The privatization of public sector enterprises (PSEs) has been a recurrent theme on international arena since the early 1980s. Unsustainable large budget deficits, highly irrational taxation, and burdensome funding of huge PSEs deficits, are common factors precipitating the need to privatize.

The efficiency and growth orientation were also referred as justification for privatization. However, the Pakistan government has embraced privatization as part of the conditionalities attached to the IMF- and the World Bank-designed structural adjustment programme.

The privatization process was to be driven by reforms for improving the enabling environment like economic stabilization, trade liberalization, strengthening the institutional framework for implementation, governance, and credit recovery. The privatization process since 1999 also included, before offering for divestment, preparatory measures aimed at enhancing the commercial viability of PSEs, such as removing subsidy support, separating non-core welfare activities, strengthening financial management, and contracting to the private sector non-core activities such as maintenance.

The thrust for the privatization is not new in Pakistan, and Sixth Five-Year Plan (1983-80) included provision for a divestment commission to identify public sector enterprises (PSEs) to be sold to the private sector, and establishment of a deregulation commission to reduce restrictions on the setting up of industries, remove unnecessary controls, and privatize power distribution.

The privatization in Pakistan was achieved in the backdrop of extreme macroeconomic imbalance and the need for stabilization. The economy was governed with extensive government interventions across market sectors, high inflation and large fiscal and balance-of-trade deficits for two consecutive decades — 1980s and 1990s. The approach was to reduce government’s intervention in the economic activity, and increase the role of the market forces. The goods market was first liberalized to eliminate tariffs, price controls, and subsidies. Devaluation was extensively used to stem import expenditure and stimulate resource transfers to the export sector during the 1990s. Major tax reforms were also put in place to rationalize the taxation system. Assistance for the whole process of privatization from the international aid agencies has remained reluctant, cautious, placing priority first on supporting stabilization programmes and improving existing operational efficiencies.

Numerous evaluations and empirical studies have attributed the success of privatization to good governance reforms leading to improved operational efficiency, higher investment, and stronger economic growth. Without reforming governance in the public sector, the privatization may help the government in amassing direly needed funds, but its impact on the economic growth and poverty reduction will then depend on the strict conditions which are unlikely to prevail in the social strata of a developing economy like Pakistan because corporate governance is crucially bad due to rampant corruption and very limited competition. The military government after coming at the helm of affairs in 1999 started clearing the rot, but unfortunately it felt victim to the footsteps of their predecessors and started capitalizing the weaknesses of the governance to strengthen its hold on the state of affairs.

To date, the privatization has proceeded largely without attention to the sequencing of reforms and appropriateness of approach for maximizing its effectiveness. Every government since 1990s, seemed supporting privatization while ignoring the need for a more comprehensive approach to carrying out political, legal, institutional, and economic reforms; the importance of sequencing in the design of the privatization programmes/projects; the ineffectiveness of some forms of public-private partnership (PPP) as a method of privatizing; and social barriers and the need for more comprehensive welfare programmes.

Resultantly, the flow of benefits to new private owners is large and immediate, while benefits to consumers and citizens are small and uncertain, sometimes never emerged at all. The case of Pakistan is entirely different and privatization delivered unexpected results. According to the ADB’s research on the privatization, 44 per cent of total units privatized in Pakistan witnessed no change in efficiency, while 34 per cent recorded massive deterioration in efficiency and 20 per cent units are totally or partially closed.

The lack of economies of scale reinforces industry concentration in a few hands, thus skewing even more income distribution. The cement industry is a glaring example where a fair number of units were given to a certain group which helped in formation of near monopoly.

The promised new quality jobs and output stream have not been created because most of the privatized firms have failed to raise new capital, nor are those that are surviving bringing in new technology to raise efficiency levels. Large number of new owners closed their new venture after failing to compete with the new influx of imports as a result of tariff rationalization of 1990s. The government’s privatization experts failed to judge the ability and willingness to run the business of the new owners. The result was massive retrenchments in newly privatized units. These owners managed to relocate their business by shipping the remains of machinery to somewhere else.

The government to date retains ownership and management operations of the major ports, railways, airlines, gas and oil production and distribution, power transmission and distribution, the major operations of the banking sector, and telecommunications. The monopoly of PTCL was planned to end in 2002, but until now it is enjoying monopoly. True is the fact that far from contributing to the government revenue, some state-owned enterprises (SOEs) like Wapda, the KESC and the Pakistan Steel proved to be a drain on the government resources.

Some issues need to be considered for making privatization a success story. First of all, every effort must be made to encourage the involvement of small investors, so that private sector monopolies do not replace those held by the state. Where investment opportunities are spread as widely as possible, particularly to include the participation of employees and small investors, support for the privatized enterprise is widened, equity markets strengthened, and new forms of savings and investment encouraged. After the privatization of nearly 108 enterprises, only a few are given to former employees in Pakistan. Second, foreign participation in the investment process must be carefully considered and planned. At present foreign investors are apple of the eye in the privatization policy. Third, the government must take steps in any privatization effort to protect the interest of the consumer.

The government-owned enterprises are sold indiscriminately based on political expediency in Pakistan without regard to the financial strength of the bidder, the quality of management, or the overall economic system being created. This has served to undermine privatization programme. To make the privatization programme transparent, credible and trustworthy strong commitment to fair play is required. Pakistan’s economy could not absorb wholesale privatization like being witnessed during 1991 to 1993.

Margret Thatcher is often blamed for adopting hasty privatization even though only 14 units were privatized in her ten years of tenure in the UK. We had privatized 67 units between 1991 and 1993. This haste had caused major disruption in the economy in early 1990s.

The present lot includes strategically important and profit-making institutions like OGDC, PSO, PTCL, etc. These institutions are very important in the economy and contributing in financing chunk of the fiscal deficit.

Instantaneous privatization of these units is not recommended and the government should think hundred times before going to offer these strategically important units.