Pathways to privatisation

Published December 3, 2018
Finance Minister Asad Umar chairs an ECC meeting in Islamabad. ─ APP/File
Finance Minister Asad Umar chairs an ECC meeting in Islamabad. ─ APP/File

The PTI-led government is taking a fresh approach to the rehabilitation of loss-making state-owned enterprises (SOEs) in order to prepare them for phased, selective and prioritised privatisation.

On Nov 16, the federal cabinet decided to set up a holding entity — Sarmaya Pakistan Company (SPC) — to be run on the model of Malaysian and Indonesian wealth funds. The government will hand over control of 195 ailing units to the autonomous SPC to end its own ‘influence’ on SOEs.

Seven companies, including banks and power plants, have been identified for initial privatisation. For ‘strategic reasons’ and the ‘social value’ they create, the three big organisations — Pakistan International Airlines, Pakistan Steel and Pakistan Railways — will not go under the hammer. They would be restructured to become financially viable.

So far, bailouts and rehabilitation packages have failed to revive the bleeding enterprises. A report on the SOEs’ performance in 2016, which has just been released, records their combined net loss at Rs44.5 billion against a combined net profit of Rs52.34bn in the previous year.

It is now increasingly recognised that state-run units have underperformed in Pakistan because of management failures, not workers

Some critics say every financial bailout has brought government intervention at the cost of autonomy required for the recipient entities to innovate and grow organically. Poor governance and a lack of robust corporate culture in sick units are considered responsible for their underperformance.

Announcing the decision about the SPC, Information Minister Fawad Chaudhry said the sick units faced many problems and ran into losses and, therefore, the government could not privatise them. Under the given conditions, an official points out, their sale cannot fetch the right price. The SPC will manage them professionally, efficiently and ‘provisionally’ in the public sector and recommend to the federal cabinet the future course of action.

An International Monetary Fund (IMF) team has also been briefed about the government’s plans. While it is stated that there is no difference between the IMF and the government on SOE reforms, press reports indicate that the IMF may ask the government to step up its privatisation programme if the tax revenue targets are not realised. Under the existing rules of business, 90 per cent of privatisation proceeds are utilised for debt repayment, although privatisation has not helped to either reduce debts or improve state finances.

Privatisation has also produced mixed results. The strategic sale of the banks was largely successful because they were made viable after financial restructuring that included huge cash injections and cut in the labour force not engaged in the core banking business. But post-privatisation issues have arisen in cases such as K-Electric where a fresh investment by strategic buyers was not realised promptly despite being stipulated and the question of workers’ redundancies was not addressed before the strategic sale. A key issue for a turnaround in sick units, as business leader Shabir Ahmed puts it, is: how to align better the individual and organisational goals?

The SPC is being entrusted with one of the most challenging jobs. The experience of holding companies in the cultural milieu of Pakistan has not been a happy one. How the SPC can make a difference will become clearer when more details about the company’s charter and functions are revealed. One major departure from the past practice is that the SPC as well as all the ailing units would be managed/led by people from the private sector.

However, it is not known how the crucial issue of financing so many sick units will be resolved. There is a suggestion that wealth funds from neighbouring countries like the United Arab Emirates could be encouraged to invest in SPC.

Privatisation does not enjoy blanket national support. A former chairman of the Privatisation Commission once said: “The sell-off of loss-making SOEs is not going to be simple because these posed serious political, labour, employee rights and post-privatisation challenges.” That is the reason privatisation has been virtually at a standstill for the past one decade.

The last PML-N government, a strong advocate of privatisation, was able to sell just minority shares in some privatised/state-run blue-chip companies and banks.

Privatisation needs a political consensus to succeed. In the context of political economy, a more fundamental principle has been raised by Dr Pervez Tahir, former chief economist for the government of Pakistan, in his research paper titled Economic and Social Consequences of Privatisation in Pakistan. He says the latest research studies show that “efficiency and production have nothing to do with the nature of public or private ownership”.

It is also argued by some that the mixed outcome of privatisation can be traced to many units being sold to ‘favourites’. Critics quote an Asian Development Bank (ADB) study of 1998 that shows that only 20pc of the privatised units did better than before and 35pc did worse. The performance of the rest (45pc) of them was the same.

On the other hand, Dr Tahir argues, “Labour, the most effective party in any privatisation programme, suffers from the burden of unemployment and weakening of its rights.”

The government will not find it easy to overcome resistance from workers of SOEs and political activists supporting them. Over 200 state-run units employ about half a million people. Bringing 195 units under a single SPC umbrella will also encourage the workers to unite on a single platform for a common cause. Numerically less powerful workers of Utility Stores were recently able to get their demands, including no sell-off of the organisation, accepted by the PTI-government.

Pakistan also lacks effective regulatory bodies to protect consumers against possible overcharging by units that are privatised. A growing body of research quoted by The Economist stresses the need for regulators, now solely focussed on consumer welfare, “to be as eager to address the harm done to the workers” by cartels and monopolies often created by mergers, acquisitions and privatisation. Such studies also emphasise that companies should be loyal to their workers to boost productivity.

It is now increasingly recognised — also by the PTI leadership — that state-run units have underperformed because of management failures, not workers. It is also stated that the ‘surplus’ labour can be efficiently managed through the development of human skills and organic growth of rehabilitated units.

Published in Dawn, The Business and Finance Weekly, December 3rd, 2018



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