Privatisation of strategic assets: guidelines

The government has said time and again that it is resorting to privatisation in order to reduce the burden on the national exchequer as these state-owned enterprises (SOEs) are running in losses. Why then are PPL and OGDCL making net profits of Rs 50 billion and almost Rs 91 billion respectively being privatised? Their privatisation will increase the budget deficit further as the loss-making units will still be with the government, while net profits from PPL and OGDCL will not be going into government exchequer. It is now being revealed that it is a conditionality in the agreement the government of Pakistan (GoP) signed with the IMF that the shares of oil and gas companies will be floated in the international capital markets and GoP will facilitate the purchase of their shares by US cos. It is in this connection that a GoP delegation that visited USA recently scheduled meetings with two oil service providing companies Baker Hughes and Weather Ford. If the GoP has already decided which companies will purchase Pakistan’s oil and gas companies the procedure will not be transparent.

Moreover, oil and gas sector is the backbone of an economy. Allowing the USA (or any country for that matter) to acquire control of our oil and gas sector will increase our dependence on the US. In the past the USA has not heeded the advise of GoP with regard to stopping drone attacks. By increasing our dependence on the USA, the latter will become even more indifferent to our requests to stop the drone attacks.

Further, natural resources are mostly found in Sindh, Balochistan and Khyber Pakhtunkhwa (KPK). There is already resentment in these provinces and a sense of exclusion in the population of these provinces. By awarding these natural resources to outsiders, won’t we be increasing this sense of deprivation which is already posing an existentialist threat to Pakistan?

Managing privatisation with other government goals and responsibilities

Full privatisation with transfer of control of strategic sectors is something which only the Government of Pakistan is attempting to do. Countries in the region like Russia, China India, etc, are not even fully privatising the non-strategic sectors. For example, in response to a foreign exchange crisis in 1991, India undertook massive economic reforms aimed at deregulation and privatisation of the Indian economy. The goal of the Indian government was to reduce government ownership to 26 per cent of equity in all non-strategic firms. But until 1998 the government had sold an average of just 16 per cent of equity in 36 of the 258 firms while retaining control of all these firms. Using data on the population of Indian state-owned enterprises Gupta (2002) finds that partial privatisation had a positive impact on firm sales, profits and productivity in 341 manufacturing and service sector firms owned by the federal and state governments.

The realisation that there are different goals that have to coexist and governments have to learn to achieve these simultaneously is important. For example, the Government of Pakistan (GOP) has to embark upon liberalisation and privatisation policies, but these will have to coexist with strategic goals that the country might have. And liberalisation and privatisation will have to coexist with health and environment goals that the government has to achieve in order to ensure a healthy population. And this is what several countries are doing successfully. For example, the European Union is a leading protagonist of the free-market, but has very stringent standards on the import of food items into the union.

Moreover, in some less-developed countries (LDCs) the audience that governments try to appease are governments of the developed world and the international financial institutions. And since they evaluate LDC government’s performance on their commitment to reforms related with promotion of a free-market, these LDC governments try to bend over backwards to deliver on these at the expense of other goals for which the audience is the local population. For example, Pakistan is importing many food items like lentils, fruits and vegetables from Australia, Canada and India which are using Genetically Modified (GM) seeds. There is, therefore, a conflict between liberalisation and promotion of health and nutrition goals of the government. And the balancing of these goals is something which the GoP has to learn to master, which other governments even in the developing world are doing quite successfully.

Privatisation of strategic units

We have the example of Poland, a country endowed with coal reserves. The Polish government finds alternative energy development expensive and nuclear energy a distant possibility. In pursing the coal option it is pursuing its national interest over environmental obligations. Similarly, by not importing gas from Russia, the Polish government is trying to reduce its dependence on the Russian Federation at the expense of sacrificing liberalisation. Similarly, as reported in the Financial Times, Ukraine recently awarded a $10 billion gas deal to Chevron with a view towards reducing its dependence on Russian gas.

