Case for privatisation

August 13, 2011

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IN an earlier column in this newspaper this writer had made a case for rearranging the politico-economic building blocks of the Pakistani state.

The article had argued for an early closure or privatisation of either management or ownership of not just the commercial entities in the public sector but also those mandated to provide ostensibly social services like education.

The latter plea was driven by concerns about the fiscal burden of these resource guzzlers on already strained government budgets and how they were becoming a potential source of systemic risk for the financial sector. This article will present the case for speedy privatisation, not on some theoretical principles but on the basis of irrefutable evidence to support its adoption as a key element of policy and structural reform.

One particularly bad example of privatisation, the KESC (a subject that requires a separate treatment and discussion), is repeatedly brought up not just by vested groups but also the general public to oppose the divestment of a host of poorly managed, loss-making enterprises.

This perception persists and continues to find supporters despite overwhelming information on outcomes following privatisation or the opening up of economic sectors like telecom, banking, etc that were hitherto closed to private entities. An array of stakeholders has latched on to this outlier example (the KESC), contrary to all available proof of the immense contribution of privatisation towards bolstering Pakistan’s economy.To start with, take the case of the banks. The lessons learnt from the recent experience with the Bank of Punjab and that of banks like MCB, Habib, UBL and Allied (the last three with huge holes at the time of their privatisation) until their privatisation began in the early 1990s should be a sobering reminder on the need to protect the interests of depositors and to maintain the soundness and stability of the banking system by saving the remaining public-sector banks from the fate of the Bank of Punjab.

It would be naïve to expect the State Bank as the regulator to be able to initiate timely, corrective measures to prevent such abuse.

Can anyone deny the quality of services and products, the outreach to those outside the banking system and the increased employment opportunities provided by the rapidly growing private banking industry? Add to this the part it has played in the expansion of the country’s GDP and to government tax revenues to value the nature and scale of its contribution to overall public welfare.

From an after-tax loss of Rs9.77bn in 2001 (when they were government owned) the earnings of these privatised banks rose to a profit after-tax of Rs73.115bn in 2007. Higher earnings resulted in increased tax payment by banks to the government from Rs10.8bn in 2001 to Rs33.8bn in 2007. In the same vein, it is instructive that in 2008 and 2009 the average loan write-off per borrower in public-sector banks was more than twice that per borrower in the case of private banks. Therefore, the sooner we privatise the remaining public-sector banks the higher and quicker the economic and social returns to the nation.

Next, let’s take the case of the telecom sector. Does anyone seriously believe that had PTCL continued to have a monopoly in this sector we would have been able to get this variety of choice and quality of services and products and, more importantly, at such alluring and competitive rates? Also, hasn’t PTCL’s service improved since its privatisation? No bribes now needed for new connections and for getting your landline fixed — all seamless with little, if any, human contact. It wasn’t that long ago that we had to suffer all this. Either our memories are short or conveniently selective.

Next, take the case of the electronic media. Could PTV ever have provided such a variety and quality of programmes and also raised public awareness and knowledge of a whole range of constitutional, political, economic and social issues to such heights, and 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? To this writer 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 skills they have acquired) rather than the family to which they are born is justification enough to privatise every entity in the public sector.

Finally, over the years, successive regimes have overstretched the mandate of the Pakistani state. This has resulted in its inability to perform, efficiently and effectively, its core functions like ensuring security of life and property of its citizenry, provide justice, etc., responsibilities that it cannot outsource, services that it must both pay for and provide. Therefore, by giving up the management or by privatising these enterprises, scarce resources, both financial and human, will be released to enable the state to focus on the above referred core functions.

In conclusion, I for one find the vociferousness of the opposition to privatisation from politicians and bureaucrats rather amusing. All of them without exception, when it comes to their private lives, have chosen differently from what they are proposing or opposing. They are proud owners of more than one cellphone, have private bank accounts, watch channels other than PTV and would have studied in private schools and invariably chosen such schooling for their children. This private behaviour is rational as they are making choices on the basis of service quality.

However, it is this same set of politicians and bureaucrats and their collaborators who continue to oppose privatisation because of the resulting reduced opportunities for ‘patronage’ (an appropriate all-embracing term in our context) or earnings as fees or junket trips as directors of these banks and publicly owned entities.

The writer was, until recently, governor, State Bank of Pakistan.