Privatisation: Lessons from global economic pitfalls

Liberal financial institutions, including multilateral, bilateral and regional, are strong proponents of privatisation. They have made it an integral pillar of the economic model. They lecture poor and less developed countries on the miracles of privatisation. They put all efforts into marking government-owned entities as a bad idea for the economy. Though many countries have had lousy privatisation experiences, their preaching continues.

The liberal economic model works in a very sophisticated and systematic way. It starts with the development assistance, trade linkages and culminates with a debt trap. The poor and less developed countries, especially natural resource-rich and geographically essential countries, are prime targets. They knit a debt trap so skillfully that it keeps increasing, even if a country is honestly paying back the debt.

For example, in 1980, Brazil had $72 billion in debt. In the next 18 years, it paid back $146 billion and ended up with $231 billion in 1998. The story of Mexico is a replica of Brazil. Mexico started with $57 billion debt in 1980, paid back $157 billion, and ended up with $180 billion.

Once the country crosses the borrowing limit, the IFIs start cursing the recipient governments for poor policies and institutional arrangements. They forget their role and portray themselves as saviors, and hire an army of so-called independent experts, directly or through proxies, to prove their point. A good number of experts are engaged from the respective countries, including retired bureaucrats, relatives of serving bureaucrats or sometimes retired employees of IFIs. The designated independent experts have one job: to prove IFIs innocent.

After creating conducive environment for their interventions, IFIs start to dictate policy reforms in all sectors, including governance, institutional rearrangement, economic model, and end with the socio-economic sector. They want countries adopt all reforms at once, which bring more problems for them. They start losing control over governance, institutions and economy.

Simultaneously, the IFIs and their hired experts promote the private sector as the most efficient player in the economy. They criticise State-Owned Enterprises (SOEs) and blame them for the ills of the economy. They term SOEs inefficient, loss-making entities and waste of national resources. They never share the reasons behind the inefficiency and loss-making so that people can know the truth.

They also compare SOEs with the private sector without considering the differences between the roles of government and private sector and their responsibilities. It is common knowledge private sector is only concerned about profit, as it applies all tools to maximise it. Private sector is not responsible for serving society or building a prosperous society.

On the contrary, the first and foremost responsibility of the government is to meet the needs of the people and to serve their interests.

Despite this difference, the IFIs compel the government to go for privatisation, and countries trapped in the debt trap have no choice except to listen to them. They need money, so they start to talk about privatisation. We can observe the same trend in Pakistan these days.

The government here is focusing on privatisation of national assets. Federal ministers are delivering lengthy lectures on the self-perceived benefits of privatisation. They are writing articles in the newspapers and fiercely debating on TV talk shows to convince people about the benefits of privatisation.

Maybe they are ignorant or hiding the fact that IFIs play a double game after privatisation. On the one hand, they ask the government to create a good business environment by providing tax concessions and other incentives. The private sector also joins them, requesting concessions and preferential treatment. On the other hand, they pressure the government to increase revenue after selling the revenue-generating entities.

Now, the government has only one option: indirectly taxing the poor. It has to raise taxes on essential commodities and services like petrol, food, health, etc. Increase in taxes ushers a new wave of negative implications for the poor and middle class.

The story does not end here. After the first episode of privatisation, they will come up with the demand for the second. A new list is prepared and handed over to the recipient country.

In this context, before going for privatisation, Pakistan should learn from the experience of other countries. Had privatisation benefited them or negatively impacted them? We should study and analyse the Argentina case study. In the early 1990s, it started an extensive privatisation programme, putting on sale companies from productive and service sectors. The IFIs, other institutions and Western countries prescribed privatisation as a remedy for all the ills. Rather, IFIs pressurised Argentina to go for privatisation.

Many experts highlighted that the impact of privatisation was positive in the short-term because it led to a positive inflow of foreign reserves. The data shows Argentina received a $15 billion net inflow after a long time. Before the privatisation, the country was facing negative inflows. It positively affected the fiscal account.

However, the long-term impacts were very severe, and Argentina is still going through the shocks. After the first few years, fiscal accounts started showing negative trends, and financial resources depleted for multiple reasons. First, Argentina had to pay for the liabilities. Owing to privatisation, it paid a considerable amount of money to the employees who lost their jobs.

It engulfed a significant chunk of earned money from the privatisation. Second, the government had to pay for the loans and loan services for the privatised entities. Third, Argentina lost a substantial stream of revenue and job creation ability.

The negative impacts of privatisation continued to haunt Argentina, and economic situation there deteriorated with time. At the beginning of the 2000s, Argentina had to go for the peso’s devaluation. It complicated the situation for foreign investors, who faced challenges running the business. They started to leave the country, which further aggravated the situation.

In the recent past, Argentina had to negotiate the biggest assistance deal with the IMF to recover from the shocks. But still, economic recovery is a distant dream. The United Kingdom is another example where privatisation introduced problems.

Some studies highlighted that privatising public services badly impacted service sectors like health, transportation, etc. It was quoted the bad performance of the NHS led to extra deaths. The railway story is even more interesting, where the government privatised the railway in parts. One company was given track maintenance and the other rights to run the trains. It created harmful competition between the companies and impacted the railway services. A strong anti-privatisation drive is going on in the UK. France and Spain are other countries facing staunch opposition to privatisation of services.

Privatisation also erodes the capacity of the State. It starts to lose experts in the specific sector, and faces challenges in monitoring and regulating the sector. The State has to rely on consultants.

Owing to the negative implications of privatisation, anti-privatisation or nationalisation drive is going on in many countries. For example, Mexico is buying back power and oil companies.

In conclusion, like Argentina, Pakistan is going through difficult times. The wrong policy choices have badly impacted the economy, and SOEs are among the worst victims of that policy choices. The successive governments have equally contributed to the deterioration of SOEs. Now, under pressure from IFIs and the vested interests of the ruling elite, Pakistan is pursuing a privatisation policy without considering the importance of SOEs and its negative impacts on the economy and social status of the country.

Pakistan must analyse the possible consequences of privatisation before going for that. It can also learn from its privatisation experience in the 1990s and 2000s. Late Dr Pervaiz Tahir’s report can help Islamabad draw a few lessons.

Lastly, if Pakistan refuses to learn from global experience and that of its own, the negative impacts of privatisation will further deteriorate the economy and social fabric in the short run. In the long run, it will have profound implications for Pakistan’s security. Thus, instead of privatising SOEs, Pakistan should work on the management and governance of SOEs to fix the problems of SOEs.