Miscellaneous

Privatization

Privatization has become an intensely polarized subject in Pakistan with politically charged rhetoric dominating discussions. Substantive debates around its policy rationale and the institutional prerequisites necessary for its success have not been given priority. With this, as a context, five questions are being flagged to further objective discussions on the subject.

First, are we getting the framing on privatization right? Privatization is generally viewed through the narrow lens of 'sale of state enterprise' in Pakistan. This is evidenced by a covenant of the Privatization Policy, which envisages it to be “...a mechanism for the reduction of debt...” In effect privatization is linked to the fundamental question of the role of state in the economy. It is part of a broader policy choice involving deregulation and liberalization. Privatization is part of a set of policy changes, a government can espouse to make private sector the engine of growth, with the understanding that the role of the government is to provide an enabling policy, impartial oversight, transparent regulation and a level playing field for market operators.

Public-private engagement in state governance happens on a spectrum, at the extreme end of which is total transfer of ownership of enterprise, or public property from government to the private sector, which is what privatization entails. Opening up of a sector, previously a government monopoly to the private sector can also be labelled as such. At the other end of the spectrum is out-sourcing or contracting-out of certain functions, from the government to private entities. Although this also involves private-private collaboration, it is distinct from 'privatization'. To understand what a government can, and what it cannot, privatize and where public-private engagement in a contractual format becomes relevant, the functions of government should be brought to bear. Policy-making is an essential government function and cannot be privatized. Regulation is also a core function of the state, but can be out-sourced to an autonomous entity, with a public mandate. Several regulatory functions are currently being performed by autonomous entities in Pakistan, with the Oil and Gas Regulatory Authority (OGRA), Pakistan Electronic Media Regulatory Authority (PEMRA), Pakistan Telecom Authority (PTA), being examples. Countries also have experience in contracting out other government functions such as revenue collection to private entities. Governments can opt to contract out service delivery in areas such as health and education to private entities on the premise that the private sector has better outreach and/or management capacity to deliver a pubic mandate if it is financed publicly. In policy parlance, this approach is referred to as 'purchasing services from the private sector', an approach Pakistan has already experimented with. Running industrial enterprise is not a core function of the government unless certain exceptions compel it to do so. These exceptions must be clearly appreciated. When there is no incentive for the market to play a role in an area that needs to be served; when an equality gap needs to be bridged; where a strategic objective stands to be gained for the country; or when a specific impetus needs to be lent to open a sector, government involvement in market activity/enterprise may be justified, otherwise activities should be left to market operators.

This brings us to the second question of how privatization becomes relevant in Pakistan. Over the years, Pakistan has established a long list of Public Sector Enterprises (PSEs) which do not fall under the list of exceptions mentioned above. They are additionally inefficient and are a burden on the national budget. Billions of rupees, which could have been spent on welfare, national development, and debt retirement, are being used to pay for their inefficiencies. The government, therefore, has to make a choice between two options, both of which could potentially improve the efficiency and effectiveness of sick PSE's – either reforming governance arrangements while continuing to have state control or by opting to transfer them to the private sector through privatization. For Pakistan, both options remain challenging. The country has a bad track record of introducing corporate culture in PSEs on the one hand and has also been unable to auger public confidence in the process of privatization, on the other. This notwithstanding, the list of ineffective PSEs must be examined to explore which option fits best to reform each. As privatization is a complex procedure and not an ordinary auction, a robust and transparent process becomes critical for its success

The third question, therefore, focuses on the process safeguards, which are necessary for the privatization process. Many PSEs listed on the privatization list do qualify to be there. It is not the rationale that is questioned but the process, which becomes a point of contention. Today the opponents of privatization in Pakistan may not be ideologically opposed to the idea but are fearful that the transactions may be carried out in a non-transparent and/or unfair manner, state assets could be sold at throwaway prices, political cronies could be rewarded for allegiances, that in the process of 'stabilizing' these enterprises state resources may be unnecessarily spent and that strategic objectives could be compromised. Privatization vests enormous power of patronage in governments and these concerns are a real risk.

Government can hedge against these risks by ensuring full legal safeguards and water tight procedures and by upholding the highest standards of transparency and accountability in the privatization process. A number of imperatives emerge. As a starting point, the governing norms of privatization in Pakistan should be revisited. These include the Privatization Commission Ordinance 2000, the Privatization Policy 1994, and the privatization programme paper, which also lists the names of the units/entities to be privatized alongwith respective divestment strategies to be adopted.

The policy has been amended once in 2009 and needs to be revisited since it has been two decades since its formulation. It does, however, outline several robust principles but the key question is one of their implementation, as discussed later in this comment. The 2000 Ordinance provided for establishment of the Privatization Commission. It is being inferred that legislative authorization for individual privatizations are implicit in the framework, in other words it is being taken as a 'framework authorization act'. However, lessons from other countries show that legislative authorization is usually needed to change the status of individual PSEs as well. A legislative cover can have beneficial impact with reference to transparency and policy support for privatization.

