THE Asian Development Bank (ADB) announced on June 20 that it had cancelled a loan of $20 million approved primarily for the restructuring and privatisation of state-owned enterprises (SOEs).
Unable to manage the strategic sale of any major SOE and given the balance-of-payments’ position, Islamabad probably thought it wise to save financial charges paid to the lender on the loan committed for it.
The cancellation of the ADB loan also indicates the bleak outlook for privatisation of huge loss- making SOEs continuing to place a heavy financial burden on the government and the taxpayers.
Policymakers should not lose sight of the fact that privatisation is different from routine commercial transactions in that it involves a strategic sale to a strategic buyer for well-defined strategic reasons
Over the past decade, the strategic sale of SOEs has virtually come to a halt with the exception of off-loading of some minority shares in already privatised enterprises or a small unit here or there.
The Zardari-led Pakistan People’s Party’s (PPP) government had at best a lukewarm approach towards privatisation. The PPP is opposed to privatisation of the Pakistan International Airlines (PIA) and Pakistan Steel Mills (PSM) located in its political stronghold in Sindh.
As rural Sindh is not creating jobs, the unemployed migrate to Karachi which has some capacity to absorb unskilled labour. Constantly under pressure from the “powers-that-be” from day one and the political and social vulnerability it created, the Pakistan Muslim League-Nawaz government was deterred from taking bold decisions.
Judicial activism over the past few years also discouraged strategic buyers as did the fast sinking state of major SOEs with no visible sign of effective restructuring. An interesting view has been expressed by Mehmood Mandviwalla, senior partner Mandviwalla and Zafar, in a recent paper presented at Woodrow Wilson Centre.
He argues that privatisation “has not been an economic ideology for successive governments.” And the “government ownership of privatisation is for the wrong reasons. It is rooted in either the desire to use the proceeds of sales for financing the budget deficit or simply to meet the deadline for publishing the Expression of Interest imposed as a consequence of International Monetary Fund (IMF) or other conditions.”
Mandviwalla also raised a more pertinent issue when he stated that “the country ownership (of privatisation) is limited. To the public at large, it is a change in owners from one shareholder (government) to another (private sector).”
He believes that privatisation will only be effective and popular if private managers act in the public interest. Critics have argued that privatisation amounts to selling “family silver.” And that the bleeding organisations such as the PIA and PSM are strategic assets which cannot be trusted with foreigners.
Incidentally, these critics within the establishment have not demonstrated any capability to take care of these sinking strategic assets. A former federal minister for privatisation in Musharraf’s regime Dr Abdul Hafeez Shaikh had then criticised the bureaucracy for opposing the sale of SOEs.
Employees fear losing their jobs and perks, and trade unions oppose privatisation as jobs are getting scarcer in a transforming economy for which different sets of skills are required and the redundant staff is not trained.
The pool of skills and expertise in privatised institutions is dispersed as a result of redundancies. Privatisation is not for the benefit of all stakeholders. Schemes like the golden handshake are not attractive enough for those losing their jobs/careers.
Finally, privatisation has not been an unqualified success. In the first wave of privatisation in the country, an ADB study revealed that only 22pc of the companies did better after privatisation. The efficiency level in 44pc of the units was the same and 34pc did worse after privatisation.
Around 16 SOEs were closed down. They included fertiliser, cement, steel, chemical plants, and ghee factories. The buyers of these productive assets were not thoroughly screened, some of them having access to corridors of power.
K-Electric’s performance under private management has not established the private sector’s efficiency in the eyes of the consumers in Karachi protesting against power breakdowns. And the regulators have proved largely ineffective in protecting the consumers’ interest.
In Britain, too, critics say that many of the privatised industries are much too close to the government. They argue that this can lead to dismal service as happened in the case of the British railways. From what has been discussed so far indicates what went wrong and why privatisation has not been an outstanding success.
Privatisation is not like any other commercial sale. It requires a strong presence of regulators to protect consumers and place curbs on rent-seeking which sustains low productivity.
Published in Dawn, The Business and Finance Weekly, July 2nd, 2018