Is privatisation the solution for state-owned enterprises?
The government is spending Rs400-600 billion per year on these SOEs, reducing allocations for the social sector and increasing the country’s debt. What will be the way forward, privatisation?
The perception that a change in ownership will be the solution is not true. People who advocate privatisation argued that the private sector can manage corporations more efficiently due to its profit-oriented approach compared to the state, which is not supposed to do business.
Besides the debate who should do business and who should not, there are some questions. What is the capacity and priority of the state? What are the tools and tactics the private sector has to manage and efficiently run these enterprises which governments do not have? Is the state capable of running the enterprises on the pattern of corporate sector?
It seems irrational that instead of tackling corruption and other impediments, the state should sell public assets to the private sector.
Another view which opposes privatisation points to irregularities and corruption in the privatisation process. In Pakistan, effective privatisation started from 1991 after nationalisation in the 70s. Privatisation started with two primary objectives – payment of foreign debt and poverty alleviation. Now anyone can easily assess what privatisation has achieved. The external debt stands higher at $60 billion and approximately 43% of population lives below the poverty line.
According to the Privatization Commission, the privatisation process is aimed at selling government property in an open and transparent manner with a view to obtaining the best possible price. But how much transparency and openness have been observed during the privatisation process was evident from the steel mill case which everyone knows.
So, privatisation in an attempt to eliminate corruption is not appropriate in the sense that the same corruption problem emerges during the privatisation process as in running government organisations.
Another view that these corporations should first be reformed and restructured in order to make them profit-oriented and then privatised also seems to be rubbish because there will be no need to sell public assets when they are making profit. What has been achieved in the case of Karachi Electric Supply Company (KESC), which seems in more wretched condition after privatisation. Pakistan Railways, no doubt, is in its worst condition due to mismanagement and vested interests, but after the outsourcing of some operations, like the business train, to the private sector while using its infrastructure, nobody can favour privatisation.
There are certain examples all over the world where public utilities are running successfully under state control. The economic mechanism in countries like Pakistan does not favour privatisation, which itself is considered a source of corruption. Improving efficiency, restructuring and output-based evaluation may reduce losses of the state-owned enterprises.
The writer hosts business talk shows on FM 101 and Radio Pakistan and is pursuing M Phil degree in Economics.
Published in The Express Tribune, August 6th, 2012.
COMMENTS (7)
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Sorry this is a nonsensical article just flowered with vague bits here and there and with endings such as: "Improving efficiency, restructuring and output-based evaluation may reduce losses of the state-owned enterprises." Duh, really? Express Tribune Editors, are you really reading this?
The author compares Pakistan with itself. What you need to look at is whether it has been successful in other countries and especially emerging countries. You'll see that the answer is almost always a big yes - especially in the long term: even if government sector companies do well in the short term in emerging countries (the Steel mill was turned around in the Musharraf era) they just cannot remain efficient because of corruptions and political considerations such as those for jobs (take the example of NADRA. An amazing institution with still some its greatness but stuck in the quagmire of overstaffing...)
Sir u r just pointing that the how bad the alternatives are but the waters we are in currently are also hot. So given ur acute sense of economy, can u just not talk abt minimizing losses and propose how can we make SOEs an efficient and profitable entity?
Whole economy runs on the concept of Capitalism all around the world. Private sector plays the most part in the economy of the developed countries. In US, defense production is even carried out by private Sector which is BillIion US$ Industry. Every where Banking systems is based and driven by Private Banks, which look after the Private Sector. Writer has not given any example of Pak Govt Enterprise where it is performing efficiently and contributing to Govt exchequer. Only exceptional sector is Oil & Gas, which is inherently successful all over the world.
I am quite disappointed by authors lack of information on the KESC issue. Being an engineer my self I can safely say with 101% surity that KESC is far better today than it was before privatisation. Keeping in mind that the main role of KESC is delivering electricity and not generating it. The distribution network has improved in KESC by leaps and bounds and if political parties had not interfered the corrupt line-men were showed the door 5 years ago, they would have been replaced by more competent staff. And police or Army co-operates the bill recovery of the city can easily come to 80-90% . KESC is one of the success story, despite the fact that it was under sold at the first auction and the first company that took over couldnt handle KESC properly, and even then that company sold KESC for double the price it had bought and left with 100% profit in one year despite abysmal performance, this should be look into by NAB.
Just can not argee. When governance is as bad is it is in Pakistan your argument makes little sense.
I disagree completely with the writer regarding privatisation. He said that improving efficiency, restructuring etc. will reduce losses. That is the biggest problem in state owned organisations. There is no will. Everybody is looking for his vested interests.
Even if we take the example of KESC, with the kind of mess the company had before privatization, it is not an easy task for the new management to correct things overnight. Be it overstaffing, wrong staffing, unions, ghundaism, corruption, dilapidated equipment etc. etc., it takes time and effort to make improvement. If you look at the situation in karachi vs rest of the country, it is much better in karachi. Now coming to profitability, it still a net loss making company, but its losses are reducing every quarter, with significant improvement in line losses etc. Last year thier EBITDA also became positive.
Now take the example of privatisation of UBL, MCB, HBL etc. You see a marked improvement in thier quality of services and thier efforts towards customer satisfaction. Before privatisation, all of these banks were net loss making enterprises. Now they are not just profit making, they pay significant taxes to government exchequer.
PTCL would have been bankrupt a long time ago, if it was not privatised. They reduced thier manpower from almost 60,000 to 30,000 and now they have announced their aim to reduce it to around 15000 i.e. 1/4th of the manpower is actually required to run the company despite the fact that the network has actually increased. That very clearly explains the inefficiencies in government organisations.
Government job is to make policies, not to run corporations. Let private sector manage corporations and government concentrate on policy making. Government can still have significant shareholding, with no management control, to ensure continuous profitability.
This sentence shows you do not know what you are talking about. The external debt increased for exogenous reasons and have nothing to do with privatization. Second, Pakistan's privatization has mostly been subdued. If enough was sold, economic growth would be much higher. You should look at the banking sector that was privatized, it has done tremendously, also telecom, cooking oil, a load of mills, etc. This opinionated piece is a joke.