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Privatisation or the sale of the century?

Zarvan

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Part - I

The regressive fiscal measures taken by the PML-N government in its first nine months in power make it abundantly clear that PM Sharif’s ‘most experienced’ team has no interest in citizen welfare when taking important economic decisions.

While the citizens have been burdened by unprecedented increase in prices of electricity, gas, petrol and burdened further by increase in taxes on essential daily use commodities, the elite has been lavished with tax breaks and amnesty schemes to get richer. However, the party may have just begun. The ‘most experienced’ team’s next target is to deliver what may be the ‘grand sale of the century’ – marketing it as the miracle cure for the ailing economy.

This is the same miracle cure that was administered by the ‘most experienced’ team in the 1990s under the IMF stabilisation programme. The results of the 1990s privatisation programme were dismal. The Asian Development Bank’s 1998 evaluation report found that only 22 percent of the state-owned enterprises (SOEs) that were privatised were performing better under private-sector management, whereas 34 percent of the unit’s performance worsened significantly.

Out of the 83 manufacturing units privatised, 20 were closed down permanently, leading to significant loss of employment. We risk making the same mistakes if we are not more thoughtful in our approach. The government has prepared a list of 31 state-run enterprises to be privatised within the next three years. There is little to suggest that the results will be any different this time around.

The PTI supports a formal restructuring of state-owned enterprises under an independent board of directors (BoD) and through a transparent process as prescribed by the Pakistan Institute of Corporate Governance. The best example of a developing country successfully turning large inefficient state enterprises into engines of growth is Malaysia. The Malaysian government setup an autonomous strategic investment company ‘Khazana Nasional’, run by an independent BoD with powers to appoint CEOs and hold them accountable on clearly defined performance benchmarks. The landmark Government-Linked Companies (GLC) Transformation Programme of Khazana Nasional has been a huge success and has rapidly transformed inefficient SOEs into high performing corporate giants.

SOEs with strategic importance were kept under government ownership but made competitive through eliminating influence of politicians/bureaucrats. Strategic importance can be for financial reasons (the income generated for government), energy security, employment generation capacity and public service delivery (water, health, education and public transportation).

A few select SOEs with little strategic importance were also privatised. However, privatisation was pursued only after the SOEs had been restructured and made profitable to achieve maximum value for shareholders (government and public). Importance was given to strengthening the regulatory agencies to achieve the privatisation objectives of enhancing competition and raising competitiveness of industry.

The Khazana Nasional model was also a key recommendation put forward in the National Economic Agenda that was presented to the government in 2012 by the Pakistan Business Council (PBC). This is also what the PML-N promised in their 2013 election manifesto. Specifically, the PML-N manifesto stated that “the immediate task of the CEOs – appointed by independent and professional boards, will be to manage these corporations effectively and to plug the losses”. Instead we see indecent haste in outlining over 31 SOEs for privatisation.

Like all other pre-election promises, the PML-N government has abandoned its promise of a transparent privatisation process managed by an independent board, free of nepotism. Instead the Privatisation Commission BoD nominated by PM Sharif are all members affiliated with the ruling party and hence not independent. The professional expertise of some of the members is also highly questionable.

Despite the passage of over nine months in power, the PML-N government has failed to appoint CEOs of over 28 of the SOEs/institutions. The SOEs being run with acting CEOs include PSM, PSO, OGDCL, SNGPL, SSGC and Pepco etc.

For example the acting CEO of the PSM is the same man accused by the PML-N to have systematically destroyed Pakistan Steel under the PPP government. This raises serious questions marks on the intent of the government. Questions are propping up over the government preparing to hand over these SOEs at throw-away prices to friends and family.

Similarly, the PML-N government has systematically moved to weaken the regulatory authorities ahead of the planned privatisation programme. Ogra, Nepra, SECP and now even the SBP are without appointed CEOs and are being run on an ad hoc basis. The scant regard this government has for laws pertaining to regulators can be evidenced from the multiple violations of the State Bank Act being committed by the government in the last few months. This again raises serious question marks over transparency of the privatisation process – with the government deliberately and systematically weakening regulatory authorities ahead of initiating privatisation.

