The curious case of privatisation

There is a need to identify the vested interests that are opposing privatisation

Commercial operations by state enterprises are rarely successful particularly in economies that lack transparency; where appointments are made without merit and real need; and where bureaucrats and others cannot be held accountable for violations of rules.

Compared with similar enterprises being run by the private sector, public sector companies in Pakistan are highly inefficient. Pakistan International Airlines, for instance, is drowning in debt while private sector airlines operating in the country prosper. This is despite the fact that the national flag carrier enjoys a monopoly on some lucrative routes. Pakistan Steel Mills has been closed for three years after it failed to compete with private sector mini-steel mills. Pakistan State Oil commands over 70 percent of the oil market in the country, yet struggles to survive while several private sector oil marketing companies flourish. Electricity distribution companies in public sector post huge distribution losses and fail to collect bills. Railways operations would halt as soon as the government stops footing its salaries and pensions bill and underwriting its losses.

Some of these public sector businesses had performed admirably well 40 to 50 years ago. Pakistan Railways was the major carrier of goods around the country. It earned most of its profit from goods transport operations. It was efficient and competitive. Today, the volume of its goods transport operations is only a fraction of what it was 50 years back. Its service delivery has become unreliable. In the ’60s PIA was the pride of Pakistan. Its equipment, staff and services were considered one of the best in the world.

Things started deteriorating in public sector enterprises after mass nationalisation of numerous industries and commercial enterprises during the first PPP regime. After this mass nationalisation, public sector enterprises became parking grounds for political workers of every ruling party. Today almost all public sector enterprises are massively overstaffed and most of the recruiting is without any regard for merit. Over a period of time, these enterprises have stopped being efficient and become parasites. The previously efficient enterprises like Railways and PIA too have suffered the same fate. The only remedy now is a transparent privatisation.

But vested interests are creating discontent on privatisation and have made the process painfully slow. Meanwhile the value of these assets is continuously declining and liabilities increasing with every passing day. Political appointees and bureaucrats deputed in PSEs have a stake in recurring purchases. The procurement rules are engineered in such a way that only favoured suppliers are qualified to quote rates. They quote low prices because they supply low grade materials. If a competitor dares to supply the same quality his supplies are rejected on quality grounds. The entrenched bureaucracy in SOEs creates hurdles in the privatisation process by fomenting fear among workers that their jobs would be in danger. They also tell the rulers that their capacity to accommodate friends, family members and party workers would be compromised if state enterprises are privatised.

Three decades back the nation had no issues regarding privatisation. Opposition to this policy has picked up over the last decade.

Three decades back the nation had no issues regarding privatisation. Opposition to the policy has picked up over the last decade. There is a need to identify the vested interests opposing privatisation. The bureaucracy seems to be the top beneficiary in public sector companies. Bureaucrats in the Ministry of Industries control the public sector companies. Top bureaucrats are deputed in these enterprises at lucrative salaries and perks. While these state owned enterprises continue to make heavy losses, the perks and privileges of the top management continue to increase every year.

Political parties are not on the same page about the way these entities should be treated. The problem with most public sector enterprises is that they are not only overstaffed. A large number of workers and officers appointed on political grounds are incompetent and corrupt. Much of the equipment installed in these companies has lost efficiency for want of repair and maintenance. The combined impact of these factors is that most of these companies are making huge losses. These companies do not operate like private sector commercial companies. The Pakistan State Oil, for instance, enjoys near monopoly in the oil sector and should make hefty profits but its margins are drastically reduced as the state, the owner of the enterprise, asks it to supply oil to power sector companies on credit which is difficult to recover as the state owes payments to power companies. No private sector oil company supplies oil on credit to its customers.

There is a difference of opinion among political parties on how to improve performance of these companies. Past governments in the last three decades have tried every trick to make the public sector companies commercially viable but since these companies operate on bureaucratic red tape, the inefficiencies persist. The fact that all political and military governments inducted cronies and supporters in these companies without merit, makes the decision to privatise politically difficult.

Every government in the last two decades has tried first to sell these companies and, on encountering resistance from workers and some political elements, agreed to salvage the companies through better management. Better management, however, required further investment in these entities. Meanwhile top appointments were made on the discretion of ruling party and merit was again ignored. The fresh investments made in these companies went down the drain while losses continued to mount. The present government is confused; it wants to privatise some profit making enterprises but wants to retain the loss making entities like PIA (which has accumulated more liabilities than its assets) and Pakistan Railways.

Governments ignore the fact that after years of abuse public sector companies have not only lost operational efficiency but their equipment has also degraded. Revamping these companies would not only require change of management with one of utmost competence but also investment in new technology. The privatisation process was very fast during the first tenure of the PML-N government when in a span of less than three years major state owned cement plants, most of the ghee mills and all rice mills were privatised. Two major banks and two tractor plants were also handed over to the private sector. During that period the state owned chemical plants, some steel manufacturing units and textile units were also privatised. All these entities had been making losses when in the government sector, bleeding national resources. Past privatisation has thus proved mostly successful. The privatised companies that were posting losses before privatisation are now depositing in many cases more tax revenue in the exchequer than the price at which they were handed over to the private sector.

The writer is a senior economic reporter at The News

The curious case of privatisation