Privatisation and Deregulation

 

Privatisation is a supply side approach to bringing about increases in economic growth. Supply side economics is the application of microeconomic policies intended to increase the overall supply of goods and services. By increasing the efficiency of the factor inputs in the production process output should increase. This should have the effect of shifting aggregate supply to the right and increasing the potential level of output as shown in the diagram below.

   

Arguments in favour of Privatisation:

Economists offer several arguments in favour of transferring government run firms to the private sector:

Arguments against Privatisation:

The process of privatisation and deregulation is intended to increase the level of competition. However, this may not happen for a number of reasons:

Privatisation Process in Pakistan

History and evolution of privatisation in Pakistan:

The concept of privatisation is not new to the policy makers of this country. It may be traced as back as in 50s, when Pakistan Industrial Development Corporation (PIDC) was established in 1952 to boost up the industrial development in the country. This premier Corporation established over 50 industrial undertakings in the length and breadth of the country and after their successful operation and management, these units were transferred from the public to the private sector. The tide of nationalisation, which swept the whole economy in the first half of 70s, was reversed in 1977. The privatisation of State Owned Enterprises (SOE) became an important instrument of economic policy of the government in late 80s.  However, it was in 1991 that privatisation process in Pakistan became effective.

In this topic, we will limit our discussion only to the privatisation process post-1991.  In 1990-91, the new government declared privatisation as its primary economic policy objective.  The agenda of privatisation announced by the Government covered a wide spectrum of fields like industries, banks, development finance institutions, telecommunications and infrastructure facilities.  The government announced the creation of a Privatisation Commission on 22nd January, 1991 to implement the disinvestment programme within the shortest possible time.  The birth of Privatisation Commission institutionalised privatisation efforts in Pakistan.

While providing a legal cover to the privatisation process, the government at the same time also moved to protect the interests of the stakeholders, of which labour was given primary importance. A separate Inter-Ministerial Committee was constituted to deal with the labour employed in the SOEs and safeguard their rights. The Committee negotiated a package of incentives for labour employed in these enterprises with the representatives of workers.  The agreement with labour was executed on October 15, 1991. The agreement has provided the basic parameters to safeguard the interests of labour and include minimum one year service guarantee after privatisation, reservation of 10% shares for the labour, opportunity to the employees to purchase the unit by putting competitive bid and several other concessions to the workers. It also provided a scheme of Golden Hand Shake (GHS) and Voluntary Separation Scheme (VSS) for the workers and officers of the public sector undertakings.

Overall results of the privatisation process in Pakistan are mixed. In certain sectors like power generation, financial institutions, cement and automobile the performance of the privatised units is satisfactory and the new management have succeeded in improving the quality of product and service as well as financial health of the units. The workers have also benefited in terms of higher salaries and better working conditions. In other sectors like edible oil and roti plants privatisation has not been very successful.

During January 1991 to June 2003 the Commission completed 132 transactions for Rs 101 billion.  During the financial year 2003-2004, the Commission has successfully completed privatisation of 8 transactions including privatisation of Habib Bank Limited, AC Cement Rohri, Thatta Cement Limited, Kohinoor Oil Mills, and Capital Market Transactions (OGDCL, SSGC, POL, ARL, DG Khan Cement and NBP). The total sale proceeds realized during the year amounted to Rs.33.3 billion.  Out of the sale proceeds received during the year, the Commission has remitted Rs.11.2 billion to the Government of Pakistan for debt retirement and poverty alleviation program.  The Commission during period from July 2004 to April 25, 2005 has realized Rs. 33.8 billion from sale of GOP shares in PIA, PPL, KAPCO, Falleti’s Hotel and 10% additional shares of Kohat Cement, Dandot Cement Ltd. By 25th April 2005, the Government of Pakistan had completed or approved 147 transactions at gross proceeds of Rs 168 billion.  Some of the major transactions recently completed are:

Number of privatised transactions

(1991 – April 25, 2005)

Sector

No. of

Transactions

Amount

(Rs. In million)

