Wednesday, 30 October 2013

Answering Objections to Privatization

PMLN government has finalized a list of state owned enterprises (SOEs) to be privatized in the coming months. Various quarters have voiced criticism of the plan. Most of this criticism is motivated by groups having vested interests. Political opponents also see this as an opportunity to score points and are trying to confuse the public regarding the need and the effects of the proposed privatization process. In this article, we will discuss the various objections raised.

The first objection or rather allegation is that the privatization program is being carried out on the dictates of the IMF. Anybody who has followed PML-N's history will know that privatization has been the cornerstone of PMLN's economic policies since the 1990's. It was PMLN that initiated the process of privatization in Pakistan. Privatization has been an important part of the PMLN manifesto for more than 20 years. In its Jan, 2013 manifesto PMLN clearly states
Identify enterprises which need to be privatized and assign targets to the privatization commission to ensure completion of the privatization process within the assigned time frame.
PMLN therefore has a public mandate for its privatization program. Anybody calling it a policy formulated under the dictates of the IMF is clearly unaware of history and core party policies.

The second objection relates to questioning the need for privatization. There are two groups of people that raise this argument. One questions the need for privatization in totum, irrespective of the status of the SOE. This group does not even support the privatization of loss-making entities that are sucking up hundreds of billions of government funds annually. The main group falling in this category is Pakistan People's Party. PPP's founder Zulfiqar Ali Bhutto was responsible for the nationalization program of the 1970's and is therefore predisposed to opposing any privatization plan. Supporting privatization would amount to admitting the mistake of its founder, a move that PPP is not yet mature enough to consider. Secondly, PPP, in each of its tenures, has used SOEs to generate employment for its loyal party workers (jiyalas) and their families. Many SOEs including PIA and Pakistan Steel are heavily staffed with PPP loyalists. Privatization, with management control, will put the jobs of these loyalists at risk. Furthermore, after privatization, PPP will lose the ability to use employment in SOEs as a political reward / bribe in any future government. Many scandals relating to misuse of SOE funds and assets surfaced during PPP's last tenure. These include the NICL and OGRA scams currently being investigated by NAB on the direction of the supreme court. The bottom line is that PPP does not want to lose control of these SOEs. They may be generating losses for the government of Pakistan but they are certainly benefiting the party.

The second group only objects to the privatization of SOEs that are running in profit. They question why the government should off load these entities when they are generating a profit? There are several reasons for the privatization of such entities. Running businesses is not the job of the government. The job of the government is to provide an environment conducive to running of the businesses by regulating business practices and protecting consumer rights.  If an entity is generating profits under government control it will generate higher profits under private management with better quality of service. Secondly, after the privatization of large loss-making SOEs, the burden of political over-staffing and misuse of government resources will shift to the remaining SOEs turning them into loss making entities. It is therefore better to privatize them while they are still profitable.

The present government is investing heavily in power generation to end the menace of load-shedding once and for all. Several projects have been initiated that require funding. Divesting from current SOEs will release funds to the government that can be invested into these new projects. For instance, the government is in advanced stages of finalizing two coal-fired power plants each of 660MW from its own resources in the Pakistan Power Park, at Gadani. The government's own investment in the project will give confidence to foreign investors and it is planned that a further eight plants each of 660MW will be installed in the power park. This government investment in the power sector holds far more value for the people than its current investment in banking or insurance. In the medium term the new SOEs created in the form of these power plants will also be privatized and the funds will be utilized where needed the most.

Another objection is the national pride argument. It is claimed that privatizing Pakistan International Airlines (PIA) and the steel mills will somehow dent our national pride. How many other governments, in democratic and developed countries are running airlines and steel mills? Pan Am, the national flag carrier of the United States, went bankrupt in 1991. The U.S. government made no attempt to save the airline in the name of national pride. The U.S. government has even ended its space shuttle program realizing that the private sector has developed to a point where it can provide the same services at a fraction of the cost. Seeing Pakistan Steel run on life support at less than 10% of its capacity should hurt our national pride more than seeing it prosper in private hands.

Finally there is the argument of why can't the government restructure these SOEs by bringing in qualified management. Billions have been flushed in the name of restructuring and bail-out packages on SOEs in the past. Those asking for more seem to have learned nothing in the last 40 years. 

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