Privatization Program in Pakistan

Muhammad Waqar 2013-02-0207 Political Economy of Pakistan (POL341) Dr. TaimurRahman Privatization Program in Pakistan: Lack of Proper Implementation 1. Introduction 1. 1 Background During last six decades, Pakistan has employed several different popular policy trends to get better economic position. Under influence of prevailing Statism in 1950s Pakistan developed industrial base and disinvested some of state enterprises. Bhutto perceived nationalization policy at the time of dominance of Statist school of thought.

Statist school of thought considers it a duty of state to play active role in economy of country directly or indirectly (Kamrava). In 1980s, developing countries started getting more liberal economic policies after getting indebted due to OPEC crisis and stagflation in late 1970s. In early 1980s, International Monetary Fund (IMF) and World Bank started advising adjustment in economic policies of indebted countries which included almost all least developed countries (LDCs). In 1988,Structural Adjustment Program (SAP) brought a complete package of adjustments in economic policies of Pakistan to get hold of worsening economic position.

Speedy privatization was one of the adopted policy measure under this program as liberalization and deregulation were at the core of SAP. After formation of Privatization Commission of Pakistan (PC) in 1990, Pakistan was on the road to privatize public enterprises. Privatization program was adopted to overcome fiscal deficits, to deal with inefficient public sector and to promote Laissez-Fair economy (Roepstorff and Ansari, p. 8). Along with these motives, Privatization was adopted in order to retire national debts (Pakistan, Ministry of Finance, 1991) and to attract foreign direct investments (FDI).

These were some of the main justifications posed by Pakistan for the reason behind privatization process. But behind the scenes policy makers throughout the world started realizing inefficiency of state owned enterprises. Some scholars pointed out biases behind these rationales negating the presented arguments. Privatization became matter of controversy and dissatisfaction for stakeholders and in the scenario of Pakistan all taxpayers and policymakers are stakeholders. There was a hot debate which started from early 1980s regarding the choice of policy measure to deal with poor public enterprises.

Privatization process proceeded in following years in a way which made it more controversial. These controversies became a hurdle for Pakistan in privatization process making it difficult for privatization commission of Pakistan to achieve best interest of Pakistan out of this policy. In order to understand why we couldnot get better off even by selling out 167 public units for Rs. 476. 421 billion since 1991(Pakistan, Privatization Commission), we need to understand relevance of this program’s inception relative to international political economy and its far reaching consequences on political economy of Pakistan.

When one assesses course of privatization procedure followed by Pakistan after 1990, one would be of the opinion that privatization is bad and controversial for Pakistan. Some well-known social scientists like Akbar Zaidi also have this opinion. It is important to consider both sides of privatization policy. One should understand that the privatization policy did possess some potential benefits for economy which were not achieved by following bad policy measures. The privatization commission can reconsider its implementation procedure by restructuring privatization framework to get best socioeconomic interest of Pakistan.

Privatization policy itself was potentially beneficial but the lack of proper implementation of privatization policy by Pakistan is the reason for controversies related to it. This paper is about the close analysis of privatization policy followed by Pakistan since 1991. The paper will be focusing on its inception on grounds of wrong generalizations,the loopholes in its implementation procedure, corruption occurred in this process and comparison of outcomes of privatization in relation to what is and what could have been.

This paper will discuss rationales for privatization under SAP by World Bank and privatization commission of Pakistan. This discussion will follow up with analysis of these rationales. This analysis along with the critiques against it will help check the authenticity of these rationales. This analysis will in turn provide reason for controversies related to this program from its very beginning. The discussion will further analyze implementation procedure adopted by privatization commission. It will discuss how this policy proceeded in its implementation and to what extent it was successful under that implementation procedure.

