The Governor of the State Bank has pleaded for privatisation in general and PTCL in particular on ideological rather than pragmatic grounds. Having worked at the World Bank for many years he has unflinching faith in the trilogy of liberalisation, privatisation and deregulation. Whereas liberalisation and deregulation are almost universally successful but privatisation is highly complex with dubious results around the world.
Nobel Laureate Stiglitz terms Privatisation as "briberization" not because he finds the concept corrupted but after analysing the process of privatisation in different countries across the world he finds it highly tainted. Whereas liberalisation and deregulation is another expression for Adam Smith's concept of laissez faire and calls for a level playingfield without any hindrance from the government.
The process of privatisation involving choice of a party which is selected for divestiture of public assets and the price at which the public sector units is sold is never free from blunder and suspicion.
One can quote many instances from the history of privatisation in Pakistan where the timing, choice of party and price were faulty. The four Pearl Continental Hotels were sold at a throwaway price of Rs 12 crore by the Zia government to a party which borrowed the amount from NDFC whose charter did not provide for such a loan.
In the first Nawaz Sharif Government multiple units were sold to Tawwakal and Schon Groups whose reputation was well known to everybody in Pakistan. In the second Benazir Government WAPDA's most efficient Kot Addu Power Plant was privatised.
While it was costing WAPDA two US cents per kwh and after privatisation it had to pay five cents per kwh to the foreign party which was also given Income Tax exemption as given to Independent Power Plants (IPPs).
The State Bank sold the bankrupt Allied Bank at a very good price of Rs 11 billion but Habib Bank was sold for Rs 22.4 billion although its value was more than five times as compared to Allied Bank. Moreover, benefits of more than Rs 13 billion were given after privatisation to Habib Bank and the party was allowed to pay the bid money in two instalments whereas these favours were not advertised.
The most scandalous history of privatisation was in Russia. The Economist terms it as "dubious privatisation which made Abramovich and other oligarch billionaires". A dozen oligarchs bought the entire public assets under Yeltsin by borrowing money from public banks.
One of them Khodorkovsky has been condemned to long prison sentence for tax evasion and other malpractices.
It is admitted beyond doubt that nationalisation of the private industry and financial institutions in1970s was a great blunder. General Zia-ul-Haq should have handed back the nationalised units to the previous owners in 1977. The nationalised units did not run well and stunted the economic growth of the country. The nationalisation was taken to the absurd limit of privatising ginning factories, flour mills, and rice husking units, some of which had assets less than Rs 10,000.
The Asian Development Bank conducted a study on the units which had been privatised in 1990s and found that only onethird was running better and out of the remaining twothirds many, including all engineering units, were closed because their assets were stripped as in the case of Zeal Pak. Cement factory whose industrial operations were stopped and the factory land sold as real estate.
For privatisation to be successful it must be well sequenced, parties with good credentials chosen and units sold at appropriate price.
The National Bank of Pakistan has been judged to be the best bank in Pakistan by Banker/Financial Times for last five years consecutively, not because of its size but strict financial standards of return on equity and return on assets. According to proponents of privatisation it should have been the worst.
In a way the controversy between public and private sector is sterile because if the public sector is run on commercial lines, it can do as well. Admittedly there is political interference in public sector units, but one should not throw the baby with the bath water. The bath water should be gradually drained and the baby allowed to grow.
In the case of PTCL it has been argued that its privatisation will lead to "dynamic competition-oriented culture". It needs to be emphasised that PTCL has the landline monopoly in Pakistan but its mobile affiliate Ufone is already facing severe and healthy competition from five other private sector mobile telephone companies.
There are no competing telephone landlines or electric cables or water supply pipes or gas pipes anywhere in the world. These are what the economists call "natural monopolies". Theory and experience is strongly in favour of public sector running natural monopolies. Because a monopolist can raise prices without fear and ignore small and distant users in the context of Pakistan. The mobile phone companies cover only urban population which is 40 percent of the total population.
