CONTRARY to what diehard exponents of economic liberalism or socialism would like others to believe, the privatisation of state-owned enterprises is neither inherently a virtue nor essentially a vice. It is a policy which has both potential advantages and disadvantages.
A country may embark on privatisation for one of several reasons, including: promoting allocative efficiency; curbing political corruption; presence of chronic loss-making SOEs; job creation, and attracting capital inflows, particularly in the shape of foreign exchange.
Privatisation may aim at breaking the monopoly of the public sector and promoting competition, leading to allocative efficiency. The same purpose, however, can better be achieved by removing barriers to entry for the private sector into the industry, instead of by selling SOEs.
For instance, the telecommunication and electronic media sectors in Pakistan have registered a marked improvement not because of privatisation but because of the entry of several firms, which gave the consumers of these services a wide range of choices.
Instead of going all out for privatisation or condemning it lock, stock and barrel, it is important to look at the rationale for offering an SOE for sale and the transparency of the privatisation process
Political corruption can be another reason for privatisation. In Pakistan’s case, state-owned banks were forced to give loans to the people in power and their cronies who had no intention of paying them back or even using them for the purpose for which the credit was provided. The result was massive bad debts.
However, a private bank will make such transactions only at its own peril. Not surprisingly, the privatised banks have by and large not faced outrageous amounts of bad debts.
But the problem has more to do with having a corrupt political and bureaucratic culture than having financial institutions in the public sector. In such a corrupt culture, privatisation itself presents an opportunity for graft and lack of transparency. Public assets may be sold at less-than- market rates to people close to the decision-makers — crony capitalism — or to those who lack the expertise or intention to run these units in a competitive manner.
The privatisation of some major enterprises in the country, notably banks, has invited such allegations.
There is a strong case for selling chronically unprofitable SOEs. Such enterprises are a burden on the public exchequer and may better be disposed of. But even in such a case, a couple of factors need to be kept in view.
One, the enterprises not providing basic or strategic services should better not be sold. For instance, all else equal, there is a stronger case to privatise PIA, whose services are consumed by the affluent section of the society, than for privatising the Pakistan Railways, the preferred means of transport for low-income commuters.
Two, in such cases, importance needs to be given to privatisation’s likely effects on competition, transparency and the managerial and technical expertise of the bidders in providing such goods or services. If privatisation is likely to stifle competition, it is better to avoid it.
Privatisation can be an instrument of job creation by attracting domestic and foreign investment. However, this purpose can be served only if the new management has the capacity and the intention to make the newly acquired assets work.
In several cases, firms that had bought privatised units were interested only in their land, which they got at prices lower than market rates, and used them as real estate instead of producing the goods or services they were meant for. In such cases, privatisation would only promote rent-seeking behaviour.
Finally, the sale of SOEs can be a source of capital for the government. The Privatisation Commission Ordinance 2000 provides that 90pc of privatisation proceeds are to be utilised for debt retirement and 10pc for poverty alleviation.
Its merits aside, there are two problems with such an approach. Selling SOEs in itself is not a sound way to overcome the problem of capital deficiency. Such a problem is more often than not a result of macroeconomic mismanagement. Besides, the sale of inefficient enterprises will not yield the desired capital and the sale of profitable units for injecting cash into the public kitty is not a sound approach.
The conclusion is that instead of going all out for privatisation or condemning it lock, stock and barrel, it is important to look at the rationale for offering an SOE for sale and the transparency of the privatisation process. At times, the objectives of privatisation may better be achieved by some other policy measure, such as promoting competition. At times, selling a chronic loss-making enterprise may be the best policy option.
Published in Dawn, Business & Finance weekly, January 4th, 2016