It will briefly discuss the alternative implementation procedures that could have brought better results. Then the discussion will proceed towards assessing matter of corruption in this procedure. Proceeding towards concluding the paper, it will compare the present scenario as a result of these implementation policy measures with the potential scenario which could have been brought about while following alternative implementation procedure. It will be concluded with assessment of the whole discussion. 1. 2Literature Review

Most of the scholars debating in relation to privatization policy take clear position for or against it. In late 1970s focus of attention shifted from Statist policies towards more liberal and market oriented policies in almost all LDCs. International Agencies including World Bank and IMF were active promoters of deregulation and liberalization of economies. From the perspective of PEs of Pakistan,Muntazar B. Ahmad and Laporte’s analysis concludes that these enterprises were poor performers (M. B. Ahmad and Laporte, pp. 145-66). They also presented recommendations favoring change in policies regarding public enterprises.

Kirkpatrick points out weakness in the argument of World Bank both through statistical and theoretical analysis. S. Akbar Zaidi (Zaidi), AsadSayeed (Sayeed), NawabHaiderNaqwi and A. R. Kemal (Naqvi and Kemal) also criticize biases in the arguments of these agencies. World Bank and privatization commission of Pakistan (PC) provides material in support of privatization policy. PC is right in its argument that deficits in public enterprises are funded with taxpayer’s money which diminishes incentive of improvement (Pakistan, Privatization Commission).

Isteqbal Mehdi and Syed Anwar-ul-HasanBukharietc have written in favor of privatization in Pakistan. Dr. A. R. Kemal has also analyzed the implementation of privatization in Pakistan. While Riyaz H. Bukhari has analyzed the monitoring and regulatory aspects of privatization policy which says that there were inappropriate monitoring and regulatory measures in privatization policy (Bukhari). 2. 0Privatization Policy: Privatization is not new thing to Pakistan. In 1950s when Pakistan developed industrial base through import substitution and protection, it assisted rivate sector in managing enterprises. State developed enterprises and disinvested to private houses who managed them to contribute towards remarkable growth period in history of Pakistan. Bhutto came to power in early 1970s and pursued nationalization policies. 2. 1Period after Bhutto’s Nationalization Across the period of 1972 through 1977 Bhutto nationalized thirty one large firms in ten basic industries including banks and insurance companies and 2000 rice, flour and cotton mills to get government’s active control in ensuring provision of basic goods and services to masses.

These 2000 mills were later denationalized in 1977 (Table 1). Later government perceived more liberal approach towards public sector policy. But the far reaching consequence of Bhutto’s nationalization came in the form of lack of confidence for investment in Pakistan. So Pakistan suffered from capital flight. Moreover, nationalization policies helped extend development of informal sector of Pakistan but discouraged massive investments. The state owned enterprises suffered from large deficits due to several bad luck factors in that era in the form of OPEC oil crises and contraction of world trade due to recession.

The over extension of public sector could not escape from being inefficient from purely entrepreneurial perspective. Therefore, it has to shift towards more liberal approach regarding public sector policies since late 1970s. 2. 2Debate regarding efficiency of PEs World Bank’s 1981 report on economic prospects analyzed the situation that arose as consequences of overextended public sector in relation to debt crises in early 1980s. It says that overextended public sector along with the scarcities of financial resources, skilled manpower, and organizational capacity has resulted in slower growth which accounts for the present crisis. World Bank, 1981). Kirkpatrick conducted a statistical analysis of World Bank’s view on PEs in less developed countries (LDC). In his cross sectional analysis of statistics from twenty three LDCs, he found negative but statistically insignificant correlation between income growth and share of public sector enterprise output in GDP in 1970s (Kirkpatrick, 1986, pp. 685-96). Therefore, it is statistically proved from empirical evidence that the relation of growth and public sector ownership bears no significance.

World Bank also disillusioned performance of public sector by entitling them inefficient units in their reports in 1981(World Bank, p. 38), 1983(World Bank, p. 46) and 1993(World Bank, p. 2). Kirkpatrick argues against the image of PEs in LDCs drawn by World Bank and International Monetary Fund (IMF) taking a position that it is quite difficult to compare two sectors as private enterprises are conceived for financial performance while PEs are there for economic, financial and distributional performance (Kirkpatrick, 1988, pp. 11-26). He also questioned their definition of efficiency.

