INTERNATIONALLY privatization is highly controversial issue. Nobel Laureate Stiglitz and others deride it as “ briberization” and give examples of the havoc created by it in Russia under Yeltsin and in other East European countries. The Washington Consensus (identical economic stand point of IMF, World Bank and US Treasury) is strongly of the opinion that the government should confine itself to defence; law and order etc, and entire range of economic activities should be left to the private sector.

Economic theory and practice in modern times has become highly empirical. Any theory which is not supported by robust time-series and cross section data is not entertained at the professional level.

Similarly, in practice and policy-making, the success or failure of course of action being pursued in different countries should determine whether it will succeed or not. There is no room for ideologues in modern times as the test of the pudding lies in eating according to an ancient proverb.

The model country for rapid economic growth is China which has logged ten percent GDP growth over the last sixteen years. Such a high rate of growth has not been enjoyed by any country in economic history of the world. The Chinese despite strong advice from the Washington Consensus never privatized any industry. The State Owned Enterprises (SOEs) did not expand during this period and whereas, they contributed about 80 per cent in industrial output in late 1980s, their contribution in the present decade is less than 20 per cent.

Moreover, China which receives about $50 billion annual FDI did not open its services sector like banking and telecommunications to foreign investors. The petroleum sector in all developing ‘countries including the city states like Qatar and Kuwait is a hundred percent government owned enterprise. Pakistani policy-makers need to look around the world and adopt the most successful international practice with respect to privatization and other economic policies.

The minister for Privatization has announced that the government was targeting completion of bidding for six companies before the end of the current fiscal year (June 2005). These include Pak-Arab Fertilizer, National Refinery Limited (NRL), Carrier Telephone Industries, United Bank limited (UBL), PTCL and Pakistan State Oil (PSO).

The United Bank is already privatized and the government would be selling its minority share of 49 per cent whereas, previously it had decided that it will maintain this equity share in order to have effective public sector representation on the board as the management with majority share had already been sold to foreigners. The CTI is a small unit. What is surprising is that the Government has decided to complete bidding of four major public sector enterprises Pak-Arab Fertilizer, PTCL, PSO and NRL in next one and half month.

The rushed massive privatization is difficult to understand and would be a major change from previous privatizations, because the previous privatizations were sequenced over the whole financial year. Even those who favour privatization as a policy advocate a highly sequenced approach. If the government proceeds as desired there will be serious fiscal and Balance of Payments (BOP) dangers.

In the current financial year the government has lost a major source of revenue, i.e. petroleum surcharge. In financial year 2003-04 the government collected Rs42 billion under this head. In the current financial year, the government may collect less than Rs5 billion or may be even less as it has correctly not allowed the domestic prices of petroleum products to increase pari-passu with international prices.

The international price of crude oil has surged five folds since 1999 and according to the latest reports the Oil Companies Advisory Committee (OCAC) has asked for price hike as they are selling petroleum products below international prices. OCAC claims that it had to bear a differential on account of oil prices of nearly Rs14 billion whereas the Government has paid back only Rs6 billion. Hence, the government is in a fiscal squeeze.

The four major companies whose bidding government has targeted to complete by June 2005 i.e PTCL, PSO, NRL and PAF contribute about Rs40 billion towards government revenues as they are all big money spinners for the national exchequer. PTCL itself contributes more than Rs20 billion. If the government were to privatize all these companies in a rush the fiscal deficit will increase by the amount of profits they were contributing to government’s non-tax revenues. The budgeted estimates of federal government’s total revenues are Rs805 billion.

If the government loses both the petroleum surcharge and the dividends of its mega profitable units, more than 10 per cent of the federal government’s revenues will vanish and the fiscal deficit will increase by more than one percentage points. The government’s tax revenue which has increased by 13.5 per cent in the current financial year have not led to an increase in tax-GDP ratio as there is a double digit inflation with GDP growth of more than seven per cent. The denominator has increased more than the numerator.

The current account deficit during nine months of FY 2004-05 has surged to $1.34 billion against a surplus of $2 billion in the same period of last year. Not only has the trade deficit increased by more than five times from $685 million during July- March 2004 to $ 3.5 billion in July-March 2005. There has been almost a parallel deterioration in services account which has quadrupled from $639 million to $ 2.42 billion during the same period. The outflow on services account is primarily on account of shipping charges, remittances of profits and foreign travel expenses. There has been a substantial increase under all these major heads and due to laudable rapid economic growth in the current financial year.

The foreign firms like Unilever, Shell, foreign banks and others have made record profits and the net negative investment income will almost touch $ 3 billion as compared to $2.4 billion in the previous year. If these profitable public sector enterprises are privatized, the annual rain of remittances of their profits will increase by more than $500 million.

In this context it is important to emphasize that the current level of remittances which is running above $four billion may not last for another few years as this figure represents transfer of capital and savings by Pakistani expatriates. Soon this figure will come down to remittances from current income and decline over a period of time. It is therefore unrealistic to make BoP projections on the basis of annual remittance level above $4 billion.

The Privatization Commission (PC) is also not altogether transparent in its procedures. The two important steps of fixing the reserve price and pre-selecting the bidders remains a secret. Even despite court orders it has not revealed for almost a year as to how its consultants calculated Habib Bank’s reserve price at about Rs22 billion when the bank was more than 10 times more valuable than Allied Bank which was sold for Rs11 billion with negative equity.

Nor has the Privatization Commission revealed as to how Agha Khan Fund for Development, Central Insurance Company and the State of Qatar Fund were pre-qualified. No one knows the legal structure and financial strength of Agha Khan Fund for Development.

The bidders for PTCL are all telecommunication companies of developing countries like Singapore, Malaysia, Kuwait, Saudi Arabia and Turkey. It will be a wonder if Saudi Arabian or Kuwaiti Company can run PTCL better than Pakistanis. The PC has not learnt any lesson from privatization of KESC which is in limbo and whose operations are deteriorating from day to day because the present management does not know as to how long it will last and the Saudi bidder has probably run away after analyzing that management of KESC is beyond him.

The privatization of PTCL and PSO are security risk also. If PTCL is privatized all domestic and external calls can be bugged with serious consequences for national security.

Similarly, we have failed to learn from the bitter experience of 1965 war when the foreign oil companies throttled oil supplies at critical moments to Pakistan’s armed forces. It is therefore essential that there should be one national oil company which is successfully competing with major multinationals like Shell, Caltex, and Total.

As pointed out above no developing country has totally privatized its oil and gas sector. We can look beyond our border to India whose Prime Minister has categorically stated that “no profitable public sector enterprise will be privatized”.

Already the shine on our macroeconomic indicators is vanishing due to double digit inflation and current account deficit. A substantial likely increase in fiscal and current account deficits will further tarnish the macroeconomic achievements. The rush to privatize, major units like PSO, PTCL, NRL and PAF is difficult to understand given the political and security situation in Pakistan, and its neighbours. The very fact that we have failed to attract even one western bidder who may manage these units better than us should give us second thoughts on the timing and sequence of privatization of majors.

A much better alternative will be to privatize through gradual sale of shares of these national strategic assets to the public. Millions of Pakistanis will gain- without a very major fiscal impact or drain of foreign exchange.

PSO and PTCL — the commanding height of our economy which have preserved in all looks and corners of the country would cease to be Pakistani when they are handed over to foreigners. This should be cause for dismay among all Pakistanis.

(The author is a former Secretary Planning)