These days with the news of the government's agenda of privatisation many questions are making the rounds; why privatise? Why might privatisation fail? What is needed to make privatisation work? To answer these questions, it is usually argued that government's intervention causes economic inefficiencies. There are many who support privatisation and there is no dearth of those who are protesting and arguing against it.
The debate on the issue is raging and both the camps are putting forward their arguments. According to PIDE Vice-Chancellor Dr Rashid Amjad, "Policy stances which reflect our best economic interests and take into account the political economic dimensions should be adopted." In his views there is a need for a refurbishment of the system for increasing efficiency and productivity of loss-making public enterprises
There are many pro-privatisation experts like, NUST Dean Ashfaq Hassan Khan, "Benefits of privatisation help reduce the country's debt burden and also help improve the allocation of resources." State-owned enterprises (SOEs) are generally considered unproductive all around the world, primarily because they serve the political masters and the bureaucracy more than the business and the owner (state) they represent.
The privatisation of these SOEs is considered to be the solution on the premise that the private sector is more efficient and cost-effective than the government. The role of government should be narrowed down to policymaking and ensuring that the right business environment exists. Efficiency of a government in running any business can be captured in these words of Milton Friedman, "If you put the federal government in charge of the Sahara Desert, in 5 years there'd be a shortage of sand."
Present government has embarked on a strategy for privatising a number of SOEs. Why should these organisations, like Pakistan Steel or Pakistan International Airlines (PIA) be privatised? They are inefficient and poorly managed and on top of that they are a heavy burden on the national kitty. They are costing Rs 400-Rs 500 billion annually. They wear the crown of destabilising the budget and adding burden to the national debt. How can a financially poor country like Pakistan continue to foot the bill of the inefficiencies of these institutions? In the words of Margaret Thatcher "The problem with socialism is that you eventually run out of other peoples' money." Same is the case here that we are running out of other people's money to fund these giant government-owned businesses.
The debate on the point of "to be or not to be"; "To privatise or not to privatise" is relatively simple. For this part of the debate it is easy to see the writing on the wall. These SOEs cannot survive without budgetary support from the government. They are the mega employment exchanges for the kith and kin of the high and mighty. Do we really want to add thousands of workers to already bankrupt institutions? For how long we can rely on our friends and masters to help us with funding support, debt and grants to keep these giants afloat? Privatisation is the answer to many of these woes. But privatisation as an ideology is not the solution to all the ills that befall the public sector.
Privatisation for the sake of privatisation is not the answer. Privatisation has worked in many cases and it has failed in many other instances. According to Kevin R. McDonald who published his article "Why Privatisation Is Not Enough" in Harvard Business Review; that most newly-privatised companies need dominant, experienced shareholders to compensate for the weaknesses of managers. Without the backing and nudging of such shareholders, companies tend to operate in the same inefficient ways they have learnt over the years.
Kevin further noted based on his research that the positive effects of privatisation are not spontaneous. Investors earn outstanding returns only when they themselves add value in the form of leadership, systems, experience and direction. Privatisation taken as the salvation of all the woes of state-owned enterprises, seen as a panacea for improving corporate governance, management, and performance may be an incomplete truth and therefore, in Kevin's words "it's like a runway that is just a bit too short, extremely dangerous."
Developing on the stories that Kevin R. McDonald put forward through his research in Poland, there were many success stories like Thomson Polkolor which was a joint venture post-privatisation between Thomson, the French electronics giant that acquired RCA in 1987, and Polkolor, a Warsaw-based producer of picture tubes for color television sets. Problems were the same as we see in our SOEs, very big payroll but there was no cash to pay the employees. There was urgent requirement of capital, better management, better work attitudes, and an injection of basic business skills and procedures. The main sources of operational difficulties were the lack of sense of responsibility in the employees and lack of motivation to improve productivity.
Nevertheless, the Thomson Polkolor joint venture achieved impressive financial results in first 16 months of operation. Its sales doubled, the joint venture generated an operating profit in the same period. It started paying taxes, whereas the former state-owned enterprise paid no taxes at all.
An example of privatisation gone wrong is As a result of Thomson's changes, employees are visibly cheerful for the first time in memory. An Krosno Glass Works (Krosnienskie Huta Szkla). Krosno was privatised in November of 1991. Important aspect of this privatisation was the way the ownership was distributed between the government, employees, development bank and general public. After the government which held 35% of the shares; 28% of the shares were widely dispersed among the public. The remaining shares were held by the employees, bank and another company purchasing the products from Krosno.
Krosno's revenues fell dramatically after privatisation. One of the reasons was the world-wide recession but that was not the only reason. The management of the company failed to respond to the falling sales and was unable to exploit the only profitable business of hand-blown glass.
Management's failure to exploit their profitable line of business hurt the company. Unfortunately, there was no dominant investor with sufficient experience to turn this around. Replacing the company president twice in two years was the board's response to this problem. The inadequacy of the corporate governance revealed itself and the dispersed share ownership was seen as the reason behind this lackluster performance. Contributing reasons were no market-oriented governance; board members lethargic participation, government nominated members failing to attend the key board meetings. This pointed to one big flaw that there was no strong third voice in the shape of strong sponsor guiding the management.
In various other studies it has been pointed out that certain positive effects are evident from all privatisation's many of these related to sales effort. But the overall performance is more linked to a dominant shareholder whose intervention is the key to improving corporate performance and governance.
Privatisation as an ideology that has to be followed for the sake of it would not work. Also the experience of privatisation has given out mixed results all across the globe. Evidence suggests that privatisation which results into distributed and fragmented shareholding has less chances of success as compared to the instances where we have a strong, capable shareholder in the form of a local or foreign business house with sound expertise and exposure in the same sector.
So the debate is not about privatisation itself, rather it is about how we do it. Privatisation is more akin to selling the family silver. We can do it once. It will surely give us the much needed funds but we must do it right the first time. Otherwise the future generations will find neither the silver nor the benefit of the funds. Privatisation can energise the economy and put right many institutions that were once great. We may find PIA again training the leading twenty plus airlines in the world or we may find Pakistan Steel turning the wheel of our infrastructure and economy.
In the words of top manager of one of the privatised entities in east Europe, "Privatisation alone is like throwing a person into the water and calling it a swimming lesson." Privatisation alone is not the answer. We have to be very careful about the process and the results both. Just throwing the shareholding away to scattered shareholders may result into a change in the ownership but it will not result into the change in the performance of these institutions. Privatisation must be done in a manner that results into new management thinking and active board governance by the new shareholders. Otherwise our institutions will remain rudderless and drift away on the currents of economic distraction one after the other.
(The writer is the CEO of a power project and can be reached at kashifmateenansari@post.harvard.edu)