This is a two-part article. Focused on privatisation as a viable policy tool - part-1 will look at global literature on the subject while part-2 will look at examples of privatisation in the UK and Pakistan's experience with privatisation.
Privatisation as an effective tool to not only reduce annual bailout packages from the budget but also to fuel productivity of the privatised entity premised on the principle that the private sector seeks to maximise profitability (in marked contrast to publicly run units) has enamoured many a government around the world.
Margaret Thatcher popularised large-scale privatisation as a viable economic policy and many began to use Thatcherism as a synonym for privatisation. Post-Thatcherism even left wing parties like the Pakistan Peoples Party could not ignore the advantages of privatisation though Benazir Bhutto did back out in instances where labour protests were sustained. Unfortunately, however, the PPP continues to engage in using autonomous/public sector entities as recruitment centres for party workers, a practice that continued during its last tenure in power, which compromised their profitability requiring ever rising budgetary injections.
Nawaz Sharif has clearly emerged as the champion of privatisation in Pakistan and whenever in power has engaged in privatisation that he argues benefits the economy. Arguments in favour of privatisation were highlighted by Joseph Stiglitz, a Nobel laureate, in a foreword to a book titled Privatisation - Successes and Failures consisting of a series of articles published in 2008 by Columbia University Press: "Many (state-owned entities) have not been run efficiently, and many have created losses that have been a burden on the state-money that could have been used for education or to pursue other developmental objectives. There are instances of corruption. Even advocates of state ownership, like Greece's socialist prime minister, Andrea Papandreou, talked of the challenges of "socialising" the SOEs making them act in ways that were consistent with social objectives, not just the interests of their managers and workers".
Fair enough but today the question that is increasingly being asked is whether privatisation is always the right approach based on studies undertaken? Stiglitz disagrees: "The World Bank and the International Monetary Fund (IMF) pushed countries to privatise as much as they could and as fast as they could. Privatisation became not only one of the pillars of the "Washington Consensus" but also a condition imposed on countries seeking assistance. The experiences of the last 15 years have cast a pallor over this unbridled enthusiasm for privatisation..... a new, more pragmatic consensus is developing-more consistent with economists' normal two-handed stance, "it depends." Privatisation has had some successes, but it has also been marked by dramatic failures and disappointments".
Questions have arisen because it is acknowledged the world over that the process of privatisation is marked by enormous abuses, Stiglitz maintained: "in many countries a few individuals managed to grab hold of previously state-owned resources for a pittance and become millionaires - or billionaires.....there is an even more serious principal-agent problem in the privatisation process itself. What is at stake is not just the current flow of profits (rents), but the present discounted value of these rents, which is much larger". Stiglitz's argument is that the profits that would accrue to the state over the life span of a profitable entity and not just its annual profit must be taken into account as lost revenue. He acknowledged that "there are a variety of ways by which the extent of abuse in the running of SOEs can be monitored and controlled (eg, by benchmarking), but experience suggests that it may be more difficult to control abuses within the privatisation process. Standard remedies have focused on the use of auction processes but in Russia and elsewhere it became clear that there is ample scope for auctions to be rigged by setting the rules (including "qualifying" bidders"). Other failures of privatisation arose when monopolies (especially natural monopolies) were privatised before regulatory and antitrust systems were put into place". I feel certain that several readers have already identified several instances of privatisation in Pakistan that conform to these situations.
And perhaps most disturbing Stiglitz argued that it has been noted that "the private sector was better at exploiting monopoly power than the government: overall economic efficiency was not enhanced. But while privatisation has deservedly had its critics, so have SOEs".
The Hebdon report released by Cornell University found "in conclusion...privatisation to be, at best, a disruptive, socially destabilising, and ultimately harmful method of cost saving. At its worst, privatisation can actually increase costs, lower the quality of services, reduce public accountability, and marginalize citizen involvement in the democratic process". And advised seeking "creative alternatives to the way services are currently provided by improving the utilisation of the existing workforce. The practical answer, we believe, can be found in fundamental reform of pubic sector work process through dialogue, discussion, and negotiations. This is the challenge for politicians, management officials in the public sector, public employee unions, and employees".
The heavy reliance on quoting from the privatisation literature from a globally recognised economist/institution in this article is based on the focus of the PML-N government not on the warnings by domestic economists but on citing a few favourable reports appearing in the foreign media as well as upgrading of its rating by credit agencies (who are focused on credit and needless to add Pakistan's reliance on credit has increased manifold during the two years of the incumbent government as proof of its performance.
To conclude from the foregoing the jury is no longer out on 100 percent effectivity of privatisation as a viable policy measure as it was when the PML-N was last in power in the late 1990s.
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