SADLY, the policy debate, as illustrated by the national discourse on privatisation, demonstrates that some economists with decades of experience are saying things they should know better not to say. Either they do not know any better, or they know better but they are choosing to gloss over it for personal gains.

Such an approach has serious consequences for us as a nation, as it brings back to life an idea which should have been dead and buried long ago. The idea I am referring to goes as follows: “We should privatise some of the stake in highly profitable entities such as Oil and Gas Development Corporation (OGDC) or Pakistan Petroleum Limited (PPL), and use these proceeds to pay off our debt”.

This idea keeps on coming back from the dead to haunt us like a zombie. However, it appears that, the government is all set to do just that. This article lays things bare so that a common citizen can come to his own conclusions.

To fix ideas, suppose there is a firm, ABC, which is currently government-owned. Lets assume that it generates Rs10 billion in profits every year. Suppose the government decides to sell 10pc of its shares to the private sector. What does that mean? A share is a claim on profits. So, selling off 10pc means that 10pc of the profits will go to the new buyers. That is, Rs1 billion, out of the total profit of ten billion, will go to the new buyers, year after year.

Now, if you are siphoning off Rs1 billion in profits every year, what are you getting in return? If history is any guide, due to the country’s high risk status, highly profitable companies have a share price which is merely 10 times their profits. So, the government can raise at most Rs10 billion if it decides to siphon off Rs1 billion in profits.

The PML-N government seems to have an insatiable appetite for raising cash from whatever source possible. The government is on a borrowing spree. Privatisation of profitable entities is just another way of raising quick cash

In other words, by liquidating 10pc of the stake, the government is merely raising funds equal to one year’s total profit. Can anybody seriously argue that this is a good deal?

Even if the Rs10 billion so raised are used to service our domestic debt, the amount the government will save on interest payments will be smaller than the amount of profits it will be giving up. Given the particular brand of patrimonial capitalism that we proudly practice, the money that the government will raise is going to be a lot less than 10 times the given-up profits, as assumed here.

The basic lesson of economics, which is lost on us, is as follows: when you liquidate a part of your stake in a profitable company, you agree to give up the profits generated by that firm proportionally, year after year. And the amount of money you will get in exchange for such liquidation now is not likely to be greater than the current value of the profits that you are giving up year after year.

Even if the money so raised is used to pay off debt, the total amount saved in interest payments is likely to be less than the value of profits given up. If the government is serious about paying off debt, it should earmark the earnings of highly profitable entities for debt servicing.

If privatisation of highly profitable entities makes no economic sense, why is there so much hoopla surrounding it? The current PML-N government seems to have an insatiable appetite for raising cash from whatever source possible. The government is on a borrowing spree. Privatisation of profitable entities is just another way of raising quick cash.

And raising cash is where the interests of the government as well as that of multilateral lending agencies such as the World Bank and the IMF converge. These agencies want to make sure that their debt is paid off, and a government flush with cash is more likely to succeed in doing that. No wonder the privatisation programme has strong support from the World Bank and the IMF.

An analogy is in order here. Suppose you have raked up a lot of credit card debt. Listening to the IMF on privatisation is akin to listening to your creditor who is advising you to sell your house to pay off the credit card debt that you owe him. You will be a fool to pay heed to such advice.

The writer is a research fellow at the University of Queensland and an associate professor of economics at LUMS

h.siddiqi@uq.edu.au

Published in Dawn, Economic & Business, May 26th, 2014