable real estate rather than their industrial worth. The owners dismissed the workers , sold off the machinery and used the land for commercial purposes.
Reports continue to appear in the media revealing cases where private enterprises show higher profits not through efficiency but through illegal practices that include stealing power and gas, dodging taxes and evading the implementation of factory-cum-labour laws. While compromising on industrial safety enhances profits it has during the last few years led to major human disasters. In September 2012, a fire in the Karachi garments factory killed 258. This would not have happened if the ‘efficient’ owner had not saved money on providing emergency exits and had made better, though more costly, arrangements for stopping theft rather than putting iron bars on the windows that stopped workers from jumping out when the fire broke out. As an employee told the media, “The owners were more concerned with safeguarding the garments in the factory than the workers.”
A few days earlier absence of emergency exits, another measure to maximise profits, had led to 21 workers burnt alive in a Lahore shoe making factory the same year.
Privatisation in the 1990s and the decade did not have favourable impact on the growth of the GDP, investment and employment, argues Dr Akhtar Hasan Khan, former federal secretary and author of ‘The Impact of Privatisation in Pakistan’.
Inefficiency and corruption alone are not responsible for lesser profits earned by SOEs. . Another reason is that they do not indulge in theft or compromise on industrial safety while at the same time providing full revenues to the state.
In Pakistan, the state-owned enterprises have not always been in the red. People still cherish the memories of a period when the lean and mean PIA provided world class service and rubbed shoulders with the best international airlines. One needs to remind the critics of the SOEs that PIA then was a state owned enterprise rather than a private company. For two decades after Partition, Pakistan Railways ran on time, its restaurants provided both Pakistani and Western cuisine to travelers; it had separate coupes for couples and offered travel facilities to people in some of the remotest regions of the country. Was it then being run by the private sector?
This was possible because Pakistan was still under the hangover of the British era when rules and regulations were implemented and acceptance for corruption had yet not become universal.
Enterprises that play important role in people’s livelihood like the railways must remain in state control. Private sector would never run trains on routes that do not bring profits while people in far flung areas need them. State sector has to be present in certain food industries like ghee, sugar, milk products to discourage monopolies in the sector, maintain standards and keep prices within limits affordable for the common man.
Irrespective of whether it is the private sector or the state controlled sector, the crucial issue is that of governance and accountability. In the absence of these neither sector can perform satisfactorily.
As economist Akbar Zaidi has put it: “Many of the largest, most successful firms in the service industry and in manufacturing, are all owned by the state whether in China, India, Brazil, Russia, and even in bastions of free-market enterprise. The Economist magazine carried a special report on the rise of state capitalism, showing how numerous governments now owned very large corporations which were highly profitable. Clearly, the private/public dichotomy is a false distinction.”