Banking

7

41,023

Capital Market Transaction

17

31,700

Energy

13

41,144

Telecom

2

30,558

Automobile

7

1,102

Cement

14

8,681

Chemical / Fertilizer

18

10,204

Engineering

7

183

Ghee Mills

22

837

Rice / Roti Plants

23

326

Textile

2

                 
87

Newspapers

5

270

Tourism

4

1,805

Others

6

160

Total

147

168,080

Some Major Forthcoming Transactions:

Privatisation Commission had invited Expressions of Interest (EOIs) from qualified utility operators and strategic and financial investors in September 2003 for sale of up to 73% shares of KESC, with management control.  Four parties submitted EOIs and were evaluated by the Commission.  Three parties were pre-qualified and invited to sign the Confidentiality Agreement and undertake due diligence prior to bidding.  The bidding for KESC was held on February 4, 2005. Two Parties i.e. Hasan Associate Consortium and Kanooz al Watan (Saudi Arabia) participated in the bid.  Kanwooz Al Watan submitted the highest bid of Rs. 20.24 billion.

Expected Transactions during the Year 2005

Name of SOEs / transactions

Type of sale envisaged

Oil and Gas:

 

Pakistan State Oil (PSO)

51% shares alongwith management control

Banking and Finance:

 

National Investment Trust (NIT)

Sale of management rights

Investment Corp. of Pakistan (ICP)

Strategic sale

Power:

 

Faisalabad Electric Supply Co (FESCO)

56% shares alongwith management control

Genco 1 (Jamshoro)

51% shares alongwith management control

Industry and Real Estate:

 

Javedan Cement Company Ltd.

96.34% shares alongwith management control

Mustehkum Cement Ltd.

85.29% shares alongwith management control

Bolan Textile Mills

Machinery sale

Lasbella Textile Mills

Machinery sale

Malam Jabba

Not yet determined

Pak-American Fertilizer Ltd.

94.3% shares alongwith management control

National Construction Ltd. (NCL)

Not yet determined

Morafco Industries Faisalabad

Not yet determined

Republic Motors Ltd.

Not yet determined

Lyallpur Chemical

Not yet determined

Hazara Phosphate

Not yet determined

Tomato Paste Plant

Asset sale

Printing Corporation of Pakistan Pvt. Ltd.

Not yet determined

Karachi Shipyard and Engineering Works Ltd.

  • Strategic sale with transfer of management control.

  • % of shares being sold not yet determined.

Pakistan Steel Mills Corporation

Not yet determined

Upcoming Transactions (Latest)

Need for Privatisation in Pakistan:

Dr. Ishrat Husain, the Governor of State Bank of Pakistan, in his speech at the Overseas Universities Alumni Club and the 21st Century Business & Economics Club on August 12th 2005, gives the exact answer to the questions arising about the rationale for privatisation in Pakistan.  According to him, two decades later, after the nationalization of 1970s, it turned out that nationalization was not only unrealistic and flawed but the consequences were exactly opposite to what the intentions were.  The collapse of the Soviet Union and the bankruptcy of the socialist model eroded the ideological underpinning of this strategy and the actual results on the ground in Pakistan and almost all the developing countries shattered the ideal and utopian dreams of the proponents of this philosophy.  Pakistan’s public enterprises including banks became a drain on the country’s finances through continuous haemorrhaging and leakages and a drag on the economic growth impulses. The poor instead of benefiting were actually worse off as almost Rs.100 billion a year were spent out of the budget annually on plugging the losses of these corporations, banks and other enterprises.  These public enterprises became the conduit for employing thousands of supporters of political parties that assumed power in the country in rapid succession and a source of patronage, perks and privileges for the ministers and the favoured bureaucrats appointed to manage these enterprises. These employees and managers had neither the managerial expertise nor technical competence to carry out the job. Instead of providing goods & services to the common citizens at competitive prices efficiently, the public enterprises turned into avenues for loot and plunder, inefficient provision of services and production of shoddy goods.