In terms of the process, measures to avoid conflict of interest assume great importance while appointing board members of the Privatization Commission and the agencies to be privatized, which is where due diligence becomes critical. In the case of evaluators and external advisors involved in the privatization process conflict of interest concerns are equally relevant and can be mitigated through a strong contractual process. Also in relation to the process, due attention to job security, wages and benefits of incumbent staff become important, with the general rule being that their contractual rights should continue to be honoured after transfer of ownership. The Pakistan post-privatization experience has been plagued by inconclusive resolution of labour issues, with the case of the PTCL pensioners being illustrative.

The fourth question relates to the institutional arrangements necessary for the success of privatization. Adequate capacity assumes importance in this respect. Pakistan has vested administrative responsibility for privatization in the Privatization Commission and in doing so it has become compliant with the internationally recommended policy, which requires countries to have independent privatization units. But does the Commission have adequate capacity? Does it has a culture of promoting accountability and transparency? Is it adequately resourced to engage private actors who have the capability to negotiate and safeguard their interest in privatization transactions, as they should? Since engagement with the private sector demands certain institutional capabilities within the government system, the government should privatize a PSE only after an appropriate regulatory framework for the privatized entity has been created. Given Pakistan's past performance with regulatory arrangements, a massive effort needs to be put in place to step up government regulatory capacity and develop it for sectors and mandates which are being privatized.

Also, in terms of institutional arrangements, when a government retains an influence in the PSE following privatization, it is critical that it creates the right accountability of state functionaries who represent the government's interest on board – it isn't entirely appropriate to give government functionaries per diems several times their monthly salary as this could potentially undermine their impartiality. The fifth question: have we taken stock of evidence and are we drawing on lessons from the past whilst planning for something this large? There has always been a tendency in the country to make sweeping policy-changes without regard to evidence. Since decisions need to be evidence-guided past experiences become important. Pakistan has vacillated between several waves of privatization and nationalization. Since its inception in 1991, there have been two phases of privatization between 1992-94 and then 2001 onward, with 167 transactions to-date. It would be important to draw lessons from these experiences. There are many principles of privatization articulated in the 1994 policy against the backdrop of which impact could be gauged. For example, was there any net benefit to the government with privatization? What was the quantum of increase in revenue? What percentage of this was used for debt retirement and was the 10% meant to be committed for welfare in the 2000 Privatization Ordinance actually channelled towards it? The policy stated that “monopolistic trends will be curbed” and that “safeguards will be introduced to achieve broad based ownership and prevent concentration of resources in a few hands”. To this effect did our past experiences in privatization lead to cartelization? Did they concentrate assets in a few hands? What has been the impact of privatization on narrowing the wealth gap? Was there any collusion in the valuation of assets? What value did the injection of resources into the PSEs prior to their privatization bring? Was there ever a precedent in terms of giving minority share-holders precedent over majority share-holders? How many privatized units actually functioned after they were handed over to the private sector? Has there been an analysis of the motivation of the buyers? There have been reports, which allege that the primary motivation in some of the privatization deals was to strip the assets of their real estate value – to what extent are these true? The policy also intended to mobilize investment for PSEs from overseas Pakistanis and foreign investors. To what extent was that enabled? Have we prioritized privatization of the loss making enterprises before putting the profit making ones up for sale, which is a cardinal rule in privatization?

Have we insulated sectors and organizations that are strategically dangerous and economically unjustifiable to privatize? Some enterprises have been subject to the privatization processes, but have not been transferred to private ownership in their entirety. What have been the determinants of that? What has been the private sector's experience with the privatization process, overall and have we ever factored their side of the story into analysis? Have we conducted any analysis on this subject at all? How many Masters and PhD students whose degrees are supported by the Higher Education Commission, and hence tax payer's expense, are conducting research in this area? How many studies have been commissioned by Planning Commission, Privatization Commission or donors interested in this subject? Embarking on the process, without drawing on lessons from the past and making remedial action poses a risk for the process. The greatest risk for the privatization process is the lack of accountability within the state system, as a result of which public sector functionaries cannot be held accountable for their inability to safeguard state and/or public interest in privatization deals. The current state of PSEs is reflective of a style of governance, to which all past regimes are contributory. Years of appalling governance, evidenced in crony appointments at the leadership level, recruitments without regard to competency or organizational needs, rampant procurement collusion and lack of accountability of decision making have landed these organizations in the current state of affairs. Brokering privatization under the same shadow of governance is setting it up for failure.

Privatization is indeed an option for some of the entities listed in the privatization list. It can accrue benefits to consumers, workers, investors as well as government. We need fundamental reform of governance, one that puts decision makers' accountability at the core of state system before expecting to reap its benefits towards the goal of economic reform.


The writer is a former Federal Minister and holds a Fellowship of the Royal College of Physicians of London. A PhD from Kings College, London, she is an eminent social scientist and regularly contributes in national print media on issues of health, governance and public policy.
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