The writer is a PhD candidate at the New School for Social Research and a Research Fellow at IBA, Karachi. He tweets @alifdaru
Consider.
The economics that Mr Tirmizi subscribes to does not care if privatisation leads to improved tax revenues from the privatised state-owned enterprise (SOE). Privatisation takes place chiefly on the grounds of efficiency. It is argued that private producers in a competitive environment achieve allocative and productive efficiency and the economy as a whole achieves distributive efficiency. The state as a monopoly (or monopolistic) producer allocates resources in an inefficient way, hence the case for privatisation. In this context, it doesn’t matter if the privatised SOE improves the government’s tax receipts — that it eventually does so may be an added advantage but cannot be a reason to privatise.
Let us now focus our attention on what the evidence from Pakistan actually suggests. Tirmizi uses the performance of the banking sector in the post-privatisation period as an example of the fruits it can yield. The actual evidence from Pakistan is at worst negative and at best, mixed. No study has been able to establish, conclusively, the improvements in the efficiency of an SOE after privatisation. The profitability of the banking sector that the writer highlighted has been attributed to a host of factors and cannot be exclusively attributed to privatisation. Also, the 2004-2009 period that saw a boom in the sector was essentially an outcome of external factors. All banks generally tended to do well in that period because of the high spreads enjoyed by the sector in that period. It is quite difficult to attribute the boom in the banking sector to the privatisation of the state-owned banks.
The other two ‘success’ stories about privatisation touted in the Pakistan are Pakistan Telecommunication Company Limited (PTCL) and the power sector. The latter is more the case of liberalisation than privatisation but is certainly an instance of the state opening up an area of economic activity that had hitherto been under its control.
Kamal A Munir wrote an excellent piece on the PTCL’s post-privatisation performance on these pages “Privatisation of PTCL: A Lesson for Policy Makers”, last year. Again studies done on the PTCL’s post-privatisation performance do not point to significant gains in efficiency — or gains that can only be justified by privatisation. The power sector was liberalised in Pakistan, in 1994. Analysts (including myself) have traced the current crisis of the circular debt to the liberalisation of the sector in the mid-1990s.
The truth of the matter is that privatisation and liberalisation in Pakistan have been fraught with nepotism, crony capitalism, graft and corruption — supposedly the very ills that the process aims to cure. Evidence from other countries tells us that Pakistan is not unique in its experience. Privatisation and liberalisation, from Russia to Latin America, have not necessarily resulted in efficiency or welfare gains. These policies have undoubtedly made some people rich and powerful beyond belief.
The cacophony of privatisation in Pakistan is increasingly masqueraded in the fiscal burden argument, i.e, how SOEs cannot survive without the government’s subsidies. It is conveniently forgotten that Pakistan’s ‘robust’ and ‘efficient’ private sector is equally reliant on government subsidies whether they come in the form of subsidised inputs (fertiliser sector, agriculture/farming) or tax rebates (textiles, agriculture, power sector). Maybe the government should first leave the private sector at the mercy of domestic and international market forces and once it proves its robustness and efficiency, one can certainly turn towards the privatisation of SOEs.
Published in The Express Tribune, October 16th, 2013.
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COMMENTS (20)
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I am a little confused as to what the Author is advocating. Is privatization a good force but hasnt produced the results, or is it a negative force, which should not be urged? If it is the former I completely agree with him. Selling off state enterprises does not guarantee better performance and more efficiency, however it is the step in the right direction. State owned enterprises are by its very nature inefficient- they survive on public money, or inflationary government spending (money printing), they are unable to correctly predict change in consumer demands to better adapt themselves, they lack the profit motive and hence the key element of entrepreneurship. So does it mean that as soon as you privatize you will have a booming economy? No, but what it does mean is that, a large amount of capital will be freed up, which private individuals can use to further their own, and subsequently societies best interests. While many SOEs have not done well after privatization, the reason is not a change of ownership, but what we call government bid cronyism. These enterprises have been given to the individuals with connections with the political cadre, and have a number of hidden stipulations, which makes the entire exercise ridiculous and defunct. What we need is a large scale privatization, and a freer market, and winner and losers
Beginning of this year Presidents of more than 30 chambers of commerce from all over Pakistan reached a consensus on a two day conference in which leaders of all political parties as well gave view points pre election. Guess what they all agreed to privatize SOEs. Why? Because that's the only viable solution left. Had we made correct choices on the subject in the past we would have more options today and could for example keep the asset with govt. But give total independent control to BOD and that would hire their management etc and be accountable. This is a model being used in many countries successfully I.e. Nordic, UK etc. But interesting thing is that whatever we want to do with SOEs models are there and have been tested round the world.
