No free lunch: A powerless private sector for power reforms

Privatisation is a package deal and one cannot be naive about the conflicts between wealth creation and social justice


Ali Salman September 04, 2011



When the Economic Coordination Committee of the Cabinet decided late last month to hand over management of thermal power generation companies to the private sector for 10 years, though without giving them the power to fire existing workforce, it essentially rolled back on its own new privatisation policy, that the present Cabinet had approved on January 6 last year.


The government would call it a PPP mode, but we may need a new acronym here: Pakistan Peoples Party instead of the fanciful jargon of public private partnership. For only a party with a socialist manifesto but constrained by economic compulsions, can devise such oxymoronic methods to deal with deep structural problems.

Privatisation is a package deal and one cannot be naive about the conflicts between wealth creation and social justice, while clearly privatisation is about the former. It has several modes and one of the legitimate modes is ‘lease, management or concession contract’ under which the government can award management of state owned enterprises to the private sector without transfer of ownership. However an important clause of the ECC approved framework is that “the transactions would be structured to ensure that management control is transferred to the investor. It will be guaranteed through adequate safeguards and agreements that this arrangement cannot be reversed.”

The current ECC decision to bring the private sector in management of generation companies without allowing them the rudimentary powers of hiring and firing the workforce negates not only basic principles of management and economics but it also brings its own policy into jeopardy. The woes of KESC, another demonstration of the ‘PPP’ mode of privatisation, are not enough to convince our economic managers to take the right course. Even if we look at the 20-years-long history of privatisation in Pakistan, it is evidently clear that 99% of proceeds of the $9 billion received so far have come from sale of assets through tender and public auction and sale of shares through stock exchange. If we take out the controversial transaction of KESC from this bundle, we cannot cite even a single dollar earned from management contracts except those given to the employees of state-owned enterprises.

The fundamental problem with our governments’ economic policy making is preference to expediency over principles and doing things right instead of doing the right things. This flawed thinking of our economic managers is captured in the following statement of the Secretary of ECC. “The government has neither the resources nor the capacity to upgrade these plants, and has therefore decided to sign contracts with the private sector, which is well-equipped for the task.”

And it is not just government which has a monopoly over such surrealism and fancies. The private sector has responded in kind too. In a formal response to the ECC decision, the vice-president of the Federation of Pakistan Chambers of Commerce and Industry has ‘predicted’ that it will bring the per unit cost of electricity down. Nothing can be more misleading than this populism, which permeates across the public-private sector of Pakistan. How can average costs be brought down when the private sector is expected not only to retain the present workforce but also hire new managers - all in the backdrop of one of the world’s highest line losses?

The private sector should have said openly that while this decision, if implemented in the right manner, may increase average costs, it will ensure continued and reliable power supply. Whatever can be said of the independent power deals signed in the nineties including its effect on the average costs, there is no questioning the fact that it saved our country from darkness for at least ten years. At the end of the day, energy does not contribute to more than two per cent of the running cost of a factory. All else is fiction, titled more correctly as lack of competitiveness.

The real question is not whether the government has resources or capacity to undertake the business of power generation. It is also not whether the private sector is well-equipped or poorly equipped. The real question whether it is legitimate for any government to enter the business in the first place. When policy is fair, the private sector will follow and fill in the void created by state failure. If the policy is unfair, which is clearly the case with current ECC decision, only chaos will follow. The ECC should revisit its decision and allow the private sector complete management control and thus harmonise its decision with its own approved privatisation framework.

As it stands of now, such oxymoronic policies bring serious discredit to the entire free market system. Indeed it is only possible under a party with a socialist manifesto yet neoliberal fancies.

The writer, an economics consultant, is Executive Director of Alternate Solutions Institute, a free market think tank based in Lahore.

Published in The Express Tribune, September 5th,  2011.

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COMMENTS (6)

abdussamad | 9 years ago | Reply

@Timour

"HR cost as percentage of overall costs and do something similar for any S.E Asian country (I’m not even going to go to Europe or USA which are both far more advanced)"

LOL if you looked at the financial statements of companies in rich countries you would find that the cost of labour is their biggest cost by far. Labour is expensive in rich countries which is precisely why they spend so much on automation and outsourcing. Even then labour is their biggest expense.

But, yes, compared to our private sector enterprises govt. sector ones are overstaffed. More than that they are unionised and have the backing or political parties who can shutdown an entire city if they choose to do so. So you have to tread carefully. As we've seen with the KESC example the management failed in retrenching workers and instead chose the easier route of rent seeking i.e. tariff increases. That is exactly what will happen if you privatise more public sector entities. All in all it will just lead to higher inflation.

Meekal Ahmed | 9 years ago | Reply This is a very good article. We need to go back to the successful privatization of the banks. There was severance pay for everyone who was let go. That is the way it is done world-wide. No one can or should be simply put out on the street. In comments at the time the severance package was described as being "over-generous". Not a single worker who lost his job protested. I was astonished that the government FORCED KESC to take back workers they had sacked and who HAD received adequate and fair compensation. I don't think this happens anywhere in the world. The PPP government fears it will be called "anti-labor". If that is the fear, nothing good will come of whatever arrangment is agreed to. Changing management and/or outright privatization has to be accompanied by a labor shake-out to reduce unit costs. Of course other things have to be done too; such as having a good corporate plan which must include a freeze on pay and bonuses for senior managers for at least the first three years.
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