November Issue 2014
The Privatisation Illusion
The concept of privatisation flows out of the truism that governments have no business to be in business. Embedded in this classic clichÃ© is an earnest desire of the neo- liberals to see governments everywhere reduced to shadows of their former selves, with most of their functions privatised purportedly to turn them into effireliable and profitable enterprises.
Efficiency in the private sector means profit. But everything of social value cannot be profitable. The judiciary, the armed forces, the police, public schools, public healthcare and public transport (including road, rail and air) are of social value, and yet they cannot exist if they were required to be profitable. In developing countries the worth of assets having strategic value like oil and gas and other minerals, also cannot be measured on the scale of monetary profits accruing to the government, but against their intrinsic potential for national security. Moreover, public sector enterprises in developing economies do play a very significant role in keeping the rate of unemployment under control, even at the cost of over-crowding the State Owned Enterprises (SOEs).
It is again this backdrop and also from the lessons learnt from past privatisation efforts that one would like to caution the present government to revisit the policy to make it more responsive to the nation’s socio-economic needs rather than using it essentially as a source of non-revenue income to bridge the widening gap between budgetary income and expenditure.
We started the privatisation process in earnest during the first Nawaz Sharif government. The second Sharif government also seemed equally interested in offloading SOEs. General Pervez Musharraf appeared even more keen to get rid of as many SOEs as he could. And now in his third stint, Prime Minister Nawaz Sharif seems all set to clean the SOEs’ shelf. In between, the late Benazir Bhutto in her two terms did try to emulate Mrs Thatcher, but could divest no more than 10 per cent of PIA shares in her first term. In her second term she divested 10 per cent of PTCL, privatised the Bankers’ Equity Limited and sold the profit-making Kot Addu Power Company (KAPCO). The Pakistan People’s Party’s (PPP) privatisation record, even during its third term, was too insignificant compared to the grand successes of Sharif in his two terms and Musharraf in his extended single term. During the last term the PPP did try to revert back to its divestment policy and give the workers part of the shares in some of the units they worked for.
Sharif, in his first tenure, legally bound his government to use 90 per cent of the sales proceeds to retire national debt, reserving the remaining 10 per cent for poverty alleviation. To sell the idea to the nation at large and also to the workers in the SOEs whose jobs were at stake, Sharif resorted to the same sales pitch that the IMF had coined to suck the developing countries into a perpetual debt trap: privatisation would encourage further private investment boosting employment and ensure hefty golden-handshakes for workers wanting to retire plus one-year guaranteed employment.
Before his first ouster from power Nawaz had disposed of 47 units and privatised two banks — the Allied Bank and the Muslim Commercial Bank limited. And during his second tenure, Sharif sold Habib Credit and Exchange Bank, the United Bank Limited and the remaining manufacturing units in the SOEs. Musharraf, during his rule, sold as many as 60 units. These included capital-intensive SOEs in the energy sector, manufacturing industries like cement, fertilisers, major banks and large capital market .transactions.
During the third, or rather, fourth PPP government, 12 per cent shares in unit certificates were distributed free to 235,855 employees in 60 companies through the Employees Empowerment Trust under the Benazir Employees Stock Option Scheme (BESOS). The total worth of these shares was over Rs 100 billion. On the whole not much action was seen on the privatisation front during this period, except for the sales of Hazara Phosphate for Rs 1.34 billion.
The third Sharif government has taken up the privatisation exercise with renewed vigour. A total of 69 entities have been identified for future privatisation with 32 on the priority list and 11 at the top. June 2014 witnessed a beginning in the capital market transaction. The first transaction related to the sale of the remaining 19.8 per cent shares of UBL at what is termed as a throwaway price. Next was a five per cent share of Pakistan Petroleum Limited which supplies 20 per cent of the natural gas in the country. Work on the OGDCL transaction has already begun, while the HBL share transaction is to be taken up in December.
To begin with, never have we used the proceeds from the sale of privatised units for either debt retirement or for financing poverty alleviation programmes. All such proceeds have been used, more often than not, in trying to keep the budgetary deficit from spinning out of control. The programme has not been known to have contributed in any significant way to promote fresh investment. Units and services sold to foreign interests (HBL, UBL, PTCL, KESC and National Refinery) have, over the years, become a source of foreign exchange drain in the shape of profit repatriation.
A former economic advisor to the government of Pakistan, Dr Pervez Tahir, in his recent study on privatisation (Economic and Social Consequences of Privatisation in Pakistan) maintains that the private sector was as prone to failure as the public sector; at least 16 SOEs closed down after privatisation. In a number of these cases, the buyers had no intention of managing the units. Their interest was in real estate, machinery and the stock in trade to make a quick buck. In others, especially the engineering units, the buyers did not have the requisite managerial and professional experience.
An Asian Development Bank study assessing the performance of 100 privatised units found that privatisation did not lead to greater efficiency and reliability as there was no change in 44 of them, while 35 were found to be worse off, with only 20 performing better.
Dr Tahir further maintains that in the absence of an effective regulatory framework, privatisation works against the public interest. The trappings of this framework exist, but the performance leaves much to be desired. The State Bank of Pakistan, the regulator of the financial sector, lacks the autonomy required for independent functioning. The Securities and Exchange Commission and the Competition Commission are similarly handicapped. The National Electric Power Regulatory Authority and the Oil & Gas Regulatory Authority are also toothless and riddled with scandals. The debt burden and fiscal deficit, the very problems that privatisation was to take care of, have risen steeply. The social costs are reflected in low poverty-related expenditure. The Fiscal Responsibility and Debt limitation Act requires that the total public debt outstanding should not exceed 60 per cent of the GDP. But this has remained under the required threshold of 60 per cent only for six years between 2006-11. This was because of debt rescheduling and restructuring. During the two Pakistan Muslim League-Nawaz (PML-N) governments in the 1990s, when many units were privatised, the outstanding debt stock reached an all-time high mark of 104.7 per cent of GDP. Privatisation proceeds have been treated as non-tax revenue receipts. That is why the fiscal deficit stayed between 2.3 to 4.1 per cent in 2003-7, a period when 60 units were sold for as much as Rs 416 billion against only Rs 59 billion received for 100 units sold during 1988-99.
From 26 per cent of the GDP before the privatisation programme was initiated in 1987, the investment rate has crumbled to 14 per cent in 2013-14. Development expenditure has fallen from seven per cent of GDP in 1988 to 4.7 per cent of the GDP in 2014. It was even lower during the periods of massive privatisation, ranging between 3.3 and 3.9 per cent of the GDP during the second Nawaz government and 2.1 to 3.2 per cent of the GDP during the Musharraf period. The rate of unemployment had hoverd around seven per cent on an annual average (the highest in the decade) during 1999-2007, the years when privatisation was in full swing. A study carried out in the 1990s showed that the real prices of products of privatised units, such as vegetable ghee, fertiliser and cement, had increased rather than decreased.
What is even more worrying is the increasing trend to privatise both internal and external security. Today private security agencies have five times more personnel working for them and are equipped with more sophisticated weapons than the national police force. Similarly, the total strength of the jihadi outfits (private armies financed by known and unknown national and international charities) spread all over the country is said to be equal to, if not more than, the strength of our regular armed forces and they are also said to be equipped with all kinds of crude as well as state-of-the art weapon systems. Even our foreign affairs seem to have been privatised as Hafiz Saeed of Jamat-ud- Dawa ostensibly holds the veto powers on issues such as our relations with India and the USA.
This article was originally published in Newsline’s November 2014 issue.
The writer is a journalist and former assistant editor at Newsline.