Privatisation — where would it lead!

Privatisation is a unique medicine that International Financial Institutions (IFIs) prescribe to financially weak countries

By Shakeel Ahmad Ramay
June 24, 2024
This picture released on February 9, 2023, shows Pakistan International Airlines (PIA) aircraft parked inside a shade in Nur Khan Engineering Complex in Islamabad. — X/PIA

Muhammad Aurangzeb, finance minister of Pakistan, said at a ceremony Pakistan will go for privatisation full throttle. The Prime Minister of Pakistan is also pushing to accelerate privatisation of SOEs. It is a major condition of the IMF for a new deal.

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Privatisation is a unique medicine that International Financial Institutions (IFIs) prescribe to financially weak countries. IMF asks the country to take a dose of privatisation if it wants any help from the Fund. The extent of the dose will depend on the country’s need, whether it is heavy or light. Although the concept was introduced by the fascist regime in Italy, it is now favourite tool of capitalist economies and institutions.

The first practical intervention on this front was noticed during 1921-25 in Italy. Germany was next on the list. These actions aimed to oblige close groups or friends and create a cult of supporters.

However, the concept of privatisation truly gained momentum after Margaret Thatcher’s government. Her policies, aimed at liberalising economy and minimising government interference in business, led to the UK earning £29 billion from selling national industries and £18 billion from council houses. This story inspired European countries to follow suit and embark on their own privatisation journeys. In France, a group of cronies emerged, and they started to grab a major chunk of privatised companies and utilities. People called the group “cash grabbers”.

The United Kingdom and European countries deemed it necessary to revitalise the economy, as Pakistan Finance Minister is advocating. It was considered a pre-condition to enhance efficiency of industries and human capital. It helped improve efficiency in the early days, but later created problems. It gave rise to inequality and dominance of private sector in decision-making. Multinational companies started to bargain with governments and accrue major benefits through taxes.

Small and medium enterprises faced problems, and big companies started capturing local markets. Inequality shook the trust of common people, and movements across the world emerged, such as “We Are 99pc” in US, farmers’ movement in Germany etc. It also triggered rise of right-wing or nationalist parties.

Unfortunately, Pakistan falls for the rhetoric of efficiency and the private sector role. The Asian Development Bank highlighted only 22pc of privatised SOEs performed better; 44pc were on the same level of performance, and 34pc got worse. However, Pakistan refused to learn and continued to privatise SOEs. In 2014, the late Dr Pervaiz Tahir conducted a study to evaluate the results of privatisation. He highlighted two cases a power producer and a telecommunication company. Both companies were profitmaking entities. The new owner of power company increased electricity rates in 1999, which negatively impacted the domestic industry and the market. Dr Tahir said industry consumption declined from 31pc to 28pc.

Despite the bad experiences, IFIs are still pushing Pakistan to go for privatisation citing bad performance of SOEs. However, analysis of SOEs indicates actual problems are bad governance and political interference. Political interference leads to bad management and governance. The successive governments abused SOEs for their political goals. They violated the merit and stuffed SOEs with cronies, political workers and accommodated allies. They never tried to run SOEs as business entities. All these factors contributed to deterioration of SOEs. And now SOEs are on the verge of collapse. That’s what they wanted. Instead of fixing SOEs, they are planning to sell them.

Selling SOEs will introduce five problems. First, the State will lose productive non-tax revenue sources. This will impact its ability to invest in public goods and services like parks, entertainment facilities, education, skill development, sports and health. The proponents ignore the fact no government or state can depend only on tax revenue. Dependence on only tax makes a state weak, and individual business groups start to dictate it.

Second, privatisation will promote the notion of survival of the fittest. Those who can afford expensive services or goods are in better condition. For example, quality education is so expensive that is out of reach for common citizens. The same is true for health sector.

Third, to meet its expenses, the government must increase taxes or tax rates. Will business community, industrialists, real estate, stock exchange, landlords or common people pay for these taxes? The simple answer is common people. The ruling elite, comprising business community, industrialists, real estate, stock exchange, landlords, establishments and bureaucracy, will tweak the system and will not pay taxes. The budget for 2024-25 has proved this assumption right.

For example, the State has increased taxes on salaried class and common people and doled out packages for business groups and exporters. It did not impose taxes on subsidies to the elite or eliminate their perks. It will give birth to a new wave of inflation, which will be beyond the capacity of common citizens.

Fourth, the government will not be able to provide relief or subsidies to marginalised sections of society. In the long term, the State will be unable to meet its national security commitments due to resource shortages. Then, IFIs may ask Pakistan to reduce size of the military and privatise military-owned enterprises.

Fifth, it will create disturbance among the citizens, which can lead to undesired consequences. The analysis of history tells once the capacity of common people to bear the shock crosses the limit, undesired results always accompany it.

The SOEs are essential for ensuring non-tax revenue and running the State independently. However, we will have to run the SOEs based on economic rationale. We can learn from the Chinese model. China asked all state-owned enterprises to compete with each other. Competition compelled the companies to perform efficiently and produce better results. It also urged companies to invest in research and development and go for more innovation and better services.

The State assumed the duty to provide relief and a better life to people. It put equal focus on welfare of people. China brought 800 million people out of poverty, and is now working to graduate them to move up the ladder. Simultaneously, the private sector was encouraged to grow, and giants like Ali Baba and Huawei emerged globally.

Pakistan must comprehend IMF or IFIs will not stop privatising SOEs. The next target will be military-owned enterprises, which proponents of SOEs’ privatisation are not sharing with them. It will be a huge security risk for the country. Therefore, Pakistan should not follow privatisation agenda blindly.

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