Pakistan’s public companies have failed to deliver. Whether you take power, banking, petroleum, telecommunications, or industry, the outcome in terms of quality, output, profits, or prices is below expectations, and far below potential.

Take the Karachi Electric Supply Corporation (KESC), for example. Despite high power tariffs, the KESC customers suffer from frequent blackouts, sharp voltage fluctuations, and many billing problems. At the same time, the company is bankrupt and unable to make the necessary investments to improve services. Monthly losses exceed Rs1 billion. These are picked up, directly or indirectly, by the federal government, which in turn, imposes ever increasing taxes to finance the losses. Equally importantly, the poor and costly services negatively affect investment and employment in the KESC’s service area.

Publicly owned commercial banks have also hurt taxpayers. For example, during 1998, Rs32 billion of taxpayer monies were injected into the nationalised commercial banks.

The losses stemmed largely from appointing favourites to top management jobs and pressuring banks to lend to cronies of decision makers or to bankrupt state companies. After injecting equity, bringing in top-notch management, and giving more autonomy to banks, the situation has improved. However, without privatization, there is little assurance that this situation will not deteriorate in future.

In the manufacturing sector, the picture is grim. Virtually all publicly-owned industrial units are making losses. Not only do we pay for the losses by paying higher taxes, the quality of most industrial goods is below comparable imported products and their prices are often higher. This puts our industries that rely on such products at a disadvantage. It would be far preferable to privatise or shut down many of the units.

Even profitable companies fail to deliver. While publicly owned telecommunications and oil and gas companies are profitable, such firms make money in almost all countries, especially when they operate in a monopoly environment or in an era of attractive oil prices. Do these companies provide services demanded by consumers at reasonable cost and does their level of production and profits meets its potential? While telephone charges have fallen recently, they are still high, and customers face many billing and other problems. There is also considerable overstaffing and profits are below potential. Similarly, inefficiencies and under-investment in publicly owned oil and gas companies has meant that production and profits that are well below potential.

Privatization, when accompanied by the transfer of management control, can change all this. It will overcome the constraints brought about by bureaucratic interference and processes.

It can provide an impetus to deregulation and competition, reduce cross-subsidies, bring in new management and capital, and facilitate the introduction of new technology. It can also strengthen public finances by a combination of reducing losses, enhancing taxes from increased profits, and privatization proceeds.

All this, in turn, will reduce the need for tax increases, while enhancing the quantity and quality of goods and services for consumers as well as boosting productive employment.

Given all these advantages, why is there a perception that privatisation in Pakistan has been a failure? Seven frequently asked questions are considered below:

1) an important objective of privatisation was to reduce public debt. Yet, in the 10 years since privatisation was begun in Pakistan, why has debt grown exponentially? Little privatization in Pakistan has occurred during the last 10 years. There have been only two major privatizations involving a transfer of management control: a large power generation company, KAPCO, which was partially reversed, and a major bank, the MCB. Instead of using taxpayer funds to bail out this bank, as were done with other publicly owned banks to the tune of Rs32 billion in 1998, the MCB has prospered and contributed taxes. The other 105 privatization transactions either kept management control with the government (such as the PTCL) or were small industrial units. Excluding the PTCL and the KAPCO, privatization proceeds to date are less than $700 million (received mostly in rupees), which is 1 percent of the government’s total debt. In the meantime, additional debt continues to be incurred, partly to fund the losses of public sector entities, particularly in power, banking, transport, and infrastructure.

2) various governments have made privatization the cornerstone of their economic programme and announced the planned privatisation of many major units. Yet, why is the pace of privatization so slow and why have so few major privatizations been done? Privatization of major units such as in utilities requires a stable and attractive investment climate, appropriate pricing policies, and adequate regulatory frameworks. It also requires support from the relevant ministry, the relevant regulator, and the management of the entity being privatized. These take time to build up. Absence of these factors has made it difficult to close major privatisation transactions. The problems have been exacerbated by excessive litigation. To overcome these factors, this administration took several measures to improve the enabling environment and enhance transparency. It was rewarded for its attempts by many expressions of interest for some large transactions last summer. However, the disruptions caused by the September 11 events have made most investors shy away, forcing delays to the programme.

3) privatizations have often been followed by employee layoffs. Does this not exacerbate the serious unemployment problem in Pakistan?

