Perspective - 360°

Is privatisation the solution to Pakistan's financial problems?

Published Mar 23, 2015 05:58pm

Email


A blast furnace at the Pakistan Steel Mill
A blast furnace at the Pakistan Steel Mill

“It is not the government’s job to do business,” proclaimed Mohammad Zubair, chairman of the Board of Investment, whilst announcing the government’s intention to put a number of state-owned companies up for sale, including Pakistan Steel Mills and Pakistan State Oil. “The size of the government is too strong and too heavy,” says Zubair. The proposed privatisation of public-sector companies, which is one of the conditions imposed by the International Monetary Fund’s 5.3 billion dollars to 7.3 billion dollars bailout package, is primarily argued on two points: one, that governments can improve their financial positions by selling state-owned corporations; two, that private entities are far more efficient in the allocation of capital between alternate investments. But is privatisation really the solution to Pakistan’s financial and economic problems?

A brief history of deregulation

Pakistan’s first experience with privatisation took place in the 1950s when the Pakistan Industrial Development Corporation set up industrial units throughout the country, running them under the aegis of the government before transferring them to the private sector. When Zulfikar Ali Bhutto came to power in the 1970s, he nationalised 31 key industrial units, 13 banks, over a dozen insurance companies, 10 shipping companies and two petroleum companies over the span of six years, dramatically altering the foundation of the economy; following General Ziaul Haq’s takeover, the privatisation of these state-owned enterprises became an important part of the national economic policy. But it was only in 1991, under a Nawaz Sharif-led government, that the privatisation process began to be implemented. The process ultimately concluded at the end of 2007 when 80 to 90 per cent of the industries were put under the management of private ownership of enterprises by Shaukat Aziz, the then prime minister. According to Dr Akhtar Hasan Khan, former federal secretary and author of The Impact of Privatisation in Pakistan, a total of 166 state-owned enterprises have been sold since 1990 for a cumulative sum of 476.5 billion rupees to finance budget deficits, cut losses and improve the efficiency of mismanaged entities, aimed at spurring economic growth and job creation.

Private concerns

According to an October 1998 report by the Asian Development Bank analysing the impact of privatisation in Pakistan in the 1990s, only 22 per cent of the privatised units performed better than in the pre-privatisation period; 44 per cent performed the same whereas approximately a third (34 per cent) performed worse. Though no comprehensive research appears to have taken place regarding the outcomes of the more recent attempts at privatisation – the sale of corporations such as Pakistan Telecommunication Company Limited and the Karachi Electric Supply Company (KESC) – the general perception is not a particularly rosy one, with widespread concerns about extensive labour lay-offs and continued injection of public-sector resources into the privatised entities. “Privatisation in both decades did not have a favourable impact on the growth of the GDP [gross domestic product], investment and employment,” argued Dr Khan in his book.

A case in point, according to him, is the privatisation of the KESC, which he describes as an “unmitigated disaster” and “the biggest blunder of privatisation in Pakistan.” The government pumped 147 billion rupees into the KESC between 2002 and 2010, he says – 109 billion before privatisation and 38 billion rupees after its privatisation – and forced the Water and Power Development Authority to supply 700MW to KESC despite outstanding payments of 81 billion rupees. “The main reason for privatisation of the KESC was that it [the government] wanted to get rid of this classic loss-making enterprise. Unfortunately, the government is paying more after privatisation,” he wrote at the time. In this instance, however, proponents of privatisation may have the last laugh: in recent months, according to a report by the Business Recorder, the company has moved out of the red zone and is finally generating profits.

— Compiled from news reports