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Rethink Privitisation

DAWN — February 1, 2014
Rethink privatisation
S. Akbar Zaidi

There is an urgent need for the government to rethink its steam-rolling project of privatisation. The premise on which arguments for privatising state-owned enterprises are being made, by the government and even by many economists, are deeply flawed and are not based on substantive evidence that privatisation addresses some of the issues it is intended to. If anything, the myth that ownership, whether private or public, determines how an enterprise functions, needs to be dismissed.

Conventional wisdom assumes that the public sector will always be loss-making and a burden on the exchequer, and that the private sector is viable, efficient, profitable and transparent. These misperceptions have become part of all our understanding and discussion about the public vs private sector ownership.

One needs to remind people that Enron and Lehman Brothers were not some state-owned socialist enterprises, but freely functioning, vibrant, profit-making private-sector firms, which like hundreds of others, collapsed completely, often due to scandal, misgovernance and corruption. There are just too many examples in the private sector worldwide which show that the private sector is as liable to fail as the public sector.

Most recently, in 2008, many of the banks in the UK were actually nationalised, not privatised, by the Conservative government, and the private sector auto industry in the US, as well as many of the banks, was bailed out by President Barack Obama’s government.

Both private- and public-sector firms can fail and both can succeed. One would argue that in recent years, advanced capitalism has had many failures in the private sector and many successes in the public sector. Without governments rescuing faltering private-sector firms, so-called free-market capitalism would collapse.

Many of the largest, most successful firms in the service industry and in manufacturing, are all owned by the state, whether in China, India, Brazil, Russia, and even in bastions of free-market enterprise. The Economist newspaper carried a special report on the rise of state capitalism, showing how numerous governments now owned very large corporations which were highly profitable. Clearly, the private/public dichotomy is a false distinction.

Another argument revolves around the claim that state-owned enterprises are a burden on the exchequer, where estimates have been made which show that these firms cost the state Rs500 billion annually. Those who promote the idea of privatisation argue that by selling off these loss-making enterprises, the government would save large sums of money.

There are two problems with this line of argument.

Firstly, no one will buy an enterprise which is losing millions of rupees a day. It will have to be restructured completely, shown to be profitable first, before making it efficient. But if it can be made profitable and efficient, why privatise it? If these firms can be fixed, then why can’t they be made to run as profitable state-owned enterprises?

Privatisation is not the only option. If one of the largest state-owned enterprises anywhere in the world, Indian Railways, can be made profitable, so can Pakistan Railways. Importantly, there was never the intention to privatise Indian Railways, only to improve its performance and to make it profitable. Better management and governance structures in the public sector are an option worth considering.

The second counter argument revolves around state finances. While state-owned enterprises can be made profitable, to suggest that because the state has no resources it cannot afford to own loss-making enterprises, ignores a more fundamental problem of Pakistan’s political economy. The central problem here is the state’s inability to tax its rich rather than support state-owned enterprises. With taxes less than half of what ought to be collected, the huge fiscal deficit as well as the circular debt will always expand.

Estimates by Shahid Kardar and Hafiz Pasha show that if SROs are done away with and a more equitable taxation system is enforced, tax collection will double. Perhaps the government should try the novel experiment of taxing Pakistan’s rich and wealthy rather than increasingly imposing indirect taxes on the poor.

Even more interesting is empirical evidence from Pakistan which shows that privatisation does not necessarily improve either efficiency or profitability of firms. In fact, Akhtar Hasan Khan, citing studies, shows that only 20pc of firms perform better after privatisation, while 35pc performed worse after privatisation. Moreover, many units end up being closed and their assets stripped. They have often been undersold. Pakistan’s history of privatisation has not been a good one.

Akhtar Hasan Khan has also shown, that in the past some of the public-sector enterprises were sold to groups who had no previous experience in that line of business, and to foreign buyers who now remit profits away. In almost all cases, retrenchment of labour was a certainty following privatisation, often a pre-requisite.

One may add, moreover, that those who have been pushing for privatisation of state-owned enterprises in Pakistan seem to ignore military-owned enterprises. Perhaps there are arguments for khaki privatisation as well.

No one doubts that there are serious problems with state-owned enterprises in Pakistan, and it does become difficult to defend holding on to them. However, such enterprises can be turned around and made more efficient, just like private-sector firms.

Ownership does not determine performance. Given the inefficiencies and huge tax evasion in Pakistan’s private sector (not just the state sector), the choice is basically between crony private-sector capitalism and crony state-sector capitalism. Clearly, the single-minded intention of selling state-owned enterprises needs to be rethought.

The writer is a political economist.


One thought on “Rethink Privitisation

  1. From a crony capitalist government, what else can you expect?

    Posted by Syed A. Ehtisham Md | February 3, 2014, 5:54 pm

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