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March 13, 2016

The case against privatisation

Opinion

March 13, 2016

Feisal Naqvi recently concluded in these pages (‘The case for privatisation’, February 21) that state-owned enterprises (SOEs) fail primarily because of speed and accountability. If this argument is applied to our SOEs, then almost all of them – given their performance – should be privatised to increase speed and accountability, but this would not be very realistic.

Also, the case is weak for a new private buyer to purchase a public asset, because that buyer would have to deal with public departments that are slow and rarely held accountable, which would impede growth.

SOEs have thrived in some economies; one cannot dismiss SOEs altogether. According to a report by PricewaterhouseCoopers, the share of SOEs among the Fortune Global 500 has grown from 9 percent in 2005 to 23 percent in 2014. Furthermore, the top eight countries with the highest SOE shares accounted for more than 20 percent of the world’s trade.

A major proportion of the SOE growth worldwide is due to the Chinese SOEs. Three Chinese SOEs consistently made the top ten since 2010. Chinese SOEs have roughly $17 trillion in assets and employ more than 35 million people. Factors like attracting top talent, foreign investment, linking executive’s compensation to performance, globalisation and choosing a hybrid structure of corporate governance contributed to their success.

Chinese SOEs have established a hybrid structure through independent management akin to a private corporations, while deriving their financial power from the government. Like the SOEs here, Chinese SOEs face challenges from both the bureaucracy and political interference. The Financial Times reported that in 2004, the CEOs of several Chinese telecom companies were shifted overnight without any prior notice. Even in face of these challenges, Chinese SOEs have posted amazing results.

Another amazing example can be found in Singapore. Singapore manages a portfolio of SOEs through an investment company called Temasek Holdings, whose sole shareholder is Singapore’s Ministry of Finance. Temasek has managed a net portfolio of $177 billion, as of March 2015. Temasek’s companies are managed without government involvement; instead, Temasek provides flexibility by allowing each board to dictate its own terms for each portfolio company. This method of management has proven so successful that even China wants to imitate Singapore’s strategy on a larger scale by 2020.

Both Chinese and Singapore SOEs have handled the issues of incentive and reinvention. Though privatisation is a prudent way to eliminate budget deficit, reduce the size of government and increase public service delivery, it has not worked everywhere. PTCL’s example supports this assertion, because its profits and service delivery did not significantly improve after privatisation. Many academics have provided helpful critiques of privatisation. Some of the issues that Paul Starr, professor of sociology and public affairs at Princeton, has raised should be considered.

First, the message that privatisation sends is demoralising. This message is that whenever we face a problem, we should sell an asset instead of fixing it with good intent. This tends to discourage citizens by showing them that the government is either incompetent and cannot fix its own institutions or lacks the initiative to fix them. Moreover, when the government consistently chooses to sell its assets to the private sector, it is essentially making a ‘buy vs make’ decision. If buying were the way to go in the face of trouble, then no large corporations would exist.

Additionally, the continuous sale of our assets may make us less of a nation. Starr has argued that the sale of SOEs would decrease accountability and reduce public debate, ultimately reducing the public’s interest in the country’s businesses. Starr compares the suggested treatment of the government’s assets to a family’s consideration of their food as the nourishment necessary for survival; in other words, instead of thinking about its institutions as a subsidy, the government should consider the success of its institutions as integral to the country’s survival.

Some supporters of privatisation argue that it will decrease the size of the government. However, lobbyists in the private sector aggressively lobby for increased public spending because that is how they make money. With more resources, private companies use their influence to secure government contracts. With increased public spending still an issue, the size of the government is unlikely to be reduced.

Furthermore, there is a cost to the citizens when the government does not fix the issues with its institutions. Both our education and health systems are examples of the government’s lackadaisical attitude toward problems in the public sector. Instead, the private sector has created a wealth gap. Since the private sector can charge whatever it wants for the services it provides, only the wealthy are able to benefit from them and those who do not have sufficient income cannot obtain quality care. This gap has diminished the access of the poor to quality services. The focus cannot merely be on privatisation; we must focus efforts on improving public services in order to increase public access to quality services.

Proponents of privatisation also argue that converting public sector services to private ownership will give the private sector the freedom to perform more efficiently and force companies to provide better customer service. Despite the benefits, it is important to note that the private sector is driven by its own interests and may not consider public interest when making decisions.

Moreover, it is assumed that buyers will pay more for an entity than what it is actually worth because the private sector buyer expects greater revenues from the sale. We should remember that potential buyers usually pay less than the asking price, when the entity needs restructuring. At times, it makes more sense to sell an entity after doing some restructuring than it does to sell it haphazardly.

We must make an attempt, with good intent, to improve an organisation before throwing in the towel. As business author Guy Kawasaki said in ‘Rules for Revolutionaries’, “create like a god, command like a king and work like a slave.” It seems we believe in the first two, but we fall short of the third. In order to truly improve our institutions, we need to put in the work. If we put in the necessary work, we wouldn’t need the private sector to rescue our institutions; we could rescue them on our own.

Email: [email protected]

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