Privatization: The good and bad

In the 1990s Pakistan started off on an ambitious multi-step power sector reforms programme. It was a long and drawn-out process that began with the induction of independent power producers followed by the unbundling of WAPDA and creation of the National Power and Regulatory Authority (NEPRA). It was supposed to have culminated in the privatization of all major DISCOs. However, the process fell through for a number of reasons, including the lack of political will.

Back in the 1980sn and 1990s, privatization and deregulation of public infrastructure services was a common refrain, not just in Pakistan but in the entire developing world. Government management of the services such as telecommunication, transportation, water and energy was deemed inefficient and monopolistic. Private industry -- accountable to profits and losses of an open market and, thus, believed more efficient than the government -- was proclaimed the better way for consumer choice.

The IMF and the World Bank were the biggest proponents and drivers of this trend. Supported by the US Treasury, these policies were referred to as The Washington Consensus, a term coined by the English economist John Williamson. In 1992, Mary M. Shirley, chief of public sector management and private sector development division at the World Bank, declared in the Fordham Law Review, "There are virtually no limits on what can be privatised." It certainly appears to be the case.

Take the telecommunications sector for example. New entrants into the telecommunications market – including low-cost carriers and Voice-over-Internet-Protocol (VoIP) providers – have been welcome disruptors, positively affecting consumer choice and prices. This industry has, as a result, become more innovative, customer-oriented, and “lean.” The banking sector in Pakistan is another example where privatization has been a positive experience, for the most part. This is in no small part because of the presence of a robust and truly independent regulator, the State Bank of Pakistan. The airline sector might have been more successful, but for the fact that Pakistan is an economically challenged country, where air travel has never really thrived.

Privatization alone cannot fix what is probably the biggest deterrent to any resolution of Pakistan’s power crisis, the burgeoning circular debt. This problem affects DISCOs across Pakistan and is more than just an accounting issue, which is how most governments have treated it so far. The most common solution has been bailouts, which incidentally have only served to compound the problem by increasing the country’s debt burden and letting government DISCOs, and other power sector debtors to get away without trying to find an effective and permanent solution. But at the same time, it is unfair to say that privatization of this sector cannot work, when we never really carried it through. Ex-WAPDA DISCOs were unbundled but never privatized. With government support, they never really had the incentive or motivation to improve performance and efficiency. The competitive market never materialized and most private sector investment remained limited to generation.

If we look at the success of the privatisation of the power sector in countries such as Turkey, where the end result has been phenomenal to say the least, we know that if carried out properly, it can work. In Turkey, the process began with the distribution facilities: the state-owned Turkish Electricity Distribution Company was split into 20 regional distribution companies, as the first step towards privatisation. The generation business was restructured into seven portfolios to be spun off into companies and then privatised over the next few years. Five-year distribution tariff profiles, licenses, and performance standards were established along with supporting regulations on tariff equalisation, monitoring of quality of service, and approval and monitoring of investments. Five-year transition contracts for existing generation capacity (public and private) were signed. The transitional balance in virtual mode in 2005, and from August 2006 it had moved to cash settlements. As a result, the access to grid electricity went from just 62% in the 1990s to 96% in 2009. Cost of power went down as well as a result.

Positive impact of privatization

So, that brings us to the critical question. Does privatization lead to positives that are usually lacking in the public sector? According to several studies – including by the World Bank - privatization usually leads to improved performance and efficiencies. One of these is corporate governance and several parameters that come under it. These parameters include but are not limited to autonomy and accountability, and management practices (including financial discipline, human resources, and information technology).

In the public sector autonomy in these areas is usually lacking or not adequate since most major strategy and investment decisions are taken at the ministerial level, and not by public sector corporations themselves. Once an entity is privatized it can make independent decisions without worrying about political implications. The only area that may be left to the management of these corporations is HR, but even that is usually plagued by politics.

Merit-based hiring, and the addition of professional management that has skill and experience in the relevant area is often difficult in the public sector because of these political influences. Similarly, public sector companies rarely cultivate a culture of incentive-based performance since there is usually no reward-based structure, or the threat of being fired if one does not perform.

A key area that is critical to the long-term health of a corporate entity is financial discipline. Public sector companies are pretty much always at the mercy of the relevant ministry when it comes to capital requirements or other major investment decisions. And as mentioned above unwarranted and unhealthy practices such as bailouts and handouts remove the incentive for public sector companies to improve their performance.

One shoe does not fit all

Privatisation does not always work though. Some sectors have thrived while others have fallen under the weight of free market principles in public infrastructure services. Take water for example. Where there have been attempts to privatise water, provision failure and public discontent have forced municipalities back to the table. An in-depth investigation on water sector privatisation -- jointly undertaken by the Transnational Institute (TNI), the Public Services International Research Unit, and the Multinational Observatory in 2014 -- concluded that over 180 cities and communities in 35 countries remunicipalized their services. "Direct experience with common problems of private water management -- from lack of infrastructure investments to tariff hikes to environmental hazards -- has persuaded communities and policymakers that the public sector is better placed to provide quality services to citizens and promote human right to water."

In some sectors and industries, for privatization to work, there needs to be regulation and vigilance so that there is a balance between affordability and efficiency but also a focus on sustainability goals and the security of supply. This is what is often referred to as the public utility policy triangle. Supporting each part of the whole brings certain challenges. A parallel challenge for regulatory bodies is thus to motivate private enterprises to take social and environmental objectives into account, and not just shareholder value. Good governance and transparency are key to stoking public confidence and private investment in the sectors are not just a product, but also seen as a human right. Where absent – due to non-transparent decision processes, or waning political will, among other factors – the reverse occurs.