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Hazards in privatisation

March 06, 2014


THE government’s refusal to join the debate on its plans to privatise a large number of enterprises is only strengthening doubts about the soundness of the policy and the correctness of the implementation process.

Against the government’s disdainful silence, economists of standing and integrity have exposed flaws in the current privatisation programme. They have found the logic and scale of the plan to be in conflict with the state’s economic interest. The workers are protesting for social reasons; labour’s interest is compromised and the consumers’ interest is ignored. The authorities have a solemn obligation to answer both lines of attack.

Quite a few commentators have drawn ammunition for their assault from the publication The Impact of Privatisation in Pakistan by a former Planning Secretary, Dr Akhtar Hasan Khan. The book is a scholarly study of privatisation policies and practices and is a must-read for anyone who wishes to say something on the subject. On the basis of the Asian Development Bank’s analysis of 1998, studies by economists (A.R. Kemal, for instance) and his own research, the author has shown:

• Privatisation of the state-owned enterprises did not lead to their more efficient management; only 20pc of the units recorded better performance, 44pc functioned as before, while 35pc were found to be worse off. The percentage of worse off public manufacturing enterprises after privatisation rose to 42.

• The citizens did not benefit from privatisation as the prices of products rose by more than 100pc over seven to eight years.

• The workers did not benefit as the employment growth rate fell over the same period.

• Quite a few units were sold at throwaway prices, some to people who had no experience for the job. As a result, the former made profits beyond their legitimate entitlement and the latter caused the closure of important units (including Zeal Pak Cement, National Cement and Pak China Fertiliser).

It has also been argued that in the zeal for privatisation the security interests of the state have been ignored. For instance, the Civil Aviation Authority has been put up for auction. Will defence strategists accept the idea of private parties’ control over Pakistan’s airspace? Similarly, in a country where the construction of substandard roads is a big scandal, will it be safe to privatise the National Highway Authority? The idea of privatising the Karachi Port Trust is quite ridiculous. The trustees represent the stakeholders, only the chairman is appointed by the government. If the government stops nominating the chairman and lets him be elected by the trustees, the authority will be completely privatised.

The champions of privatisation base their case on the assumption that the public sector is innately bad, the government cannot manage a business enterprise and indeed it is not entitled to do so. These assumptions can be challenged.

The privatisation and deregulation theses deny the state’s welfare functions and its duty to plan economic development in the interest of the people — their employment needs and protection against exploitation by profit-hungry entrepreneurs. An additional factor in Pakistan’s case has been the private entrepreneurs’ inability to establish works the country needed.

Thus, the Pakistan Industrial Development Corporation was created to establish manufacturing units that could be transferred to the private sector and Pakistan became known for using public funds to jump-start the private sector. This meant the use of public resources to enable private entrepreneurs to make money.

The public sector was also needed to keep certain projects, such as the production of arms and ammunition, out of private hands — for obvious reasons. Finally, private enterprises that were found inadequate or lacking in capacity to improve services were taken over. The most significant units were town-based electricity generation and distribution companies.

Has Pakistan progressed to a level that the reasons for having a public sector are no longer valid? Does the private sector have the capital and expertise to meet agriculture’s need for water for irrigation? Can anyone aware of the havoc done by Darra Adamkhel’s gunmakers seriously entertain the idea of privatising the Wah Ordnance Factory? Will it be safe to entrust nuclear power generation to private hands?

An underdeveloped state cannot leave its workers and consumers at the mercy of profit-driven entrepreneurs. The competition within the private sector in Pakistan is not strong enough to result in a lowering of prices. The line separating the pursuit of legitimate profit and exploitative practices is very thin and in Pakistan the latter option seems to have become the rule.

What this discussion leads to is that neither the evil attributed to the public sector nor the good claimed for private enterprise is wholly true. There can be no absolute dicta. Wherever a society is short of capital and skills, the public sector has a legitimate role to defend the consumers’ and labour’s interests. Besides, it is wrong to treat PIA, Pakistan Railways or Wapda, to name only a few, as purely commercial undertakings; they are public service enterprises. The policy of selling them after making them profitable is an admission that they can be turned into going concerns, and that removes the main argument for their privatisation. Selling these units to any foreign or local buyers will be contrary to public interest.

It is essential to check the abuses noticed in the past; the whole privatisation policy needs to be reviewed openly and with the participation of all stakeholders, the sooner the better.