Pakistan’s longstanding fascination with privatisation originates from external and internal sources. External influences are closely tied to the heightened role of the International Monetary Fund in the country’s policymaking decisions.
Internally, the drive for privatisation stems from three key sources. Firstly, there’s the concern about the fiscal situation, with government deficits posing a persistent challenge. The conventional belief attributes a substantial portion of these deficits to losses incurred by public enterprises, fostering the idea that a privatisation programme could mitigate fiscal pressures.
Secondly, internal pressure is rooted in ideology regarding the role of the state. Economic thinking in the late 1980s focused on concepts like government failure and the efficacy of the market. In this ideological context, advisors lean towards diminishing the power of the state, viewing privatisation as a means to that end. This viewpoint also garners support from elements in the ongoing theological debate about the ideal form of an Islamic economic system.
The third source of pressure emanates from the business community, driven by the prospect of making substantial financial gains through privatisation transactions.
If subsidies are deemed necessary for competitiveness, the anticipated impact of privatisation on the fiscal deficit may be limited
Privatisation may be deemed necessary, but it alone would not suffice to realise the efficiency gains promised by its proponents. The perceived effectiveness of privatisation in reducing the fiscal deficit could be overemphasised, primarily due to the private sector’s dependence on subsidies to maintain competitiveness both domestically and in foreign markets.
The ultimate success of privatisation hinges more on the structure of Pakistan’s private sector than on the ownership of any specific business.
In traditional economic theory, the hallmarks of a competitive market include both productive and allocative efficiency. The impact of privatisation on allocative efficiency is contingent upon how well markets function. This raises the crucial question: “How competitive is our private sector, and does it truly exhibit characteristics of a competitive market while being self-sufficient in competing against foreign businesses in both domestic and international markets?”
Let’s delve into these questions. The private sector in Pakistan is notably marked by numerous subsidies, encompassing export subsidies, energy subsidies, tax exemptions, and protection. The substantial reliance on these subsidies raises significant concerns about the self-sufficiency of the private sector.
If subsidies are deemed necessary for competitiveness, the anticipated impact of privatisation on the fiscal deficit may be limited.
Moreover, the family ownership structure within the private sector poses challenges that could undermine the gains from privatisation. The private sector operates in an environment that lacks true competitiveness, with a concentration of ownership among thirty-one families, as highlighted in the Pakistan Institute of Development Economics’s report.
These influential families might wield their power to stifle competition, introducing inefficiencies into the processes of production and resource allocation. To sum up, the private sector consists of a bunch of families using their influence to stay competitive.
Examining the non-financial and financial sectors reveals a structure that resembles monopolistic markets more closely than competitive ones.
The financial sector, primarily dominated by a small number of commercial banks, enjoys substantial profits by catering predominantly to its largest customer — the government itself. This dominance results in a lack of incentive for these banks to prioritise providing better and more affordable services to the private sector.
No new modes or tools of investment, insurance, or any other financial products have been introduced to the public for several decades. For instance, the financial sector shows a notable lack of innovation when comparing the range of new products offered by banks to those in the mobile phone market, where new products and models are frequently launched.
This deficiency can be attributed to a lower level of competition among commercial banks. Despite being privatised in the 1990s, these banks persist as oligopolies and undermine the gains from privatisation.
As argued by Hemming and Mansoor, “efficiency is determined by market structure rather than ownership”. The mere privatisation of a firm does not fundamentally alter the market dynamics or the factors influencing its pricing decisions. It is reasonable to assert that a public monopoly often transforms into a private monopoly, maintaining inefficiencies in pricing decisions and resource allocation.
Further, in Pakistan, enterprises are typically found in sectors such as services or manufacturing, where scale economies are limited, and the market can accommodate only a few firms. In such scenarios, the gains in allocative efficiency from privatisation remain uncertain, and regulatory reform is expected to yield greater efficiency gains than privatisation alone, even though, in practice, the two often coincide.
Despite some noteworthy exceptions, the anticipated gains in allocative efficiency from privatisation are expected to be modest. The argument for privatisation, therefore, hinges on the potential gains in productive efficiency within the firm.
Advocates of privatisation posit that public enterprises are more susceptible to internal inefficiencies compared to private firms for various reasons. Firstly, public enterprises, shielded from competition, tend to mismanage production inputs, leading to inefficiencies in their processes.
Secondly, in many countries, public enterprises have easy access to subsidised capital, undervaluing capital in their investment decisions. Post-privatisation, competition for capital access would drive more efficient utilisation.
And lastly, public ownership and regulations compromise managerial incentives, resulting in cumbersome controls and a lack of pressure for managers to optimise company performance.
However, the efficacy of privatisation in enhancing efficiency depends on its ability to foster increased competition. This outcome is not guaranteed, as the prevalence of numerous firms in almost all industries where public enterprises operate provides room for monopolistic competition.
In conclusion, privatisation alone is insufficient to address our challenges. A comprehensive strategy involving robust regulatory and structural reforms, alongside an improved incentive framework, is crucial.
This approach not only supports the growth of small and medium enterprises but also encourages individuals to embark on new business ventures. By fostering a more dynamic entrepreneurial landscape, this integrated strategy harnesses the full potential of privatisation, driving heightened competition and delivering improvements in productivity and allocative efficiency.
The writer is an assistant professor and a researcher at the Centre of Economic Planning and Development, Minhaj University Lahore.
Published in Dawn, The Business and Finance Weekly, December 11th, 2023