The PML-N privatisation mantra is deeply flawed. The party argues that the private sector can run these SOEs more efficiently and that the government can no longer afford to spend taxpayers’ money on bailing out these SOEs every year. There is little evidence to suggest that private enterprises are always more efficient than state-run enterprises. Take the example of the energy sector; Sinopec of China and Saudi Aramco are just as profitable as BP or Exxon Mobil. Similarly, Singapore Airlines and Emirates, both state owned, are bigger and more profitable than almost any of the private sector airlines.

The corporate banking giants in the US and EU had to be renationalised or recapitalised following the 2008 global financial crisis. The railways sector in the UK and EU had to be renationalised following disastrous results under private-sector management.

The real reason the government is demonstrating undue haste in pushing through privatisation is the need for money to finance its large deficits. The PML-N government borrowed over Rs883bn (June 1 to January 24) from the SBP for deficit financing – a new record beating even the woeful PPP government’s dismal performance.

The IMF has put strict limits on further money printing and so the government is seeking new avenues to finance its unsustainable deficits. Instead of initiating real reforms to raise government income through tax on the large, extremely wealthy untaxed segments of the economy or curtailing unproductive spending, the government has gone for the easier short cut to finance its large deficits. This is, of course, a very short-sighted strategy as it is onetime revenue earned through sale of the SOEs and will leave the structural problem unresolved.

Let’s dig deeper and see how serious a drain the SOEs put on the government finances. The budget documents show that government paid Rs367bn in FY13 to SOEs for subsidies/losses out of which Rs350bn (95 percent) was accounted by only two entities – Wapda and KESC. As we know, KESC (Karachi Electric) is now a privatised entity. If we take out Wapda and KESC the losses of the SOEs paid by the government in the FY13 budget were only Rs18bn.

Interestingly, the government forgets to mention the fact that most of the SOEs put up for privatisation are profitable and earned the government over Rs63 billion in dividends alone in FY13. So the net budget impact for the government (dividends minus subsidies) of the SOEs, excluding the power sector, was a positive contribution of Rs45 billion last year!

To be continued
Privatisation or the sale of the century? - Asad Umar
@Horus @WebMaster @Icarus @Slav Defence @SpArK @Stealth @Oscar @Jango @Jungibaaz @Aether @Bratva @fatman17
 
He seems to be implying that the fiscal luxury granted to Pakistanis is somehow sustainable, and that somehow you can not have regressive fiscal measures in place even when you consider the amount of billions we have borrowed and are borrowing from the international capital market. It is not our money, it is not money that belongs to Pakistani awaam, it's someone else's money and we'll need to pay it back.

Besides, forget paying it back, you can't not take measures such as haphazard privatisation to reassure and meet requirements of the IMF and other people who fund us.

Granted, the tax breaks are a crime, the failure to widen the tax net is both a crime and incompetency. Granted, the privatisation process is not transparent and likely highly inefficient, with likely undervalued assets being given away, and only God knows what will happen to those too.

He is right about the mismanagement, but he shouldn't imply that he somehow wouldn't go to the IMF and others, and still somehow maintain the current level of spending, with no fiscal shock in the mean time. If PTI came to power, they'd need a few years to restructure the way that's being described, and I don't see how they could instantaneously fund the ext year's expenditure without borrowing and without running up very high deficit. And if they do not spend and do not borrow, and they give the common Pakistani his money's worth in fiscal terms, people would loot burn and pillage until that government falls too. Pakistan's economy offers luxuries to people that they have not earned and then proposes to pay for those luxuries which should not be there in the first place by running deficits and borrowing extortionate amounts of money.
 
He is right that govt is not able to manage its expenses. He is also right that Govt is not taxing the person who deserve to be taxed. Instead govt is trying to sell SOE's and the privatization process isn't transparent. If govt will sell those SOE's then we will have more unemployment.

I just don't understand why govt can't run SOE? Govt can do it if experts are appointed and that SOE's get autonomous. The example Asad umer mentioned like Emirates Airline, it's State owned and still the best performing enterprise.

