Privatisation

The decision to privatise government-owned entities brought the subject to the lime light. The debate that has been going on for some time has been reinvigorated again with both the camps – for and against privatisation – coming up with everything in their arsenal of arguments.

As I noted in another article “Privatisation; salvation or an incomplete truth” the debate whether privatisation is good or bad and whether it is required or not has to come to an end soon. Privatisation has been the order of the new era. In the last more than two decades global economy has seen a lot of privatisation. We have seen that the number of transactions across the globe have risen and the size and value have also increased.

It is hard to find a country that has not embarked on a privatisation programme. Malaysia has sold its National Lottery, Buenos Aires its zoo, Poland has privatised its glass and picture tube factories, etc etc

Margaret Thatcher noted in one of her articles citing “the Economist”: “Nationalisation, once all the rage, is out; privatisation is in. And the followers of the new fashion are of the left, the right and all hues in between.”

The new thought says that ownership is a significant determinant of enterprise performance. In both developed and developing countries, good SOE performance has been very difficult to bring about and even harder to sustain. Those who prefer state ownership advise for the induction of highly-paid and obviously-motivated managers backed by changes in the systems and incentive plans. Very often governments comply and try to improve performance by bringing in new and dynamic managers, and paying them incentive salaries. These measures sometimes have a positive effect. But as the crisis dissipates, so does political resolve.

Political interference is a common syndrome of SOEs and it tends to re-emerge. According to a World Bank Study in Korea, where reform short of ownership change ended losses in a group of SOEs for three years in the mid-1980s, large deficits reappeared later on. In New Zealand and Japan, SOE reforms were successful only when done in conjunction with privatisation.

SOE reforms have been seen as limited and unmaintainable by many governments. The burden of funding loss-makers has put the poor governments to opt for privatisation. Same is the case in Pakistan where the giants owned by the weak state are bleeding our anemic economy to death. The only good these SOEs are doing is providing nice job opportunities with magnificent titles to the mighty bureaucrats and an ever obliging employment exchange to the politicians.

The debate whether privatisation works or not appears to have long been won by the proponents of privatisation. But for a privatisation programme to be really successful, it has to be properly structured. Only then it will yield enduring benefits.

In a book titled “Privatisation in Malaysia: Regulation, Rent-Seeking and Policy Failure” by Jeff Tan, the author has studied the process and concluded that privatisation does not necessarily lead to efficient economic outcomes and that its success or failure depends on the political context in which it is formulated and implemented. It highlights the role of politics and its interconnection with the underlying class structure in determining the nature and outcome of privatisation. It is also suggested that privatisation should not be undertaken unless the government has the political and institutional capacity to regulate it.

“The outcome of privatisation, including what is privatised, how, to whom, and more crucially, the performance of privatised entities, will thus be determined by both institutional and political factors.” Furthermore, success or failure of privatisation in developing countries depends not on whether the government intervention remains, but on both the government capacity to monitor and regulate the privatised entities and socio-political constraints on it.

This clearly indicates that the discourse has to shift. We need to understand what has to be done right to make the privatisation successful. While going over some articles I read a report published in 1992 by the World Bank written by SunitaKikeri, John Nellis and Mary Shirley. They concluded that “Privatisation is not a blanket solution for the problems of poorly performing SOEs. It cannot in and of itself make up totally for lack of competition, for weak capital markets, or for the absence of an appropriate regulatory framework.”

They synthesised a few lessons to make privatisation a fruitful process. In their view, it works best when a larger programme of reforms is under way and privatisation fits into that. In the countries where successful privatisation happened like New Zealand, UK and Mexico it was accompanied by reforms to open markets, removing price and exchange rate distortions, and encouraging the development of the private enterprise. It has worked best where regulations have been created to protect consumers. Improving competition and reduction of monopoly has been a part of such reforms.

