Zombie idea

THE government has announced a privatisation plan to sell off state-owned entities including ones that have `blue chip` status in the Karachi Stock Exchange. The argument given is that such privatisations will increase net social benefit and will help the government pay off the country`s mounting debt. Such claims need to be evaluated with a cool head.

Any economist who can think clearly and is honest should know that both claims are false and have been discredited with experience. Privatisation can only increase net social benefit if the price the government gets by selling state-owned entities is greater than their current market value under state ownership.

Does anyone really think that the price the government gets for OGDCL, the national oil and gas company, and Pakistan Petroleum Ltd will be greater than their current value? Certainly not. For argument`s sake and for illustrative purposes, assume that these enterprises are currently worth Rs200 billion under state ownership. The government will be lucky to get even half of that.

The only way the government can get more than Rs200bn for them is the following: if the private ownership magically makes these enterprises worth a lot more than Rs200bn and there is enough competition for buying these enterprises so that the prices paid are bid up beyond their current market value. Are we really saying that this will happen? Not likely.

The above argument is even stronger if the government is planning to sell some shares while keeping the management stake in the companies. Clearly, in that case, there is no chance of getting more than the market value of the shares as there will be no change in management, so the mythical magic wand of the private sector cannot even be invoked in theory. Privatisation needs to be evaluated purely on merit irrespective of the ideological narrative that tends to divide people with one group all for it and another totally against it.

The claim that privatisation of profitable entities will increase net social benefit is absurd. The fundamental point that advocates of privatisation fail to see is this: you get easy cash through privatisations, but this comes at the cost of giving up earnings that these `blue chip` entities generate.

There is a case for selling loss-making entities as they are a drain on taxpayers. But, this does not extend to highly profitable entities. It is not a magic cure that can be indiscriminately applied.

How about the second claim that privati-sation can be used to pay off the country`s mounting debt? This claim also defies logic.

The current market value of these stateowned enterprises represents their earning potential. The emphasis here is on `earning potential`.

These enterprises are `blue chip` and are worth billions because they earn money.

Why sell them to pay off debt? Why not use their earnings to pay off debt? If the government is really serious about debt then it should earmark the earnings of these enterprises for debt repayment rather than selling them cheaply. That`s a far better way of repaying debt. So, the case for selling off `blue chip` state-owned enterprises rests on flimsy logic.

Who are the real beneficiaries of privatisation? There are two sets of primary beneficiaries. 1) Financial advisers who will be hired by the government to help in privatisations. If history is any guide, they will make a lot of money. 2) Executives and the top management of these state-owned enterprises. They will see their salaries and perks increase. Almost everyone else is likely to be made worse off.

It appears that the government sees privatisation as an easy and politically cost-free way of raising money. Also, systematic privatisation of state-owned enterprises is a part of the standard package of policy reforms pushed by bodies like the IMF Serious economists know that the idea of privatisation has been thoroughly discredited by experience. There are numerous examples of reversals of earlier privatisations by various governments across the globe.

As one example, Britain reversed the privatisation of its rail network after the failure of a private sector operator. Similarly in New Zealand, the government re-nationalised airline and railways. In Australia, public outcry against private telecommunications operators has forced the government to announce plans to set up a publicly owned broadband network.

Highly acclaimed economist John Quiggin describes privatisation as one of the zombie ideas in his book Zombie Economics. To sum up, the privatisation of highly profitable entities is an idea which should be dead and buried. However, it does not stay dead. It keeps coming back from the dead to haunt us like a zombie. It truly is a zombie idea.• The writer is a research fellow at the Risk and Sustainable Management Group at the University of Queensland and associate professor of economics at LUMS.

h.siddiqi@uq.edu.au