His general view is on the whole for PEs in Less Developed Countries (LDC). Soon the basis of comparison of these arguments we can say that World Bank exaggerates negativity attached to public enterprises. From the perspective of Pakistan, AsadSayeed and Akbar Zaidi points out biases of World Bank about PEs in Pakistan. World Bank argues private sector remained underdeveloped due to regulatory controls in manufacturing and burden to pay for deficits due to inefficiencies in large PEs (World Bank, 1993, p. 2). Akbar Zaidi,AsadSayeed, NawabHaiderNaqvi and A. R.

Kemal argued that Public sector industry has not been a failure in Pakistan even if we consider efficiency strictly in terms commercial performance (Zaidi, p. 140). Zaidi fails to incorporate into his arguments the monopoly power and several other significant edges enjoyed by PEs which in most of respects incomparable to private enterprises. He was unable to mention here the burden of deficits in PEs financed by tax payers. Privatization commission of Pakistan (PC) argues in the favor of privatization by stating that: ‘The impetus for privatization comes largely from the negative experience of state-owned enterprises (SOEs). ‘The experiment proved to be a failure. Sooner or later, SOEs exhibited the following characteristics: * Mismanagement and overstaffing * Inappropriate and costly investments * Poor quality and coverage of services * High debt and fiscal losses Production and profits that were well below their potential ’(Pakistan, Privatization Commission). In addition, PC claims that Pakistan’s SOEs(State owned enterprises) have failed to deliver’ and their ‘outcome in terms of quality, output, profits, or prices are below expectations, and far below otential’ PC also brings examples of some heavy loss making public enterprises like Karachi Electric Supply Corporation (KESC), United Bank and Habib Bank and their bailout through taxpayers’ money. It virtually considers all SOEs as loss making. Profitability of Pakistan Telecommunication Limited (PTCL) and Oil and Gas Development Corporation (OGDC) is credited by PC for monopoly power. Hence, PC aims at bringing new investments in order to strengthen public finances along with bringing in quality and quantity of goods and services. One of the objectives of PC is to reduce corruption.

Such a vague explanation was dissatisfactory for citizens and policy makers. These explanations are not well supported with facts and figures except for few enterprise examples. 2. 3Inefficiency in Public Enterprises Public enterprises ranged from highly profitable (PTCL) to high loss-making (Pakistan Steel). In the presence of varying financial and socioeconomic performance of public enterprises, it is difficult to make generalization about the (in)efficiency of whole public sector. Most of PEs did not perform reasonably satisfactory from commercial perspective due to several reasons among which management incapability is important one.

M. B Ahmad argues that PEs with improved management performed well even from pure commercial point of view. Sayeed’s argument in favor of good performance of PEs is weak. He showed thatwightedaverage of productivity growth in the public sector was higher than that of the private sector (Sayeed, 1995). It is biased argument to compare public sector industry and private sector merely on the grounds of factor productivity growth not incorporating other factors. These factors justifydissimilarities between the two sectors e. g. provision of large sum of credits, monopoly power of PEs etc.

Comparison of PEs and privates enterprises by Naqvi and Kemal has also failed to cater the factin their arguments that it is very difficult to find similar grounds for the comparison of these two sectors. They are comparing two sectors in terms of profitability, efficiency level, capacity utilization and effective rates of protection. Both sectors were far from being similar to be compared in terms of their size, economies of scale, access to large sums of credit, rational individual approach of management for private enterprises etc. Moreover, we cannot deny the sharp decline in private and foreign direct nvestment after nationalization policy of Bhutto. Comparison of public sector enterprises with private enterprises in terms of economic and distribution performance are beyond the scope of this paper. But we can make an opinion about financial performance of several PEs by looking at their financial performance indicators. We can analyze that such an overextension of public sector made it vulnerable to corruption. M. B. Ahmad perceived sound approach in comparing PEs with good management practices with PEs having bad management practices. He concludes that PEs with good management practices are more efficient (M.

B. Ahmad and Laporte, pp. 145-66). As Bhutto’s nationalization extended the pervasive wide circle of public sector ownership. This overextension leads to inefficiency in most of PEs due to bad management practices. While some PEs performed exceptionally well even in pure commercial terms. Their performance could be attributed to either monopoly power or high effective protection rates e. g. monopoly of PTCL in telecom sector and that of OGDC in oil sector. Therefore, public sector enterprises were in a severe need of change to perform efficiently contributing towards sustainable growth of Pakistan.