In our context the privatisation of larger companies like OGDCL there has to be a detailed preparation and homework before they are brought to the block. This preparation includes the scoping of the assets, thereby identifying what we have on the books, which are valued properly and what we do not have in a proper valuation on the books. Further if larger organisations require injection of cash or modernisation or induction of machinery or aircrafts as in the case of PIA that has to be left for the next phase when the private sponsors come in, as privatisation is undertaken for the same reason that new sponsors bring in capital and make these investments. A few ways in which this preparation has happened across the globe in successful privatisation’s: breaking the organisation into competitive and marketable units, bringing in dynamic private sector managers (this has been done in airline sales around the world) and settling past liabilities. In Argentina while privatising the steel and railways, they shed excess labour. It sounds familiar as Pakistan Railways and PIA are notoriously high on the number of employees per operative unit of their business assets.

Much has been said about free market these days in Pakistan. Privatisation and free market require a well-developed, properly managed regulatory framework. In Pakistan regulatory scene is not that bad. We have a number of regulatory authorities in place with a fair level of policy and regulation framework. However, the requirement is to reduce the red tape and make these regulatory authorities more responsive to change.

While talking about the regulatory framework I am reminded of another book published by the World Bank. Commenting on the objectives and strategy for the privatisation in their book, “Privatisation the lessons of experience”, John R Nellis and Mary M. Shirley put forward the conditions for success of any privatisation programme. They have enumerated two main aspects, which will affect the strategy and outcome of the privatisation. One of them is the macroeconomic policy framework of the country and the other is the nature of the market where the enterprise is offloaded. As far as the first one is concerned, they think that a well-developed institutional and regulatory capacity has to exist for a privatisation programme to become successful and yield better financial economic results. For the strength and efficiency of this macroeconomic framework a well-functioning legal structure is very important. According to them such a framework contains important aspects of various business laws, including the competition law, dispute settlement laws, etc. If we examine how we are faring on this count we can look at the World Bank report on Doing Business. According to the report of 2012, as far as the regulatory quality is concerned Pakistan’s performance was somewhat better than the developing countries of Asia, however, on the criteria of “Rule of Law” and “Control of Corruption” Pakistan is performing lower than the average of its peers in the region. Similarly another important area where our performance is not up to the mark is “Enforcing contracts” and “Paying Taxes”.

It goes without saying that the whole process of privatisation has to be charted out in a manner that it is fully transparent and should be perceived as the same. Many countries have taken the route of competitive bidding, developing objective criteria for selecting bids, and creating a proper monitoring process.

Privatisation does come with its price, especially for the underprivileged working class of these SOEs. Privatisation’s have been followed by large scale downsizing. This gives rise to a lot of apprehension that also becomes a motivation for the stakeholders to rise against the idea. Government can help by developing a safety net for the employees. This may include a generous severance package encouraging voluntary departures precluding the need of painful downsizing. Other ways of creating such safety nets may include employee ownership schemes thereby making the employees become part of the shareholder community and retraining the employees for other suitable trades so that they may get re-employed either with the same company or with some other business. These measures will reduce the problems of the employees and also add to the productive workforce of the country.

In the same way privatisation must help in changing the public-private mix in the economy. This can be brought about by encouraging the growth of a dynamic private sector by creating an enabling environment. In Pakistan the biggest hurdle in this enabling environment is red tapism and corruption. Though corruption gets a lot of attention and obviously a volley of statements from the top political leadership but “In-action” goes unpunished. Rather sometimes inaction is rewarded as those who do nothing and neither allow anyone to do anything get away with flying colours when judged for corruption. But this menace of inaction damages the private sector in the same manner as corruption does.

If we are sincere in turning around the economy and bringing in efficiency in the SOEs by Privatisation we need to take into account the lessons learnt from the past experiences all over the globe. It is said, the road to hell is paved with good intentions. Privatisation though intended for good can only achieve the right results only if it is done right and for the right purpose.

(The writer is the CEO of a power project)