COMMENT: Is privatisation the only alternative? —Jamil Nasir - Wednesday, May 04, 2011

Source :\05\04\story_4-5-2011_pg3_5

There is no clear-cut theoretical case for or against public sector enterprises. It is the governance, merit and transparency that matter. If a government is unable to improve the efficiency of the PSEs, it is equally likely that it will fail either to manage the privatisation process

Public sector enterprises (PSEs) in Pakistan devoured about $ 3 billion during the fiscal year 2010. Their annual operational losses amount to about 1.5 percent of the GDP. The subsidies doled out to the loss-incurring PSEs constitute about two-thirds of the annual defence budget of Pakistan. In this background, the government decided to constitute a cabinet committee on restructuring (CCOR) with the mandate to formulate and implement a restructuring plan for the ailing public sector enterprises. The government plan envisages complete transfer of ownership of PSEs to the private sector as an ultimate objective. The new growth framework, a policy document prepared by the Planning Commission of Pakistan, also recommends that the state should divest itself from the public sector enterprises to reduce the ever-increasing fiscal deficit. Further, the bureaucrats should not be in the business and let the private sector come forward for the healing of these enterprises.

Privatisation of the PSEs is premised on the popular perception and rhetoric that PSEs are necessarily inefficient compared to the private-run enterprises and in order to make them efficient and profitable, it is better to get rid of them. This thinking is, however, partly fallacious, as drawing comparison between the private sector enterprises and PSEs is just like comparing apples with oranges. Their basic objectives differ. The overriding objective of the private sector organisations is profit-maximisation but the PSEs may have multiple objectives and achievement of such objectives might be equally important.

Contrary to the point that no reliable empirical evidence is on record either in favour of or against the public sector enterprises, it is argued that privatisation reduces economic inefficiencies and fosters competition. The case is also made out for privatisation on the ground that the public sector is inherently lethargic due to red tape, and it is exceedingly difficult for the decision makers and managers in the public sector to think out of the box for the solution of the problems the public sector organisations are faced with, as the bureaucrats who generally hold the decision making authority in such organisations find it difficult to by-pass the bureaucratic rigmaroles they are groomed in.

Granted for the sake of argument that privatisation is the best policy prescription to inject efficiency and profitability in the PSEs, the question however remains whether we meet the prerequisites of an effective and successful privatisation process. At least two conditions should be met: first, a country must have a deep and well-developed capital market sector, and, second, the general perception about the government undertaking the privatisation process should be that of a clean government.

Is it possible that fingers will not be raised on the privatisation deals especially in the context of several scams like Pakistan Steel Mills, National Insurance Company Ltd (NICL) and Hajj that have surfaced in the past few years? Even if the government exercises maximum possible cautions to make the privatisation of PSEs transparent, the privatisation deals may finally land in the courts merely on the accusations of corruption. The whole process of privatisation may be put into jeopardy or at least delayed. In this way, the costs of privatisation may turn out to be prohibitively high.

Further, contrary to the general perception prevailing in Pakistan, global experience shows that the privatisation of the loss-incurring PSEs is not an easy process. In this regard, privatisation experience of UK is a case in point. The government of UK embarked on the privatisation process in 1980s in the regime of Margaret Thatcher. In the initial phase of the privatisation in UK, in most of the cases economically successful enterprises like British Petroleum, British Aerospace, Cable&Wires and National Freight Corporation etc were privatised.

Even the gains of privatisation in a country like UK are questionable as the studies undertaken on the subject are not conclusive in their results. Some of the empirical findings suggest that the efficiency gains that were achieved immediately after the privatisation process were mainly due to rationalisation of employment. Thus there is no clear-cut theoretical case for or against public sector enterprises. It is the governance, merit and transparency that matter. If a government is unable to improve the efficiency of the PSEs, it is equally likely that it will fail either to manage the privatisation process or perform its regulatory role effectively after privatisation.

Moreover, we have several examples, in developed as well as developing world, where PSEs have played very vital role in the development of the country. POSCO of Korea and Empresas Publicas de Medellin (EPM) of Colombia are two very pertinent examples to make the point. POSCO emerged as a giant while operating in the public sector. It was established as a joint venture in 1968 and continued to operate under the public sector till 2000 when it was privatised. Globally it was rated as the most efficient producer in a number of steel products.

EPM Colombia is the largest energy provider of Colombia and considered a success story in the public sector. It ranks on the top of the list of public and private companies in terms of efficiency and financial sustainability. The point is that PSEs are not necessarily inefficient enterprises. Thus the argument is that privatisation is not the only alternative to bringing in efficiency and profitability amongst the PSEs.

Organisational/administrative reforms can be one of such alternatives. The goals of the PSEs need to be re-examined critically with a view to prioritise them and do away with the objectives hindering the growth of these enterprises. Restructuring of the incentive system of the employees to link it with quantifiable performance indicators of efficiency, productivity and client satisfaction may be another target of broad-based organisational reforms. Inducing competition between various regional or functional units of the organisation can also be a viable option to improve the efficiency of these enterprises. In view of the hitches involved in privatisation, it would be more prudent that other policy alternatives on the above lines are also explored while formulating a strategy for the restructuring of the PSEs.

The writer is a graduate from the Columbia University, USA, in Economic Policy Management and studied economic governance in the UK. He can be reached at

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