Privatisation fails to meet objectives

Asset sales bring proceeds of $11b, but could not ensure efficiency, competition


Shahbaz Rana November 24, 2022
The study identified weak regulators as a reason for the failure to achieve the privatisation objectives. photo: file

ISLAMABAD:

The success of Pakistan’s privatisation programme has remained limited to only generating $11 billion in sale proceeds, as the country could not achieve the post-privatisation objectives of improving efficiency and competition, says a new independent study.

The findings come amid the International Monetary Fund’s (IMF) push for approval of the State-Owned Enterprises (SOEs) Bill to improve efficiency and management of public sector firms. The finance ministry has requested the holding of a joint session of parliament to approve the law, after the bill was rejected by the Senate.

In a study titled “Public Sector Enterprises (PSEs) in Post-Privatisation: Evidence from Pakistan”, authors Naseem Faraz and Dr Ghulam Samad concluded that the key objectives of the privatisation programme had remained unfulfilled. The study has been published in the Journal of Applied Economics.

“Our main finding is that the performance of firms has improved in the post-privatisation period but (it is) statistically insignificant,” said the authors. Privatisation has been carried out with the motive of reducing the fiscal burden and increasing the efficiency of the inefficient PSEs. Since 1991, the sale of PSEs has raised revenues of Rs649 billion, or $11 billion.

The $11 billion has been worked out by applying the exchange rate of the year when a privatisation transaction took place.

Pakistan is one of the developing countries where privatisation of a large number of PSEs has taken place, but the post-privatisation effect is yet to be analysed. Second, rather than focusing on one or a few sectors, the study considers all the privatised PSEs.

The study showed that the performance of a few firms improved in the post-privatisation period but it largely remained negative.

“In particular, the privatised PSEs in energy, cement and chemical sectors do not show positive gains in the post-privatisation period. However, the telecom and textile sectors have experienced a positive change in the performance of the privatised PSEs.” “Similarly, the results also showed that the efficiency of firms did not increase significantly.”

The authors said that according to their assessment through the Key Informant Interviews, the malfunctioning of regulatory environment led to the market failure that eventually resulted in market exploitation.

Regulations and regulators are captured by the market, bureaucrats, judiciary and politicians. An effective regulatory environment does not exist to force the privatised entities to have higher efficiency and develop a competitive environment.

Government intervention in the regulatory sphere is dominant. Every regulatory authority has a board member from the government. This practice is clearly not aligned with the privatisation regulations.

The government intervention (secretary sitting as a board member) creates conflict of interest by having ownership and management together.

The privatised banking and energy companies have failed to bring in the benefits of sell-off, according to the study. The process of privatisation and rewards distribution favoured mainly the buyers, while the government faced risk and cost.

According to the authors, the privatised companies earned a higher average rate of return on assets compared to their fully government-owned counterparts, as measured by the total net profits-to-sales ratio.

The higher returns on assets suggest a favourable effect of privatisation. On the contrary, the profitability or productivity measure (net profits-to-sales ratio) was relatively higher for the privatised firms but it was statistically insignificant compared to the period when the firms were fully government owned.

“The privatised firms experience a mild increase in productivity compared to their pre-privatisation period. This difference in performance is not statistically significant.”

Privatisation also did not enhance the efficiency of the privatised firms in terms of increase in sales. It suggested that the efficiency improvement was merely coming through the reduction in cost of production.

The study identified weak regulators as a reason for the failure to achieve the privatisation objectives.

“Unfortunately, the regulator Pakistan Telecommunication Authority (PTA) did not influence PTCL and other related entities to work in a regulated market environment.”

The role of the PTA is limited to overseeing the determination of market prices. PTCL’s privatisation was not a fair deal. It lost $800 million and also did not improve the market in terms of competition.

“The government sold 26% shares to Etisalat and also transferred the management, which is against the rule, which requires 51% shares,” emphasised the authors.

The government had agreed that Etisalat would pay $2.6 billion by making upfront payment of $1.4 billion and the remaining $1.2 billion in nine installments of $33 million each. For the deal, the government received only $1.8 billion and the remaining $800 million was never paid.

“The monopoly of the telecom sector persisted despite the privatisation and drove away billions of dollars.”

The privatisation of KESC, now KE, also did not achieve the objectives. Though the main reason of the privatisation was to get rid of the loss-making enterprise, unfortunately the government is paying more after privatisation, according to the study.

Published in The Express Tribune, November 24th, 2022.

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