While some privatizations will generate net employment as a result of expanding production or services, employment in many privatized entities may decrease after privatisation. This is because state-owned enterprises often have many more employees than needed for efficient operation of the company. Many of the employees perform little or no work and/or have low productivity. This implies that either taxpayers end up subsidising their salaries or consumers pay for it through higher prices. The extra amounts paid by taxpayers or consumers leaves less money in the hands of people who might otherwise spend it in a way that promotes productive employment.

The privatization programme as a whole, by injecting new investment, introducing better management, and improving competitiveness, and leaving more money in the hands of the public, is likely to result in increased employment opportunities. At the same time, laid-off workers are often given generous separation packages that can be used to start business or obtain training to help them prepare for a new job.

4) why have there been so much doubt cast on the transparency in past privatisations? Why are there so many unpaid amounts outstanding from past privatizations?

Much of the dissatisfaction arises because of a perception that the sale price was too low or that it was not paid in full. Perceptions of what constitutes an appropriate sale price are based on the reference price calculated by independent valuers or by ministry officials and employees of the entity being privatized. What is not fully appreciated is that valuation is not an exact science. Only by offering the entities in an open and transparent manner to the public can the true market value of the company be determined. In any case, employees and ministry officials are rarely competent to estimate the sale price. Moreover, if the sale price is considered too low, the Cabinet Committee on Privatization, which approves every sale transaction, can always turn it down.

However, this has not stopped employees and ministry officials from instigating federal investigative agencies to question the sale price. Fuelling the zeal for prosecution are political rivalries, inadequate public dissemination of the objectives and process of privatization, and a general distrust of public officials. This has sometimes delayed or stopped the sale of many companies, which has allowed for the continuation of inefficiencies and corruption via contract kickbacks and pilferage, embezzlement, fraud, undue or misused perks for senior officials, and appointment of staff and managers on political or nepotistic grounds.

There are 22 transactions (out of 107) where the sale price has not been paid in full. While the number of transactions is large, the total amount outstanding, including mark-up, accounts for only 5.6 per cent of the total privatization proceeds. As many of the disputes stemmed from staggered payment arrangements or from discrepancies in joint audits carried out to adjust for the value of the company between the bidding date and the handover, the PC now has a policy to seek full payment at the time of handover. While the old policy of receiving staggered payments may have been misguided, there is little evidence that it was motivated by personal gain.

5) How do we know that the private sector will be any more efficient than the public sector? After all private companies go bankrupt and close down all the time and corruption is not limited to the public sector.

The worldwide experience has shown private companies to be more efficient than public ones. The incentives all work towards having greater efficiency in the private sector. However, even with improved efficiency some private companies will go bankrupt while some private managers may also be corrupt. The big difference is that the loss will be borne mainly by its private shareholders, rather than by taxpayers, and the private shareholders will be more likely to hold corrupt managers and employees accountable.

6) what has been the evaluation of privatisation in Pakistan?

A study funded by the Asian Development Bank in 1998 found that the 92 privatizations carried out between 1991 and 1997 were an overall success. The privatization programme achieved, at least partially, most of its objectives, including improving the efficiency of enterprises and the economy, improving state finances, widening and deepening capital ownership, and protecting the interests of employees. In a detailed analysis of 21 enterprises, the study concluded that there had been economic benefits in 10, poorer performance in 5, and in 6, the position was roughly neutral.

The study found very little impact on employment-in the 21 companies sampled; there was a slight increase in employment. The social impact and impact on consumers was positive as was the impact on capital markets and ownership. On the negative side, some first-time shareholders suffered from buying shares in companies that did not get restructured, that were not operating under a proper regulatory framework, and that had no strategic shareholder.

7) the PC seems quite confident of achieving the objectives of privatisation. What if they are not achieved? Who will be held responsible and accountable?

A better question to ask is who is responsible if the public sector entity is not privatized? Who is accountable for delaying the privatization of the UBL so that it required Rs21 billion equity injection in 1998? Who is responsible for delaying the privatization of the PTCL so that its value may have fallen to one-quarter of what it once was and whose services and coverage during this period have left much to be desired? Who is responsible for picking up losses of the WAPDA or the KESC and for putting up with power cuts that deter businesses and cause huge hardships to households? While investigative agencies are quick to question actions leading to privatization, the costs and corruption associated with inaction in privatization matters are often enormous.

[The writer is the advisor to the Privatization Commission].