In the past, private entrepreneurs in Pakistan did not make ‘profits’ in the real economic sense by earning a return on their investment in a competitive world. On the contrary, they earned ‘rents’ through the maze of permits, licences, preferred credit by the banks, subsidies, privileges, concessions and specific SROs granted to few favoured firms. Naturally when one sees people becoming rich not through the dint of their hard work and enterprise but by manipulation, or bypassing the established rules and laws, we should not be surprised to see the venom against the so called ‘private profits’.

The policy reforms introduced in Pakistan in 1991 has three key essentials – (i) Liberalisation, (ii) Deregulation, and (iii) Privatisation.  But unfortunately, Pakistan could not follow through these reforms in a continuous and consistent manner despite the fact that both Benazir and Nawaz Sharif governments were fully committed to these reforms.  For example, 12% shares of PTCL were first sold to the general public in 1993-94 and it has been on the privatisation agenda of every successive government since then.

According to a popular view in Pakistan it is okay to sell the loss making enterprises but retain the profit making entities such as PTCL and PSO in the public sector.  The main economic logic behind this divestiture  is that it will promote efficient allocation of scarce resources, optimal utilization of resources, making sound, timely and market responsive investment choices, winning and retaining customer’s loyalty through better service standards and lower product prices or user charges and contributing to the expansion of the economy through taxes, dividends etc.  The basic reason for privatising these enterprises is that the government should not be in the business of running businesses but regulating businesses. The role of the government should be that of a neutral umpire, who lays down the ground rules for businesses to operate and compete, to monitor and enforce these rules, to penalize those found guilty of contraventions and to adjudicate disputes between the competing business firms.  If the government owned firm itself, there is a strong conflict of interest and the other competitors lose confidence in the neutrality of the umpire. Under these circumstances, the market becomes chaotic, disorderly and unruly as there is no neutral ‘person’ to monitor and enforce the rules. The economy thus pays a heavy price for this loss of the market mechanism in the production, sale and distribution of goods and services. The present controversy between the PIA and private airlines is a manifestation of this tendency.  The same argument can be applied in case of PTCL. If the Government had continued to own and manage PTCL, the private sector competing firms would have felt that they would always remain at a disadvantage in relation to the PTCL. The constant fear that the government’s coercive powers and full force of policy making ability would always be used to safeguard and enhance the interests of PTCL. This would have kept the private firms away from investment in the fixed telephone or wireless loop segments.

The fears about employment losses in the industry as a result of privatisation are also, by and large, unfounded. The example of the banking industry privatisation controverts those who claim that privatisation means jobs are lost. In 1997 when the restructuring, down-sizing and privatisation of the nationalized commercial banks picked up speed there were 105,000 employees working in the financial sector. After privatisation was completed, the banking industry has expanded and the work force has expanded to 114,000. It is true that the pattern of employment has changed and more productive and skilled workers have been taken in at the expense of low skilled or unskilled.

Telecom sector has already generated, after deregulation, hundreds of thousands of new jobs through public call offices, calling cards and pre-paid card companies, Internet Service Providers, mobile phone companies, broad band services, and other value added services under the private sector. As the penetration ratios in Pakistan are still quite low, there is going to be a large expansion in the telecom sector.  Industry estimates that 100,000 new jobs will be added during next 3 – 5 years.

Conclusion:

Privatisation contributes to economic growth through productivity gains, efficient utilization of resources, better governance and expansion in output and employment. Profit making enterprises under the public sector may be making profits due to the unique market structure such as monopoly or other privileges or concessions conferred upon them by the government but it does so at the expense of the consumer who has to pay higher than market price for the product or the services. The ordinary consumer gets a benefit only through competition among private sector firms in form of lower prices and better services as has been demonstrated in the cases of banking, telecommunications and, more recently, air travel.

In a deregulated market environment, public ownership becomes a serious constraint as the rule – bound procedures and the rigidity in the structure do not allow public sector companies the flexibility to respond promptly to dynamic market conditions. Furthermore, the government’s role as a regulator and neutral umpire becomes questionable once it is itself a participant in the game through its own company.  This stifles competition and subverts expansion and growth by the private sector companies.

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