IN recent weeks, the rationale as well as the process of privatization of state-owned enterprises came under attack, largely for valid reasons. Without going into specific cases (subject of ongoing lawsuits) it is necessary that the rationale for privatisation be debated to de-politicise the issue.

Enterprises providing essential services or key inputs to the industry were nationalised in European states that bore the brunt of WW-II. This departure from the practice of free enterprise was aimed at rehabilitating war-torn economies but, for a variety of reasons, the experiment eventually faltered with serious consequences for those economies. What continues to be debated is whether the concept itself was flawed, or was it its practice.

In Britain, the rationale for nationalisation was based on the axiom postulated by Herbert Morrison. The core of the axiom was two-fold: provision of services at break-even prices, and complete autonomy of the nationalised enterprises i.e. no political interference in their affairs. The axiom assumed professionalism, sustainable financial resources and effective financial and operational controls in these enterprises.

It was on the second count that successive governments failed undermining faith in the state’s ownership ability. It was not realised that after nationalisation, state became the largest consumer of the nation’s wealth and the biggest stakeholder in the industry.

Sustained drop in efficiency of nationalised sector burdened taxpayers with higher levies defeating the objective of keeping the service prices at break-even level for the taxpayers’ benefit.

A deeper look at the failure reveals that many enterprises continued as monopolies, which prevented comparative performance and pricing analysis, and identification of developing inefficiencies that eventually caused losses.

Ironically, instead of objectively redressing the causes of inefficiency, and splitting the enterprises into logical and manageable units, governments steadily reduced their financial support and ultimately turned them into white elephants.

As if these problems were not enough, workers began to manifest unacceptable levels of arrogance through trade unions that eventually forced the demise of many of these outfits.

In the case of Pakistan, an added and far more damaging dimension was the politicisation of the management and trade unions of these outfits. Even privatized units now suffer from the after-effects of these debilitating diseases.

The monumental failures these managerial shortcomings gave rise to, established the fact that the state cannot manage every economic activity because, firstly, it cannot gear itself for such a challenge and, secondly, this approach kills the entrepreneurial spirit and suppresses the creative and innovative instincts of the people. In the long-run, suppressing these crucial instincts impedes progress, with serious consequences for the future.

This logic, however, doesn’t justify the prime minister’s view that the state must withdraw from all sectors. What he overlooks is the fact that privatisation is not the end in itself; it is a means to achieving the core objective of the state i.e. provision of essential services at the lowest cost to help eliminate economic inequalities. The state may withdraw from sectors that don’t affect its underprivileged classes but not from the essential service sectors.

Provision of essential services (healthcare, water supply, sanitation, electricity, education and mass transport) at break-even cost implies that prices charged for these services must not include a profit element. By implication, the state must not expect the private sector to provide these services. Besides, if the state can’t provide even these basic services what is the rationale for its continuation?

Since the early 1980s, privatisation was adopted by many states as the way out of the mess their nationalized sector represented. The big unanswered question is “what exactly is the objective this time?” Is it just to get rid of the outfits that drain state resources, use their sale proceeds for plugging fiscal deficit, or is it to turn them over to those genuinely better placed to manage them with the assurance of fulfilling the promise of providing services at the lowest prices to the taxpayers?

The fact that taxpayers’ money was used to purchase or set up these units places a great responsibility on those privatising these units. Firstly, the units must be sold at prices that are based not merely on the current market price (that remain suspect depending on the valuation sources used) of these units but must also include a fair proportion of future profits that the new owner will earn.

Contrary to the logic advanced by the consultants, as financiers of these ventures at the outset, it is the right of the taxpayers to receive this benefit.

Secondly, because the avowed rationale for privatising these enterprises is up-grading their performance and delivery capability through modernization and successful innovation, besides adequate and sustainable financial resources, the basic qualification of the buyers must be demonstrated ability to realise the objective of up-grading performance. These assessments often overlook verifying the buyers’ compatibility, resources and capacity.

Finally, given that the fundamental responsibility and raison d’etre for the existence of the state is the provision of essential services at the lowest possible prices, enterprise buyers must agree to pursue this goal, and allow the state to review the sustainability of their financial strength, and adequacy of financial and operational controls to ensure that they remain geared to achieving this goal. Credibly fulfilling this condition implies focused regulation of privatized enterprises, wherein the state often fails.

As with nationalisation, the rationale for privatisation remains enhanced resource efficiency reflected in quality improvement, lower prices and healthy competition, which is to be monitored and ensured by regulating agencies. That, unfortunately, doesn’t happen because regulators tend to accept profit as the yardstick for measuring these aspects. This attitude manifests an embarrassing failure in purpose-oriented regulation of the privatized units.

Instead of doing their job credibly of monitoring success in quality improvement and lowering of prices, regulators tend to rely on profit-based performance ratings awarded by credit rating agencies. Loss of regulatory focus owes itself to regulators’ incompetence, lack of commitment and, in some cases, to political interference, undetected or disguised cases of profiteering, corruption and fraud. Together, these failures (that eventually come to light) undermine regulation to the disadvantage of the taxpayers.

Governments in mismanaged debt-ridden states tactlessly promote privatisation as the healer of all economic ills (especially huge fiscal deficits) not realising that privatising state assets without putting in place an independent, focused and powerful regulatory oversight regime encourages profiteering by greedy buyers of state-owned enterprises.

Most of these short-sighted entrepreneurs do not realise that excessive profiteering can give rise to demands for nationalisation, as they did in Pakistan in the late 1960s.

Privatisation can deliver socially acceptable results only if the private sector is obliged to deliver on the promise of maximizing resource efficiency through quality improvement, lower prices and fair returns to entrepreneurs.

To achieve these objectives, regulators must have the capacity for credibly assessing these crucial aspects. It is questionable whether regulators have the capacity to assess quality improvement and basing of service/product pricing on the current inter-play between demand and supply of resource inputs.

Success of privatisation pre-supposes the existence of powerful and independent forums for redress of consumer hardship and complaints – institutions along the lines of the Office of Fair Trading and Monopoly Control Authority in the UK. For the moment we have neither, which gives the private sector a free hand to manipulate the markets to its advantage.

Tragically, private sector’s own consultative bodies – the host of federations and ‘chambers’ – also don’t engage in debates over the conduct of their members on the issues of quality improvement and pricing.

These forums point out only tax anomalies and infrastructure deficiencies. True, these issues must be highlighted but shouldn’t the sector’s sense of social responsibility also engage the forums?

Eligibility criteria for winning performance trophies indicate that these exalted forums place competitive practices, service/product pricing and quality improvement (that together manifest a sense of social responsibility) at a low priority.

These are dangerous shortcomings of the private sector that could eventually hurt the sector. Regulation or no regulation, for the private sector it is important to credibly practice voluntary self-discipline for its own image.