This change could’ve been brought up keeping in mind motives for empowering private sector with maximum participation to improve managerial efficiencies. Moreover, public enterprises of strategic importance could’ve been avoided to go under ownership of foreign investors. Foreign ownership of strategically important enterprises is a potential threat for national interests in state of emergency. Therefore, state should’ve continued with the ownership of these important enterprises. It includes Pakistan State Oil (PSO), Oil and Gas Development Corporation (OGDC) and Pakistan Telecommunication Limited (PTCL). . 0Conspiracy Theories: 3. 1OPEC Crises leading to Debt Trap OPEC oil crisis in 1973 followed by stagflation in late 1970s deteriorated economies of most of LDCs. These crises were followed by economic recession due to which international trade contracted. Combined effects of this crisis brought huge fiscal deficits specifically in all LDCs. In the period of 1976-78, public enterprises deficits accounted for one-third of all international burrowing by LDCs (World Bank, 1980). They sought loans from domestic and international lenders. LDCs continued to fund fiscal deficits through these loans.

Vicious cycle of petrodollars made international lenders capable of financing these LDCs on a huge scale. International Monetary Fund was international body conducting this activity. This cycle of petrodollars entrapped LDCs in a complex debt trap. 3. 2Protection of Interests of International Money lenders Oil revenues were saved in international commercial banks and it was the money issued to LDCs which grew to a huge sum arising suspicions of default of the loans. So, IMF and World Bank came up with large scale policy measures to ensure servicing of loans (Todaro).

IMF implemented biased policies to minimize fiscal deficits to get their loans serviced. That’s why we can notice main objective to control fiscal deficit at the heart of privatization policy. So conspiracy theory suggests that IMF protected its interests at the expense of LDCs which got entrapped in Debt trap. They used accelerated wholesale privatization process to ensure regular debt servicing through the revenues generated by the sale of PEs. It was not rational and justifiable for sustainable economic growth.

Pakistan under debt trap also received policy advises from World Bank and IMF under which Pakistan thrived upon a privatization program in this way. It is one of the main reasons for which privatization program is controversial. 4. 0Frame work for Implementation of Privatization Process: Rationale for privatization program as provided by UNIDO was ‘Privatization is being undertaken partly to offset declining budgetary revenue and partly to compensate for government investment shortfalls. It is hoped that liberalizing the economy and opening it up to competitive pressures will encourage private investment. (Roepstorff and Ansari, 1990) 4. 1Contradictions There should be clear essence of rationale behind inception of privatization policy in the framework for the implementation of privatization policy. But these two things contradict to some degree. According to A. R. Kamal modes of privatization in Pakistan can be categorized as Liquidation, Sale of Assetsand Privatization: by-passing the sale of Divestiture (it includes franchising, repealing monopoly, contracting out and leasing) (Kemal, 147). Dominant method of privatization was sale through sealed biddings in Pakistan (Kemal, 147).

While the most suitable method of disinvestment corresponding to rationales, was through sale of shares in stock market. 4. 2Focus of Privatization and its consequences Focus of privatization process has always been to get rid of state owned enterprises. That should not be the focus as it clearly contradicts core purposes of privatization. On the base of previous discussion we can describe rationales behind privatization as to get improved efficiency levels, fiscal deficits, broad based equity capital and empowerment of private sector to promote market based economy.

It was wrongly perceived that public sector will become exceptionally efficient by mere changing the locus of ownership. Zaidi, A. R. Kemal rightly criticized this approach. Under this approach Nawaz Sharif choose for Government of Pakistan to get completely retired from production of industrial goods. Privatization commission (PC) formed in 1991 and identified units to disinvest. Without considering regulatory measures before disinvestment of these enterprises, PC ended up achieving lower interest from domestic and foreign investors. It was also due the fact that PC prioritized to sale loss making enterprises.