We are left with no choice but to get our act together that is create organizations that provide services and work efficiently and unfortunately we've run out of time. Even if we cut our losses we would have won but if we're able to maintain or improve services then we would consider it jack pot.
Unfortunately it's this illogical and subjective approach that has got us here in first place! Let's do it. Present govt. Is confused and stalling. Careful doesn't mean immobile.
We should be able to print dollars than able to bring SOE reforms (including privatization) in the system? Privatization will release financial resources for entrepreneurial activity in rest of the economy.
@unbelievable:To further your point have a global tender and let the bids be online for all to see.
@Muslim Leaguer: the current fed govt is supposedly comprised of business geniuses. Are you saying they can't turn these pse's around over 5 years and then privatize at a much higher valuation? Are you saying they they will put in place their own jiyalas as they have done in Punjab and during their previous federal terms? Are you saying they will make non commercial decisions? Seems you are saying that. So why even let them be in charge if the country if they can't even manage monopolies properly !!!
I am all for privatizations so they should be done. But they should be done following appropriate planning and with the goal of realizing the max returns for the country
with rapid privatization in current situation Pakistan will be breeding place for crony capitalism, Investment is good but your economy highly depending on FDI will result in instability if there is outside shock. like 1970s oil shock or 1997 Asian financial crises.... but complete state control is also not the best it hampers efficiency and effectiveness resulting in low taxes corruption. the system should be privatized(market) but under the guidance of state directed through State. We should not follow the example of China although you will see so much growth in it but income disparity is also high in china we should follow the example of Japan, S Korea, or Taiwan. Developmental State.
Those opposing the Privatization should be made to pay for the PKR 500 Billion every year to bail out the bleeding Public Sector Enterprises (PSEs) plagued with 1. Over-employment (parking thousands of sifarishi jiyalas) 2. Massive Corruption (hallmark of these jiyalas & their appointers) 3. Non-commercial decision making (due to Babus with "permanent" jobs) 4. Permanent Parasites on the public Budget ... Why are the 3Million Tax-payers forced to pay for the theories & whims of certain individuals??
Im a trained macro-finance economist (specializing in aggregate effects of firm level efficiency) and I can tell you that you are, well, completely wrong.
If you really want to argue a point of view different than Farooq, do it on the basic of logic and reasoning. How can you do that? The only was is to tell me the model you are talking about and the frictions that would give you a solution that is Pareto dominated.
I will spare you any time in thinking about what I said since, mathematically, what you are talking about, is impossible. It is the basic lesson from unconstrained and constrained optimization.
I understand what you are saying. However the fact that these enterprises will no longer be a burden to the state exchequer as they are now, will be boon to the country. That money can then be used on social development. Your argument about the govt. subsidizing the private sector thru various means is correct and this should be rectified.
In our current situation privatization means removing a huge burden from the state.
Author has raised two potent points. First, privatization process in Pakistan has remained untransparent, marked by corruption & nepotism. And second relates with private sector in Pakistan, been termed uncompetitive, i.e. dependent on government largess for sustenance & growth. Now, both these points relate with crony capitalism, where in both cases state appears to be a greater culprit in inducing nepotism & uncompetitiveness. Following the same logic, plea of privatization becomes a matter of principle, where rent seeking space for state is reduced by taking it out of business. Its tendency to extract rent from economic activity will remain there, but its playing field will shrink....
