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Privatisation or the sale of the century?

If the drain on the public exchequer was the reason for privatisation then the government should focus solely on privatising loss-making SOEs. So why then are profitable entities such as OGDCL/PPL being privatised?

The most likely scenario, especially keeping in view previous privatisation efforts, is that the government will end up selling only the profitable SOEs (OGDCL, PPL etc) at discounted prices and will fail to sell off the large loss-making Wapda. This is exactly what happened before – with profit-making SOEs sold off while the loss-making entities remained under government control. The government will lose revenue earned from these SOEs, while the colossal losses of Wapda will remain on budget. The deficit will rise and the hole will keep getting bigger every year.

The most important question that needs to be asked is: where do the interests of the 190 million citizens feature in the government’s privatisation mantra? Will privatisation help lower prices and improve services to the consumers? Will privatisation lead to new investments and creation of more jobs? Will privatisation help Pakistan become more energy secure and less dependent on IMF bailouts? Will privatisation help alleviate poverty and reduce income inequality? Will the rights of workers be protected in the post-privatisation scenario?

Former LUMS vice chancellor Professor Adil Najam writes: “A history of bad experience, low trust in government, and suspicion of an unfair process can make even those who see the logic of privatisation highly sceptical. The result is a pervasive cynicism that privatisation is likely to leave us no better, and possibly much worse off”.

Let’s examine how previous privatisation programmes have impacted the wellbeing of the 190 million citizens of Pakistan. Professor Kamal Munir of Cambridge University examined the privatisation of PTCL – one of the biggest transactions in our history – on the government finances and financial performance of the company. He writes that “in the six years post-privatisation, earnings fell to Rs8bn (at a negative growth of 18 percent per annum) vs Rs27bn in 2005. Similarly, the profit margin declined from an average of 71 percent over the four years prior to privatisation, to just 47 percent over the six years since and continues to fall. This magnitude of change is unprecedented in the telecommunication sector, whether in Pakistan or internationally”.

The fall in profitability of PTCL has had a significant impact on government finances. Falling profits erode non-tax revenue and the resultant decline in share price has caused a “loss of approx Rs150bn to the government of Pakistan, which still owns 74 percent of PTCL shares”. The negative fallout of this has been felt through a stagnant telecom industry with limited new investments, large scale lay offs, and falling competitiveness as PTCL used to operate some of the top training institutes that provided expert technicians to the industry.

The results of other privatisation transactions are just as shocking. According to former secretary Planning Commission Dr Akhtar Hassan Khan, the privatisation of Kapco has been a major cause of the bankruptcy of Wapda. Kapco was the biggest power generation plant for Wapda with a capacity of 1,600MWs before it was privatised in the 1990s. The government sold 36 percent shareholding in Kapco for US$ 291mn along with management control. Dr Khan writes that “Kapco used to provide electricity to Wapda for US$2.5 cents before privatisation, but sold the same unit of electricity for nearly double the price at US$4.9 cents post privatisation”.

The impact of this privatisation was to instantly increase the price of power generation, causing massive losses to Wapda that accumulated over the years to unsustainable debt levels. The government finances suffered, with Wapda accounting for losses of over two percent of GDP every year – all paid by taxpayers’ money. The citizens have suffered through increased power cuts and a record increase in electricity bills. The economy has suffered with rising unemployment and no new investments have come into the energy infrastructure for over a decade. Some of the biggest privatisation transactions have been a colossal failure for the citizens of Pakistan.

While the privatisation of banks has resulted in efficient operations and better customer service, what about the developmental role of banks in a developing economy? The banking systems deposits to GDP ratio has fallen, loans to SMEs have been in constant decline for the last few years, long-term industrial finance capability is weaker than it was in the 1970s and banking has become a business of taking low-cost deposits and investing risk-free money in government paper with hefty spreads.

The experience of privatisation from the rest of the world also offers important lessons. British Rail, which owned and operated nearly all of the UK’s railways, underwent total privatisation in 1993. However, the inability of private contractors to provide safe, reliable and affordable service led to re-nationalisation by 2000. The Center for Global Development, Washington DC 2006 report claimed that privatisation and private-sector involvement raise the prices for essential goods and services, especially water, sewerage, electricity and transport. Water concessions given by the Bolivian government to private companies led to a sharp increase in water prices for consumers after privatisation – by 43 percent on average, whereas prices doubled for the poorest households.

What is the way forward? The SOEs are a problem and the slow pace of restructuring them is a matter of serious concern. However, undue haste in privatising is not the miracle cure. Undue haste in prior privatisation programmes led to governments offering ‘sweeteners’ to investors to expedite the process – at a high cost to the public and government finances. These ‘sweeteners’ include granting the buyer control with only a fraction of share ownership; and/or through an effective price discount such as that given to IPPs through high government-guaranteed dollar returns.

As highlighted in the first part of this article, the Malaysian ‘Khazanah Nasional’ is the best example of how inefficient SOEs can be rapidly transformed into profitable organisations. This should be the first step. Instead of appointing for the Privatisation Commission a board of directors that is based on nepotism and political favours, the government should reconstitute a bigger BoD with professional and independent business, legal, labour and financial experts. Political interference of politicians and bureaucrats must be tackled for any real restructuring of the SOEs.

The government must initiate much wider economic reforms for successful privatisation – a privatisation that can bring real benefits to the citizens and the economy. These reforms must include strengthening regulatory authorities including SECP, SBP, Ogra, Nepra and CCP. Former governor SBP Salim Raza highlights that “without broader structural reforms, privatisation may simply see private oligopolies replace government monopolies – intensifying private wealth, rather than creating national growth”.

Once the restructuring of SOEs has been done under professional management, those considered non-strategic can then be privatised. Transparency and accountability must be ensured and a detailed third party audit of SOEs must be undertaken before launching privatisation.

Until the above steps are undertaken we cannot support the PML-N’s sale of the century and will oppose moves to sell off public enterprises without due process and transparency.

Concluded

Asad Umar, "Privatisation or the sale of the century?," The News. 2014-02-15.
Keywords: Economics , Economic planing , Economic reforms , Foreign investment , Financial management , Financial crisis , GDP growth , Government-Pakistan , Privatization , Taxpayers , Prof Adil Najam , Prof Kamal Munir , Dr Akhtar Hassan , Pakistan , SOEs , OGDCL , PPL , WAPDA , IMF , LUMS , PTCL , GDP , SBP , PMLN