And it is not just Poland and Ukraine that do not want to be dependent on other countries for oil and gas. Countries, both big and small try to reduce their dependence on other countries for strategic resources. The statements emanating from the European Union about reducing their dependence on Russian gas and the moves by the US government to explore oil to make itself self-sufficient in oil are cases in point. This brings us to the discussion of privatisation of strategic units. Oil and gas are considered strategic resources and countries want to avoid being dependent on other countries for the import of these resources. China is a role model of a liberalised country. It has used liberalisation and privatisation very successfully to increase its rate of growth, reduce income disparities, poverty and develop the country. And yet, China exercises state control over telecommunication, airlines, banks and energy companies. These are considered strategic in nature and China feels vulnerable if these are controlled by foreigners. The recent uneasiness in France as a result of Mital Steel owned by a foreigner and agitation in the USA on the award of a port to a Gulf country leading to its withdrawal by the US government are just a few examples. But they bring out very forcefully, that even countries that are powerful and strong feel vulnerable when their strategic assets are not in their control. The GOP will also have to learn how to become a free-trade player while maintaining its control over strategic assets.

There is overwhelming evidence that when privatising strategic state industries governments retain control over key distribution assets. There are many examples of partial privatisation, which increases government revenues without reducing government control over strategic assets. Berkowitz and Semikolenova’s (2006) study on Russian privatisation of the oil sector during 1994-2003 is a useful case study which brings to the fore how the federal government privatised oil production but retained monopoly control rights over the transport of crude in the world markets.

Privatisation of strategic units have been “partial” as governments either manage to keep a major stake in the privatised companies or often retain control of a strategic distribution method even for fully-privatised companies (Megginson, 2001). For example, the state share is very large in the gas and oil sector including Petrobras in Brazil (32%), Eni in Italy (36.9%) and Sinopec in China (77.4%). In India, the generation of electricity has been privatised, but the transmission of electricity is monopolised and done by government electricity boards. The Indian national government has been using its control over electricity transmission to force generating companies to supply electricity to poor rural areas at below-market prices (Smith, 1993).

Comparing the behaviour of the government of Pakistan (GoP) with the behaviour of the countries cited above we observe the following: First, the GoP doesn’t seem to be aware of the importance of strategic sectors or the problems associated with dependence on outside powers. Second, GoP doesn’t seem interested in retaining control over strategic sectors. Third, GoP is not using its state power for the benefit of the people of Pakistan like other countries are doing.

And not only being self-sufficient in these strategic resources, countries are creating dependencies in other countries in order to further their politico-social objectives. Even very small countries are positioning themselves to control strategic resources as a way of acquiring power and status, with a view to make other countries dependant on them to bring their behaviour in line with their socio-political objectives, which would not be possible without creating these dependencies. And this dependency can also be used to subjugate countries. Israel, for example, is positioning itself to become a big energy supplier to the Middle East with a view towards changing the geopolitics and economy of a region in which it finds itself isolated. Nobel and Delek are planning constructing an under-sea pipeline from Leviathan to Turkey, Greece, Jordan and the Palestinian Authority. The Financial Times notes that the Israeli government is promoting the project not only to increase its revenues, but for the “potential positive knock-on effects on traditionally strained relations with its neighbours”.

Recommendations and conclusion

In the light of the above discussion, the following recommendations are being made to the GoP:

1. The GoP has to realise that its audience is the people of Pakistan and not governments in rich countries or the international financial institutions.

2. The GoP should learn to pursue different goals that coexist and try to achieve them simultaneously, rather than pursuing some (privatisation) at the expense of others (strategic, health, etc)

3. The privatisation policy of the GoP will have to distinguish between strategic and non-strategic sectors. For the non-strategic sectors GoP may resort to full privatisation or partial privatisation.

4. In line with government policies in countries cited above strategic sectors should not be privatised at this stage.

5. GoP should start with restructuring and privatisation of loss making non-strategic units. Starting privatisation with profitable units will increase budget deficit further.

6. GoP should use it’s position to benefit the poorer segments of the Pakistani population, rather than teaming up with big foreign companies, which will create misgivings in the minds of the public about government motives.

(The writer is Director Research, Chief Editor PBR & HOD Economics, IOBM, Korangi Creek, Karachi)