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Privatisation. Yes. But, why?

As Pakistan prepares to navigate a new round of privatisation and as we engage in passionate conversation about what is to be privatised, when, and how, it may be useful to step back and consider why we seek to privatise a wide swath of state-owned enterprises (SoEs).  The premise, quite simply, is that the what, when and how of privatisation flow directly from the why.

You do not need to be a rabid opponent of British Thacherism of the 1980s to feel circumspect about the roots of modern privatisation. The popular belief that the term privatisation in its contemporary connotation was coined by management guru Peter Drucker is convincingly debunked by Spanish economist Germà Bel in a short but incisive paper published in the Journal of Economic Perspectives (20:3, 187-94) in 2006, in which he argues that it was the Nazi party in Germany before World War II that really defined the concept and its practice as we know it today. Bel points out that Hitler’s rise to power was widely supported by business and industry and he consolidated this support by initiating a large-scale programme of restoring publically controlled monopolies to private hands.

Much more interesting, however, is why the Nazis chose to privatise. According to Germà Bel, it was explicitly “intended to benefit the wealthiest sectors and enhance the economic position and political support of the elite.” Based on the belief that high levels of savings would depend on inequality of income and wealth, the National Socialist Party saw privatisation in the 1930s as a way to “stimulate the propensity to save, since a war economy required low levels of private consumption.”

The historical irony that Bel highlights is that the arguments made for privatisation in the 1930s were strikingly similar to the primary modern argument against it: that privatisation “only enriches and entrenches business and political elites, without benefiting consumers or taxpayers.”  Why a state chooses to privatise obviously matters.

It mattered as much in the mid-1950s when, for starkly different reasons, privatisation again became such a major defining force in German economic policy that it was described (by Otto Kirchheimer, World Politics, 1954) as “probably the most important single social phenomenon of the post-war German scene.” Just how dramatically the ‘why’ of privatisation in Germany had shifted is exemplified best in the case of Volkswagen.

Born in the 1930s as a state enterprise that reflected the passions of Adolf Hitler and Ferdinand Porsche, Volkswagen was famously privatised in 1960. A major goal was to propagate broad-based economic participation. By 1966, the Harvard Law Review was reporting that “the Volkswagen privatization involved some 1,500,000 subscribers, whereas the total number of shareholders in Germany before this time was estimated to be only 500,000 or 600,000.”

Why Peter Drucker advocated privatisation (or reprivatisation, as he called it) was different still. Although the widely-cited story about Drucker having coined the term privatisation is wrong, the Austrian-born educator and management scholar has, indeed, been an influential voices on this subject. In his 1969 book, The Age of Discontinuity, he provides a different ‘why’ for privatisation: because government is “a poor manager,” has “no choice but to be bureaucratic,” and is “not a doer.”

The point is that there can be many reasons for privatisation. Ideological assertion – e.g., the Margaret Thatcher thrust in the UK during the 1980s. Ideological shift – e.g., the former Soviet bloc after the fall of the Berlin Wall. Economy-wide transformations – e.g., parts of Latin America over the last decades. Need for capital investment – e.g., divestment of Britain’s Royal Mail. Rapid technological change requiring knowledge investments – e.g., privatisation of major telecommunication companies around the world. Need to plug budgetary and governance leaks – e.g., Japan’s ongoing privatisation of Japan Post. And so on.

History, as Germà Bel reminds us, “does not prove that privatisation is always a sound or an unsound policy.” On the global trail of privatisations one finds blazing glory as well as scorched earth. What you will find depends as much on where you look as on whom you ask. History reminds us here, as in so many other places, that context matters. And so does a polity’s internal theory of why it chooses a path to privatisation. So, why should Pakistan be on the road to privatisation?

The least convincing reason is budgetary injection; the idea that privatisation will allow the government to raise easy capital to invest in other priorities. This tends to works best for highly successful SoEs and generally effective governments. Pakistan has neither. There are fairly few successful SoEs to write about and even less reason to be confident of the government’s ability to make ‘better’ investments.

The most convincing reason is budgetary drain; the idea that inefficiency and corruption have placed a permanent drag on the exchequer. This case has been best made on these very pages by Dr Farrukh Saleem in a series of op-eds which point out that around 200 SoEs in Pakistan now lose more than Rs500 billion a year, each year; Rs1.5 billion a day, every day; Rs60 million per hour, each hour; Rs1 million per minute, every minute.

Another strong reason is that, in many SoEs, endemic political interference has already triggered a chronic inability to attract, or retain, good human resource. This is evident most strikingly in how many SoE leadership slots remain unfilled. This is not about good talent not being available. It is about good talent not having the confidence that they can deliver in the context they will be confronted with.

There is, however, also a fairly strong reason to worry about privatisation in Pakistan. Our political track record in managing transformations leads to very real fears of process highjack, capture, and rent-seeking. 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.

The prognosis is disturbing. It suggests that, yes, privatisation is needed. But, no, conditions are not good. There are very few jewels to offer, and the crown itself is unstable. This is not a privatisation of choice, it is one of desperation. All the more reason that privatisation choices be restricted, strategically planned, and cautiously implemented.

The first test for the government is political. To do all it can do to be transparent. To do even more to be seen to be transparent. Innovation is called for. Maybe, consider a ‘voucher’ scheme (as used in Eastern Europe) where the entire population – or just all taxpayers – are given a small part of the ownership. You gain broader economic participation, deeper process ownership, and stronger public accountability.

The second challenge is economic: to ensure that the privatised enterprise would provide its services better and, ideally, no more expensively than now. If the argument is that things have become inefficient and expensive under government control, then the citizen justifiably expects more efficient and less expensive service after privatisation. This implies strong post-privatisation monitoring and resporting.

The third tightrope to cross will be social. Especially when dealing with large SoEs, there is justifiable fear amongst employees about job retention, remuneration, and restructuring. Ordinarily, government pushes for aggressive social safety nets. In the case of many of the SoEs that are on offer – PIA is the obvious example – our options become much more limited because a bloated and politically placed employee force is itself the root problem. One misstep on this tightrope and a messy social problem will turn into a messier political one.

The bad news is that the government has a tough job ahead of it and nearly nothing it can do will make people happy. The worse news is that there are many things it could do which will make people not just unhappy, but very very angry. The good news that the managers of this round of privatisation should aim for is to avoid that worse news.

The writer has taught public policy and international relations at Boston University and the Fletcher School of Law and Diplomacy and was the vice chancellor of LUMS. Twitter: @adilnajam

Dr. Adil Najam, "Privatisation. Yes. But, why?," The News. 2013-11-30.
Keywords: Social sciences , Social policy , Economic issues , Economic policy , Public policy , World war II , Telecommunication , Privatization , Taxpayers , Peter Drucker , Germa Bel , Dr Farrukh Saleem , Adolf Hitler , Ferdinand Porsche , Margaret thatcher , United States , Pakistan , Germany , Japan , SOEs