A COMMON refrain of donors is that Pakistan needs to raise its tax-to-GDP ratio substantially to achieve macroeconomic stability on a sustainable basis.

It has earlier been argued in these columns that the deterioration of the fiscal health of the state has resulted more on account of government expenditures gone wild.

Our experience suggests that as the revenue pie grows, additional resources are likely to be utilised to establish more non-productive agencies, with overlapping mandates, to finance grandiose, wasteful projects ill-suited to the country’s needs, giving hefty increases in salaries and perks to state employees and to keep feeding inefficient, overstaffed SOEs.

The losses of these SOEs have accumulated to Rs2.5 trillion (equivalent to $8.8 billion). Take the case of just one such institution, PIA. Its accumulated losses have crossed Rs600bn, growing at an average rate of Rs150bn per annum, with outstanding debt and liabilities of more than Rs350bn, even after having received several bailout packages from the government.

The financial burden of these resource-guzzlers, apart from haemorrhaging government budgets, has also become a source of systemic risk for the financial sector. But successive governments, despite being cash-strapped, have happily bankrolled these SOEs, all from borrowed money, while smarting at the stringent conditionalities of a $3bn IMF programme.

Going forward, no easy money will be available to continue financing their losses. In fact, most of these SOEs would need to be wound up because they can neither be repaired, nor restructured, nor privatised as ‘going concerns’.

This article argues for privatisation, not on some theoretical or ideological principles but on the basis of irrefutable evidence to support its adoption as a key element of our policy and structural reform.

Privatisation or the winding up options are, understandably, challenged by the employees of these entities and politicians who have been major contributors to their bloated structures. Unfortunately for them, there is overwhelming information on the positive outcomes following privatisation or the opening up of economic sectors such as banking, telecom, etc, that were hitherto closed to private entities.

Going forward, no easy money will be available to continue financing the SOEs’ losses.

Until the privatisation of banks began in the early 1990s, there were concerns about the fate of depositors of public-sector banks and the soundness and stability of the banking system.

It would be difficult to contest the improvement in quality of services and products, the outreach to those outside the banking system and increased employment opportunities provided by the banking industry after privatisation, apart from contributing to the expansion of the GDP, tax revenues and overall public welfare.

From an after-tax loss of Rs9.77bn in 2001, when they were owned by the government, these privatised banks’ earnings rose to a profit after tax of Rs73.115bn in 2007. Higher earnings led to increased tax payment by banks to the government — rising from Rs10.8bn in 2001 to Rs33.8bn in 2007. It is also instructive that in 2008 and 2009 the average loan write-off per borrower in public-sector banks was over twice that per borrower in the case of private banks.

Next, take the case of the telecom sector. Surely, no one believes that had PTCL continued to have a monopoly we would be able to enjoy such a variety of choice and quality of services and products at alluring, competitive rates? Also, hasn’t PTCL’s service improved since it was privatised? Bribes are no longer needed for new connections and getting your landline fixed — it is seamless with little, if any, human contact. It wasn’t that long ago that we had to suffer all this.

Next, take the electronic media’s example. Could PTV ever have provided programmes of such variety and quality as well as raised public knowledge and awareness of a range of constitutional, political, economic and social issues in a society with an abysmal literacy rate?

Moreover, and more importantly, the presence and growth of the private sector is the best, if not the sole, guarantor of recruitment on merit.

Isn’t it a pleasure to come across bright young men and women, with hardly any ‘connections’, producing and anchoring widely watched programmes on TV channels and holding middle and senior management positions in leading private companies?

This fact alone that in an economy dominated by the private sector the young would find jobs on the basis of the talent with which they are born (or the skill that they have acquired) rather than the family in which they are born is justification enough to privatise every entity in the public sector which does not hold a monopolistic position.

Successive regimes have overstretched the mandate of the Pakistani state, burning huge holes in its budget. This has resulted in its inability to perform, efficiently and effectively, what should be its core functions — security of life and property of its citizenry, and provide justice and some basic social services, responsibilities that it must both pay for and provide.

Therefore, by outsourcing the management or by privatising these enterprises, scarce resources, both financial and human, will be released to enable the state to focus on these core functions.

In conclusion, the vociferous opposition to privatisation by bureaucrats and politicians is amusing, because when it comes to their private lives, all of them are the proud owners of more than one cell phone; they have private bank accounts, watch channels other than PTV, are likely to have studied in private schools and are sending their children to the same institutions.

This private behaviour is rational, since these choices are being made on the basis of service quality. But they resist privatisation because there would be reduced opportunities for ‘patronage’ (an appropriate all-embracing term in our context) or earnings as fees or junket trips as directors of these publicly owned entities.

All that is required for the benefits to accrue from the proposed privatisation of such institutions is a competitive operational environment, without support through subsidies or heavy protection.

Shahid Kardar is a former governor of the State Bank. Mian Mansha is chairperson MCB Bank.

Published in Dawn, October 12th, 2023

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