Limits to privatisation

From the statements of the PML-N leaders (likely to adore federal ministries) a clear hint is that privatising the public sector enterprises (PSEs) would be the focus of the new regime. Indeed, that's imperative because, besides circular debt, the PSE losses are bleeding the economy.
Continued state ownership of entities like the Ghee Corp, Tourism Development Corp, Pakistan International Airlines (PIA), Pakistan Steel Mills (PSM), etc, was a folly because there is no logic for the state engaging in activities that don't fall in the 'essential services' category. Losses of the PSEs escalated the public debt to unsustainable levels and led to progressively lesser availability of resources for infrastructure revamp and expansion. The widening infrastructure gaps discouraged investment and, over time, brought down GDP growth.
That said, PML-N leadership's remedial proposals reflect a tendency for palming off the rot to the private sector without visualising the consequences of privatising every service; pursuing such a strategy will only postpone, not eliminate problems in the future.
That the state shouldn't be in businesses that have no direct impact on the common citizens is a rational view, but privatising entities that directly impact the ordinary, is flawed. In the 1970s, as flawed and sweeping policy of nationalising every activity caused long lasting damaging effects. According to PML-N's Ahsan Iqbal (contender for an office in the federal cabinet), besides privatising PIA and PSM, privatising Pakistan Railways (PR) would also be the top priority. Such a stance overlooks the difference between essential and non-essential services.
Sikandar Mustafa Khan, Chairman of the Pakistan Business Council (PBC) expressed similar views while talking to journalists at the Lahore Economic Journalists Association. Oddly, besides PR, the PSEs he identified for privatisation also included the Utility Stores Corp (USC).
Earlier, quoting the privatisation of MCB and ABL (undertaken by the past PML-N regimes) as examples, the party leaders promised that PML-N will employ highly qualified professionals (via globally advertised jobs) as CEOs of the PSEs, to restructure and prepare them for privatisation.
While wholesale nationalisation of business and industry was a disaster, privatising the PSEs too, in many cases, proved a disaster. Privatising banks was the right step, but the choice of their future owners didn't prove right in many cases - a reality that lives on.
At the end of 1997, bank's losses exceeded 22 percent of their risk assets; now these losses equal 15 percent of their risk assets, courtesy greed-driven risk booking. Until recently, our banks also had the reputation of earning the second highest mark-up spread in the world.
Yet, many banks remain inadequately capitalised - legacy of the reckless lending-driven recession. Partly, this gap also reflects a tendency for paying high dividends instead of capitalising chunks of profits to build "institutions that last a hundred years"- the dream of responsible entrepreneurs.
How much of a "success" has been the privatisation of the power sector (an essential service), which the PBC wants to continue, is evident. Privatising this sector amounted to out-sourcing, and how out-sourcing premises security served the banking sector, is also no secret.
Opposition of ANP, PPP and the self-styled Sindhi "nationalists" to building the Kalabagh dam went unpunished while the reckless policy of buying electricity on "rent" - that President Asif Ali Zardari is proud of initiating - was pursued. Has it been, and can it be the solution? Privatising the USC would be a big mistake. Isn't it imperative for the state to retain a sizeable intervention tool in Pakistan's corrupt practices-ridden retail market via a well managed USC? In fact, this logic applies to every market that can subject the ordinary to malpractices.
What such approaches (driven largely by vested interests) to managing the economy and resolving critical macroeconomic issues leads to are the failures that erode the peoples' confidence in the state and its managers; results of the recent elections are a testimony thereto.
Privatising all PSEs isn't what will deliver results; policy thereon must be rational. Should services impacting the ordinary be privatised? Will pursuit of such a sweeping policy push the poverty line below the level under which now lives 60 percent of the population?
The biggest distortion that the last regime left behind is the widest-ever rich-poor gulf that is reflected in the highest-ever poverty level; it can be bridged only by ensuring that services used by the poor aren't made dearer via the "profit element" in the post-privatisation era.
Privatisation can't be undertaken in isolation; to ensure its success, alongside it there must be tough regulation, which is a key state obligation. In the past, privatisation failed to deliver because privatised entities were regulated poorly and pursued profit as their sole objective. Privatisation unburdens the state of financial strains but it doesn't absolve the state of its obligation to ensure that privatised entities deliver quality services at prices that "offer fair value for the buyer's money." Pakistan's regulators have not had an enviable record in this context.
Recently, Chairman of the SECP - regulating the entire corporate sector - was sent home for allegedly violating SECP's code of ethics. There are other stories too of how regulators (Ogra, to name just one) compromised on drafting and imposing regulations, for personal and political benefits.
In this setting, for those who advocate privatisation of the PSEs without promising tougher regulation, reflects their sense of responsibility. It reflects either tactlessness or bad intentions; neither of them is the qualification that befits legislators, especially ministerial hopefuls. The PML-N proposes to resolve the "circular debt" by issuing more T-Bills (ie suck more liquidity out of the banking system). It may be a short-term solution. What need to be remedied are the inefficiencies in the Gencos and their self-serving reliance on state-supplied natural gas.
Increasing power tariffs (instead of checking power theft) is not the right route to cutting the circular debt. Along with checks on power theft, what offers a lasting solution is the retrieval of the hundreds of billions of tax payers' money pocketed by the stalwarts of the last regime.
Privatising the PSEs isn't "the" solution to Pakistan's fiscal mess. Until the whole system is made progressively more transparent, as before, privatisation proceeds could be drained out of it. Let us also not forget that messing up the PSEs reflects incompetence of our "all-knowing" politicians. Rehabilitating PSEs like the PR, USC and Wapda's Gencos, instead of privatising them, could show the masses that their leadership can also deliver on tough challenges - a change and that could rebuild peoples' fast-eroding confidence in the political leadership. The latest elections - praised as the harbinger of "change"- must deliver in terms of hugely improved governance of the state.