What is Pakistan budget? 4 trillion and can't we earn that much money through proper tax collection and from earning money from these SOE?? Currently govt will achieve somewhere about 2.6 Rs as revenue in 2014-15 fiscal year without taxing those 3 million+ people. Can't those 3 million people pay 1.4 Rs trillion as tax? 1.4 trillion divided by 3 million means less then 5,000$ for a year. I don't remember exactly but a person whose earning is more then 20,000$/year can be taxed directly on his income about $5000 year.


@Jungibaaz don't you think that you should first see when PTI are in power and what they do?
 
I wonder how he made billions to his ex employer, by monopolizing the fertilizer economy and price gouging, but no such a principled man wouldnt have done that. I am sure he was responsible for the low price of fertilizer we have seen in Pakistan and I am sure he sold it below the cost...such a gentleman he is, now he wants to do the same and wants govt to sell electricity, gas and petrol below the market price with no taxes and all the money earned from no taxes would be spent on the welfare of people....He is PTI's prime candidate for finance ministership.

p.s. talk to your brother about privatization and sale of the century.
 
U guyz are in a debate which India was 25 yrs back and China 35 years back. Now u have to see the outcome for these countries and decide.
 
if sole purpose of privatization is to rise money to cover up tax deficiency and focus is on privatizing shares not lose making entities then he is very much true.

unfortunately thats what we are seeing. the govt is not privatizing any lose making entities (or i would say has not done so till now) rather its focusing on money making shares.

shares of habib bank is the proof of that, govt doesnt own habib bank and thus it has no reason to sell its shares off.
now i will not be against it if the money strictly goes into development projects but he still has a point.

fact is govt is struggling on tax front and is making it up by selling money making govt shares(not privatizing entities)
 
gov is not a businesses company sale every company and consecrate on public issues .

U guyz are in a debate which India was 25 yrs back and China 35 years back. Now u have to see the outcome for these countries and decide.
and then what happen ? india until today paying loses of air india
 
gov is not a businesses company sale every company and consecrate on public issues .


and then what happen ? india until today paying loses of air india
I was talking bout privatization. Also, there is a huge debate to divest or sell off Air India. As Modi says, govts job is not to run business. Let the proffesionals do it. Govt job is to only regulate and control any extremes taking place.
 
U guyz are in a debate which India was 25 yrs back and China 35 years back. Now u have to see the outcome for these countries and decide.

But the problem stands here is that China made progress in those 35 years and India remains the same :D

In 1980 India GDP was 189.6$ billion and China GDP was 189.4$ billion so basically you guys were a bit ahead then China and today you are not able to stand in front of China proudly :D
 
But the problem stands here is that China made progress in those 35 years and India remains the same :D

In 1980 India GDP was 189.6$ billion and China GDP was 189.4$ billion so basically you guys were a bit ahead then China and today you are not able to stand in front of China proudly :D

Data: In 1980 China had about 50% more population, and a lower per capita GDP. Due to birth control policy in China, now both have almost same population size.

Back to topic, I guess privatization of non-strategic industries are necessary. The private sector is more efficient in perfectly competitive markets, and hence more fair in distribution of resources (capital, materials, human resources).

Since 1979, privatization in China has been carried out in a slow but steady fashion. It is still an ongoing exercise, and far from being competed.
 
Data: In 1980 China had about 50% more population, and a lower per capita GDP. Due to birth control policy in China, now both have almost same population size.

Back to topic, I guess privatization of non-strategic industries are necessary. The private sector is more efficient in perfectly competitive markets, and hence more fair in distribution of resources (capital, materials, human resources).

Since 1979, privatization in China has been carried out in a slow but steady fashion. It is still an ongoing exercise, and far from being competed.

Yeah and that supreme India failed in those 3 decades. :D

Dude privatization means that many people will get un-employed first. In pakistan history privatization resulted in failure of many companies. Did you read the article? He stated in previous times govt did privatization of SOE's but that resulted in a very bad decision.

If those SOE's get autonomous then they can successfully run themselves and can earn much money for Pakistan. For instance, Emirates Airline isn't it performing well? Why can't PIA if it gets autonomous? I can tell you the problem in single word and that is "MERIT".

Look if they get autonomous perform well and after some years if we privatize them, then we can sell them for much better price and can create employment for those people also whom will get un-employed or we can compensate them. Isn't it better?
 
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