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Friday March 29, 2024

Privatisation: way to earn higher profits and increase efficiencies

By Mansoor Ahmad
November 16, 2019

LAHORE: Privatisation of some profit making state owned companies, if carried out transparently, would redeem the opportunity of higher profits, which were not achieved due to inefficient operations in public sector and frequent government pressures.

Experts say that even those government sector companies that are posting profits are not operating at even half the efficiency exhibited by their counter parts in the private sector.

Take for example the performance of the National Bank of Pakistan that is twice as large as the MCB Bank. However, its annual profits of Rs10 billion are half that of MCB Bank.

The NBP has the advantage of operating under the patronage of the government of Pakistan. It collects government duties and levies and is saddled with most of the government deposits.

Any private bank with similar facilitations would have made life difficult for other banks. The HBL, UBL and the MCB Bank have been posting higher growth than NBP in the last 10 years.

Ideally, the net profits of HBL should have been around Rs25 billion. So by keeping the NBP under government control, the government is losing an opportunity to earn tax revenue on an additional Rs15 billion that the NBP is not earning currently.

Same is the case with the Bank of Punjab that is operating at low efficiency. These banks being under government control are subject to pressure from the ruling elite for doling out risky loans.

The non-performing loan portfolio of these banks is much higher than the private banks. These banks could be partially privatised by handing over their control to a private bidder to buy its 26 percent shares.

This was done in case of MCB Bank and other banks that ultimately brought back all the remaining shares after few years at much higher price than the original bid. There are numerous profit making government enterprises that could increase the tax revenue by over Rs200 billion annually if they are transparently privatised.

Disposing of the loss making public sector enterprises would be an uphill task and would take some time. The government would have to address many issues. The fate of existing employees would be a problem.

The banks that were privatised in the past, managed to reduce their cumulative workforce by 51,000. But they did so under the lucrative golden handshake scheme.

Under this scheme, each employee was given the total salary that he would have earned by the time he reached the retirement age of 60. Thus, a person aged 30 and drawing a salary of Rs20,000 was able to get Rs7.2 million.

Persons having lesser tenure got less, but in most cases the amount was in the range of at least Rs1 million. This was a lot of amount in those days.

Many of the employees after getting the golden handshake started their businesses. Many succeeded and started paying taxes to the government.

Some deposited the amount in the National Saving Schemes and started earning higher monthly income than their last take home salary.

It may be mentioned that the public sector companies are grossly over employed. Inductions in each enterprise have been mostly without merit and without any need.

The vacancies were simply created to accommodate the political appointees. This was also the case in the government owned banks that were privatised and those that are still in government control.

For the profit making government entities it might be feasible to get rid of unnecessary fat through a lucrative job severance scheme. But for the loss making public sector companies there is no cash available. In fact, in many cases the state is bearing the burden of their monthly salaries as well.

Any hint that these loss making entities would be privatised creates panic in the market. It is worth noting that though the trade unions in the private sector are either absent or firmly under control of the owners; the trade unions in the public sector are very strong and vocal. They have to be tamed.

This is now only possible if the government assures all employees of a fair deal. It will have to devise a golden handshake scheme for them. Buyers of these entities would come if they were assured that there would be no unions and they could retain only the staff they wanted.

The golden handshake could then be given from the privatisation proceeds. This would stop the government resources from bleeding once and for all.