The Public Call Offices scattered in remote corners of Pakistan are running at a loss which are cross subsidised by huge profits in congested urban areas. This function can be better performed by a public sector company.
The second issue with respect to PTCL is security. The Governor would not like his daily conversation with Finance Minister to be tapped by private foreign company. In the United States, which is the world leader of free market, a tremendous storm was raised when China wanted to buy America's eighth biggest oil company.
There was hue and cry on security issue in the Congress as well as across the nation and China was prevented from buying Unocal although its bid price was the highest. Every nation prizes its security above short-term profits and so should we.
Another factor ignored by the proponents of privatisation of mega units like PTCL to foreigners is the life long adverse impact on balance of payment. In FY05 the remittance of profits by foreign companies increased by $500 million because of very high rate of economic growth in Pakistan and sky high oil prices.
In the last three months we have sold National Refinery and PTCL to foreigners and are in the process of selling PSO and Pak Petroleum to foreigners. This will lead to additional drain of one billion dollars annually. In the ease of firms like PSO, whose entire operations are in Pak rupees, there is no justification for allowing their profits to be remitted in dollars and hiking the current account deficit.
Another argument has also been made that the government should not look for profits from units like PTCL, PSO and Pak Petroleum for budgetary balance. The facts are that Pakistan's tax/GDP ratio during FY 05 has fallen to nine percent as our real GDP grew by 8.4 percent whereas our real increase in tax revenues was less than five percent.
The budgeted subsidy in FY06 is Rs 70 billion mainly for WAPDA and KESC. This level will increase as we are rightly subsidising wheat and sugar at Utility Stores. Moreover, the fiscal balance has deteriorated because we have lost Rs 40 billion on account of Petroleum Development Levy and increase of Public Sector Development Programmes by Rs 70 billion.
The government has failed to privatise huge loss-making KESC but is rushing into privatisation of PTCL, National Refinery, PSO and Pak Petroleum without cogent reasons. The large subsidy has to be compensated by profits of public sector companies as we lack the capacity to levy taxes on three-fourths of our economy represented by agriculture and services.
In modern economics, propositions like privatisation need to be supported by successful examples across the world. One cannot name a single country where privatisation has provided a spur to economic growth. Pakistan and other developing countries need to take a cue from China whose economy for the last 25 years has recorded the highest growth rate in economic history. China did not privatise a single unit.
They stopped making fresh investment in state-owned enterprises (SOEs) with the result that whereas they contributed almost 90 percent to industrial output quarter of a century back, now they contribute only ten percent. If privatisation was such a golden path for economic growth China should have adopted it. But their economic policies have been wiser and far more successful than of countries like Russia which took a rapid path of privatisation.
There is not a single economist of international standing like Nobel Laureate Sen or Jeoffrey Sachs, who has espoused privatisation. Stiglitz, who was vice president of the World Bank, is strongly opposed to it There is no academic support for privatisation in Pakistan or abroad.
Dr Manmohan Singh is an outstanding economic policy-maker in terms of ability, experience and commitment to his country. A brilliant student from Oxford he worked for his country for more than forty years at a salary of less than one thousand dollars per month holding all the top jobs of Finance Secretary, Governor Reserve Bank of India, Finance Minister and now as Prime Minister.
He successfully pursued the policies of liberalisation and deregulation without any privatisation and he is credited for the turn around of Indian economy during the last dozen years. He has enunciated a golden principle of privatisation - "no profitable public sector enterprise will be privatised". Pakistan should follow either China or India and avoid becoming another Russia by rushed privatisation of mega public sector highly profitable companies like PTCL, PSO and Pak Petroleum. It will be totally against national interest to privatise PSO and Pak Petroleum at a time when we are facing the heavy burden of high oil prices.
We will place the entire energy sector of Pakistan in foreign hands which will be totally against national interests. We should follow USA in not allowing foreigners to buy our oil assets.
(The writer is former Planning Secretary)
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