Sunday, 8 February 2015

Privatization: Why What and How?

Privatization is a process of change in the ownership of any entity which is owned by the government. It could be done by selling shares in the stock market to the private investors or selling the entire organization to a private sector. It can also be done by selling few departments to private sector while holding the key positions. Another way which is not popular in this region is to give vouchers of books to the citizens which represents share in the state owned enterprises.
One of the potential benefits of privatization mentioned in the literature is increase in efficiency. Moreover, there is a possibility that private owned firm will invest in innovating ideas to enhance their profitability. Therefore, innovation and reduction in cost both lead to higher economic growth. Dr Akhtar Hasan Khan (former secretary Planning) in his book said that only 20 percent of the privatised units become more efficient, which is an alarming number considering the past efforts of privatisation is concerned.
Since the decisions in SOEs are taken considering vested interests, and other rhetoric concerns and not following economic benefits, therefore, apart from the efficiency and innovating ideas privatization may help government in reducing the impact of corruption. Moreover, procedures of accountability in SOEs are not transparent and effective compared to the privately owned companies.
Pakistan has been following privatization policies for the last three decades. However the process is very slow and ineffective according to many studies done. One of the major issues highlighted by Dr. Akhtar Hasan Khan is transparency. For transparency he wrote that proper advertisement, proper reserve price, proper pre-qualification of bidders and payment in short period of time are the important components which are unfortunately not devotedly followed. While giving the example of an advertisement he mentioned that among the major Privatization of HBL the selection of foreign newspapers was not appropriate.
It is generally argued that privatisation efforts reduce the burden of total debt of the country by using the money earned from privatisation on retiring the debt. Furthermore, it also reduces the expenditures incurred by the government on the loss making companies. By privatising the loss making SOEs has double impact, (i) by less spending on those SOEs and (ii) earning money by privatising and further using it to reduce budget deficit further. Fiscal consolidation by this practice has not been successful in many countries including Greece. In Pakistan debt was not reduced, poverty numbers went up and fiscal deficit was higher in the nineties. One of the problems which were discussed in general is that we have privatised profit making institutions and kept the loss making institutes. Hence expenditures of the government remained the same but revenue had gone down which increased the budget deficit.
The above story is history now. Question is that do we need a policy of privatization? Do we need government owned institutions? Are our privatization policies on the right track? What to privatize and how to privatize? Dr Khan said that we should privatize by selling the shares in the stock market. However, our stock market is not developed and the main objective of selling the shares to many people may not be achieved. Nevertheless, possibility of firing workers from their jobs will be lessened. But can we sell the entire entity by selling the shares in stock market?
One of the major flaw of the privatization policy is that we are not clear that what sector to privatize. This is important because private sector then invests freely in that sector without any hindrance. Government is confused and trying to reform the part of SOEs so that they can make them a profitable organization and sell part to the private sector. However, the attempt of reforming the organization has not been productive apparently until now apart from few smaller success stories.
Monopolistic exploitation could be another reason of the apparent confusion. Although in the presence of Competition Commission (CCP) it is difficult to do. The answer to this simple problem is “regulations” and CCP can act as a regulator. Dr A R Kemal, ex-Chief Economist and Ex-Director PIDE found in his paper that after privatization growth rate of the firms has declined and prices have increased which shows the monopolistic power of the firms. He stressed the importance of regulations that removes the possibility of monopolistic exploitation. Nonetheless, emphasized on the lesser regulations to give them flexibility to make their own decisions. Price caps were one of the suggestions which may regulate the privatized firm better. In UK this practice was adopted to regulate privatized firms.
In several other papers Dr Kemal wrote that competition is necessary to increase the efficiency. Thus, tariff rationalisation, anti-trust laws and control of monopoly are plausible regulatory frameworks that must precede privatization. Automatic systems to check the monopoly powers need to be built into the system so that there should not be any chance of exploitation.
At present few SOEs are not getting billions of rupees in subsidies and intellectuals are advising government to privatize them. However, donors and government want to revamp those organizations such as Railways and PIA. One of the old PDR’s paper witnessed the same issue that privatization in the power sector may not eradicate the problem of inefficiency. Nonetheless, it needs reforms irrespective of whether it is owned by public private or jointly by the two. Therefore, it is good to implement institutional reforms and ADB is helping the government in their reform package.
Privatisation efforts in the last few years are evidently non-objective oriented. It seems that when government wants to increase their spending they privatise some assets. It is quite similar to the situation where a member of a household starts selling their household objects to fulfil their daily needs. If this is true then it’s a mad policy.
From my mentors I learnt two possible actions after the previous privatisation practices were failed. Those are; (1) following neo-libertarians government should not involve in the business venture thus privatise everything, have very few regulations and let the private sector work (2) ask private sector to invest in a particular sector, where government wants to divest in future. As a result efficient workers will move to the private sector. When government does not invest in that sector the SOEs will go further into loss. Wait for the private sector to establish a little and then give golden handshakes to the rest of the employees and close down the enterprise. Other than the above two possibilities government may have the hotchpotch policy which is not clear to them as well as to the others.
From the above discussion the following lessons are learnt
1.      Previous privatisation attempts were not successful
2.      The important components of privatisation were not strictly followed, i.e., proper advertisement procedures, proper reserve price, payment in a short period of time and proper pre-qualification.
3.      The outcome of privatisation is not coherent with the objectives of privatisation
4.      To prevent monopolistic exploitation regulations is necessary
5.      Competition Commission needs to play its role vigorously
6.      Policy of tariff rationalization (cascading with reduction) enhances competition

7.      Current eating out the earning through privatisation is a mad policy