I love the lefties' devil-may-care approach: "Damn the statistics, I'm gonna stick with my anti-privatization stance because that's what my gut feeling says."
If you want readers to take you seriously, at least refer to some kind of data. Over 600 words and not a single reference to a number, percentage sign or statistical fact?
How many privatized entities in Pakistan have come back for a bail out package contributing to the widening fiscal deficit? None!
You say ' privatisation in Pakistan has been fraught with nepotism, crony capitalism, graft and corruption ' and is not advisable. My counter argument is that ' Pakistan's government has been from day one, fraught with nepotism, crony capitalism, graft and corruption' and that is why these government run organisations are in the red and a heavy burden on the exchequer. It is not the work of governments to run businesses but to provide an enabling atmosphere where private businesses flourish. Bottom line : If these organisations were running so as not be a burden on the state and a cesspool of corruption and rot...........there would be no need for privatisation. Reorganising has failed time and again creating more corruption and rot. Nationalising industry was an acknowledged mistake, Bhutto's mega folly, what the Sharif government is trying to do is correct that mistake. If minor glitches occur in the process, so be it.........arguing to extend the status quo is a flawed argument.
Really, no facts or figures to back up your arguments. Mere suppositions. Factually tough, one could easily find hard facts showing improvement in returns to private enterprises of power and PTCL. Of course, if it makes rich more richer, without causing state loss of expenses, well that is free market for you. That is how it goes. Atleast, efficiency improves, and undoubtedly, the government no longer hamerages out money, and has chance to gain more so from taxation. Quite a simple win win.
A very well argued point
You had a good argument going, but then faltered in the end. So what should we do with the SOEs that are a large fiscal burden? Don't sidetrack into a spurious argument that because the private sector is also dependent on subsidies then what is wrong with giving a few handouts to the SOEs. Here is the problem. The state needs fiscal savings by cutting spending and/or raising revenues. Where do you propose we find this saving? Would you like to remove all the private sector subsidies before you touch PIA and company? Would that be optimal? Or should we be thinking of a parallel reduction of subsidies across all sectors? Please be a little better thought through next time.
Privatization works in the rest of the World - but the way Pakistan govt is trying to do it is absurd. Who wants to purchase a 26% interest in a chronic loser? Who wants to assume management and all the baggage that comes with it knowing that that majority shareholder can toss you out on your ear at any moment? Who wants to do all the work and have the govt snarf off the profits via dividends they haven't earned?
If you want privatization to work I suggest you sell 100% rather than 26%, hire a Wall Street consultant to manage/negotiate the sale (mitigate the political graft typically associated with any "big deal" in Pakistan), cash deal with govt not holding any paper, target buyer who doesn't have ties with Pakistani govt (might require foreign buyer) - and allow the company to stand or fall on it's own paying it's full share of taxes, utilities and everything else. . People who think the govt should keep these businesses can't point to anything the govt runs successfully - which should be a clear reason for privatization.
THANK you, sir. For responding so intelligently to that tragic piece of writing.
Excellent article. What is perhaps even more dangerous is that state assets are being sold to finance chronic budget deficits caused by excessive domestic consumption (and not capital expenditure).
The analogy is selling the family silver to pay for a lavish life-style.
What's going to happen when there are no more assets to sell?
In the process the government is creating inefficiient monopolies in the private sector, that become 'profitable' by charging higher prices for their products!
Excellent! Very well said. Proponents of privatisation forget that once privatised the CEOs and their cronies mingle with the state and military elite to underwrite the financial performance. Without robust consumer, labour and environmental protection laws that can actually be implemented, we are just transferring a public monopoly to a private one. How is PTCL a success story? We havnt even gotten the money for it yet? Rather than getting the money we are more concerned with keeping our Arab masters happy. What a sham.