PCwas also supposed to ensure transition towards broad based equity but most of the public enterprises were disinvested to business houses of Pakistan (Shahid-ur-Rehman, 146). It was not only contradiction against the mandate of PC but it carried with it a lot of criticism towards privatization. Most cases of corruption occurred in the sale of a public enterprise as complete entity to business houses. It led to concentration of wealth in few hands. Favoritism based Sale of MCB as a complete entity to Nishat group (MianMansha) is a clear example of negative outcome of corruption in privatization. 4. Enterprises of Strategic importance There is still a school of thought arguing in the favor of public ownership of strategically important enterprises. In case of Pakistan, Dr. AkhtarHasan Khan argues that while OGDC, PTCL and PSO are profitable and strategically important there is no reason behind disinvesting them (Table2). But privatization of these enterprises with no transparency arose clear questions in the minds of concerned people. In the case of PTCL disinvestment, its ownership was transferred to ETISALAT with transfer of just 26% shares which contradicts trendy corporate practices of transfers.

Such cases blurred transparency of the process making it controversial. 5. 0Corruption: Such a wholesale privatization program opened door for corrupt people in power who reaped illegal personal benefits out of this program. Benazir government identified fourteen public units to be privatized through widespread Thatcherian-style privatization. When Mian Nawaz Sharif came to power after dismissal of Benazir’s government, he decided for government to get completely retire from production of industrial goods and identified 105 units privatization. He successfully disinvested 68 units.

Second Bhutto government extended the list of units to be disinvested including OGDC which was highly profitable and bore strategic importance for Pakistan. As privatization commission conceived in its constitution that the enterprises to be privatized will be disinvested with maximum possible participation and transparency. But this process of extreme importance for Pakistan’s economy could not remain transparent and corruption free. According to Shahid-urRehman public enterprise assets were transferred without abiding by the corporate laws related to them e. . sale of PTCL. Most of the units were sold to business houses and it contradicts the mandate of PC to get maximum possible participation in disinvestment. Many buyers defaulted payments to PC. There were many landmark cases of corruption throughout this process including OGDC privatization bid, UBL privatization, favoritism in MCB’s disinvestment etc. (Shahid-ur-Rehman, pp. 26-54). Privatization commission received Rs. 9528. 42 million for privatization related expenditure since its inception in 1991 (Pakistan, Privatization Commission).

Vulnerability of this process to corruption is further justified by analysis of Vickers and Yarrow (1988, p. 157). They enlisted intentions of gaining political advantage by certain influential groups to be one of the reasons for wholesale privatization. 6. 0Conclusion and recommendations: Debt crises caught Pakistan as it was also hit by severe stagflation in 1970s. Meanwhile overextended public sector could not prove to be productive up to expected levels. Instead of supporting economy they were becoming burden on state as they were making huge deficits.

In order to finance these deficits government had to borrow which brought Pakistan under Debt crises. International lenders exaggerated inefficiencies in public sectors and gradually implemented policies to protect their interests. Although there was serious growing need to introduce reforms in public sector policies to increase capacity utilization of PEs, this requirement were used by lenders and misunderstood by domestic policy makers. Liberalization of economy was a strong argument in the favor of privatization. But privatization do not mean to just sale off public enterprises.

Instead the true spirit of liberalization in terms of privatization is to empower private sector promoting competitive markets without intervention of state. But massive wholesale privatization was implemented in Pakistan wrapped in deception of liberalizing the economy. It provided opportunity for corruption. Therefore, International lenders are still protecting their interests and Pakistan did not face any dent in fiscal deficits (6%) since the inception of privatization. In fact Pakistan has experienced negative growth rates when pre and post privatization stats were compared by A. R. Kemal.

He concludes that average growth rate of GDP has gone down from 5. 44 per cent to 4. 15 per centwhile the compound growth rate has fallen from 5. 44 to 4. 13 per cent during pre and post privatization period. Similarly average growth rate of investment fell from 5. 55 per cent tojust 1. 82 per cent and the compound growth rate from 5. 49 to 1. 76 per cent. (Kemal, 164) . It can be predicted that if state would have implemented privatization policy with full spirit of liberalization in a gradual manner and keeping stakeholders in confidence, consequences would be far better than we have them now. Word Count: 4607

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