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Caution: not make privatisation appear better than it is

Privatisation has kept its relevance as a policy option in this country to this day – as a means to not only cut down ever-rising budgetary injections but also to improve efficiency and thereby national output. Given the lack of empirical evidence, the question whether Pakistan has benefitted from privatisation remains largely rhetorical.

The UK began exporting privatisation as an economically viable concept during Margaret Thatcher’s long stint as the prime minister (from 1979 to 1990) with the objective of increasing efficiency and profits which at the time required resisting worker opposition/resistance by taking on the powerful trade unions. The UK has since undertaken numerous assessments of the privatisation policy with three major, albeit disturbing, findings. First, unemployment rose dramatically in five years – from 1.5 million in 1979 to over 3 million in 1984 – a rise considerably higher than the estimates for Covid-related unemployment. Second, inequality increased and by 1991 the gap between the rich and the poor was at a record high. And finally, the example of British Rail showed that fares rose dramatically especially where monopolies prevailed on certain routes. The argument of increased efficiency did not materialize with only 75 percent of costs recovered, and that too achieved only once since British Rail was privatized, compared to several times before leading to the conclusion that privatisation must be supported only where a competitive market exists.

With respect to the White House and congressional negotiators working to hammer out a bipartisan infrastructure framework – a key component of Biden’s economic agenda, Nobel laureate Joseph Stiglitz in an article titled “the harms of infrastructure privatisation: a step backward in progressive policy making” dated 26 July 2021 identified a number of financing sources, including government, public private partnerships and asset recycling, which he claimed was “a backdoor to privatisation – with public funds paying for projects controlled by unaccountable private firms whose primary motive is to increase their own profits.” He contended that experience shows that “private sector faces higher costs of capital, and infrastructure projects are long-term investments, where differences in the cost of capital matter a lot. This puts private sector at a marked disadvantage…Most importantly it is hard – indeed impossible – in any contract to specify the full range of public concerns that one would want a ‘good’ partner to keep in mind and these are at the center of many key public infrastructure projects.”

Nawaz Sharif was sworn in as the prime minister for the first time on 1 November 1990 and on 22 January 1991 his administration launched a privatisation programme which differed from previous attempts by being considerably more vigorous. Support for privatisation has continued since and to this day Pakistan’s economic team leaders publicly argue that privatisation is the only way forward that would end the massive annual budgetary injections to keep the SOEs (State-Owned Enterprises) afloat; and an example of appallingly poor performance is Pakistan Steel Mills that have been non-operational for a number of years but still require billions of rupees to pay its staff salaries.

In an article published by the Cambridge University Press dated 2018 titled “Privatisation in the Land of the Believers: the political economy of privatisation” Kamal Munir and Natalya Naqvi conclude that privatisation “has not lived up to its multiple claims, including but not limited to reducing the government deficit, improving competition and firm efficiency, improving the allocation of resources, reducing corruption, and leading to increased overall economic growth…The outcome has been neither economic efficiency nor improved services to the taxpayer but simply the privatisation of profits and socialization of losses. Resources or ‘rents’ have been transferred from the public purse – which could redistribute it to even out social inequalities – to selected private hands. While such rents have historically played a part in economic development, in the case of Pakistan, they have not been accompanied by the corresponding ‘disciplinary mechanism’, which forced business interests to carry out their developmental functions in successful developers such as the East Asian Tigers. What has enabled all this to go unchallenged and largely un-scrutinized is the hegemony of the neoliberal paradigm in Pakistan” – a paradigm defined as privatisation of public assets.

Since the 1990s Pakistan’s economic team leaders have regarded privatisation as inherently a superior system compared to state control and above all suspicion, without bothering with collecting and correlating empirical evidence as to its actual effectivity. As a perennial IMF borrower the country has steadily lost its leverage as its economy has become ever more fragile with privatisation deemed a major source of revenue as well as a means to reduce the budgeted allocation for state owned entities. This is regardless of the recent hearings conducted by Nepra with representatives from Karachi’s domestic, commercial and industrial sectors continuing to express considerable anger at the poor performance of the privatized K-Electric that continues to receive subsidies under the head of tariff differential – 83 billion rupees last year and budgeted at 80 billion rupees this year.

Stiglitz in an interview warned against the Washington Consensus (which he identified as between 15th and 19th streets that includes the head office of the IMF, US Treasury, and World Bank) that he claimed “considers capital market liberalization essential, and the IMF took it as a central doctrine. Capital market liberalization includes freeing up deposit and lending rates, opening up the market to foreign banks, and removing restrictions on capital account transactions and bank lending. The focus is on deregulation, not on finding the right regulatory structure. And (former Communist countries were told) they had no incentives because of social ownership. The solution was privatisation and profit, profit, profit. Privatisation would replace inefficient state ownership, and the profit system plus the huge defense cutbacks would let them take existing resources and have a higher GDP and an increase in consumption. Worries about distribution and competition — or even concerns about democratic processes being undermined by excessive concentration of wealth — could be addressed later.”

Needless to add the ongoing IMF’s and World Bank’s quantitative time-bound conditions and structural reforms in Pakistan bear ample testimony to the truth of Stiglitz’s assertions; be that as it may our state sector continues to be viewed as inherently corrupt, inefficient and market distorting – charges that have great relevance in the country’s context which implies that the economic team leaders must carefully review their policy decisions and be flexible about adapting to the evolving prevailing conditions.

To conclude, the proposal for a charter of the economy whereby flawed policies may get a bi-partisan backing without any empirical studies to substantiate their highly dated mind-set, will almost certainly push the country’s economy into an even more fragile state than at present. Today Pakistan is known for elite capture that pervades all areas of economic activity, including the middlemen in wholesale/retail trade, and it is time to revisit entrenched but flawed economic policies and it is of critical importance to undertake empirical studies before moving forward.

Anjum Ibrahim, "Caution: not make privatisation appear better than it is," Business recorder. 2022-12-26.
Keywords: Economics , Privatization issues , Budgetary issues , Disciplinary mechanism’ Capital market , Policy decisions , World Bank , Nawaz Sharif , UK

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