Privatisation or the sale of the century?
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
Part - II
If the drain on the public exchequer was the reason for privatisation then the government should focus solely on privatising loss-making SOEs. So why then are profitable entities such as OGDCL/PPL being privatised?
The most likely scenario, especially keeping in view previous privatisation efforts, is that the government will end up selling only the profitable SOEs (OGDCL, PPL etc) at discounted prices and will fail to sell off the large loss-making Wapda. This is exactly what happened before – with profit-making SOEs sold off while the loss-making entities remained under government control. The government will lose revenue earned from these SOEs, while the colossal losses of Wapda will remain on budget. The deficit will rise and the hole will keep getting bigger every year.
The most important question that needs to be asked is: where do the interests of the 190 million citizens feature in the government’s privatisation mantra? Will privatisation help lower prices and improve services to the consumers? Will privatisation lead to new investments and creation of more jobs? Will privatisation help Pakistan become more energy secure and less dependent on IMF bailouts? Will privatisation help alleviate poverty and reduce income inequality? Will the rights of workers be protected in the post-privatisation scenario?
Former LUMS vice chancellor Professor Adil Najam writes: “A history of bad experience, low trust in government, and suspicion of an unfair process can make even those who see the logic of privatisation highly sceptical. The result is a pervasive cynicism that privatisation is likely to leave us no better, and possibly much worse off”.
Let’s examine how previous privatisation programmes have impacted the wellbeing of the 190 million citizens of Pakistan. Professor Kamal Munir of Cambridge University examined the privatisation of PTCL – one of the biggest transactions in our history – on the government finances and financial performance of the company. He writes that “in the six years post-privatisation, earnings fell to Rs8bn (at a negative growth of 18 percent per annum) vs Rs27bn in 2005. Similarly, the profit margin declined from an average of 71 percent over the four years prior to privatisation, to just 47 percent over the six years since and continues to fall. This magnitude of change is unprecedented in the telecommunication sector, whether in Pakistan or internationally”.
The fall in profitability of PTCL has had a significant impact on government finances. Falling profits erode non-tax revenue and the resultant decline in share price has caused a “loss of approx Rs150bn to the government of Pakistan, which still owns 74 percent of PTCL shares”. The negative fallout of this has been felt through a stagnant telecom industry with limited new investments, large scale lay offs, and falling competitiveness as PTCL used to operate some of the top training institutes that provided expert technicians to the industry.
The results of other privatisation transactions are just as shocking. According to former secretary Planning Commission Dr Akhtar Hassan Khan, the privatisation of Kapco has been a major cause of the bankruptcy of Wapda. Kapco was the biggest power generation plant for Wapda with a capacity of 1,600MWs before it was privatised in the 1990s. The government sold 36 percent shareholding in Kapco for US$ 291mn along with management control. Dr Khan writes that “Kapco used to provide electricity to Wapda for US$2.5 cents before privatisation, but sold the same unit of electricity for nearly double the price at US$4.9 cents post privatisation”.
The impact of this privatisation was to instantly increase the price of power generation, causing massive losses to Wapda that accumulated over the years to unsustainable debt levels. The government finances suffered, with Wapda accounting for losses of over two percent of GDP every year – all paid by taxpayers’ money. The citizens have suffered through increased power cuts and a record increase in electricity bills. The economy has suffered with rising unemployment and no new investments have come into the energy infrastructure for over a decade. Some of the biggest privatisation transactions have been a colossal failure for the citizens of Pakistan.
While the privatisation of banks has resulted in efficient operations and better customer service, what about the developmental role of banks in a developing economy? The banking systems deposits to GDP ratio has fallen, loans to SMEs have been in constant decline for the last few years, long-term industrial finance capability is weaker than it was in the 1970s and banking has become a business of taking low-cost deposits and investing risk-free money in government paper with hefty spreads.
The experience of privatisation from the rest of the world also offers important lessons. British Rail, which owned and operated nearly all of the UK’s railways, underwent total privatisation in 1993. However, the inability of private contractors to provide safe, reliable and affordable service led to re-nationalisation by 2000. The Center for Global Development, Washington DC 2006 report claimed that privatisation and private-sector involvement raise the prices for essential goods and services, especially water, sewerage, electricity and transport. Water concessions given by the Bolivian government to private companies led to a sharp increase in water prices for consumers after privatisation – by 43 percent on average, whereas prices doubled for the poorest households.
What is the way forward? The SOEs are a problem and the slow pace of restructuring them is a matter of serious concern. However, undue haste in privatising is not the miracle cure. Undue haste in prior privatisation programmes led to governments offering ‘sweeteners’ to investors to expedite the process – at a high cost to the public and government finances. These ‘sweeteners’ include granting the buyer control with only a fraction of share ownership; and/or through an effective price discount such as that given to IPPs through high government-guaranteed dollar returns.
As highlighted in the first part of this article, the Malaysian ‘Khazanah Nasional’ is the best example of how inefficient SOEs can be rapidly transformed into profitable organisations. This should be the first step. Instead of appointing for the Privatisation Commission a board of directors that is based on nepotism and political favours, the government should reconstitute a bigger BoD with professional and independent business, legal, labour and financial experts. Political interference of politicians and bureaucrats must be tackled for any real restructuring of the SOEs.
The government must initiate much wider economic reforms for successful privatisation – a privatisation that can bring real benefits to the citizens and the economy. These reforms must include strengthening regulatory authorities including SECP, SBP, Ogra, Nepra and CCP. Former governor SBP Salim Raza highlights that “without broader structural reforms, privatisation may simply see private oligopolies replace government monopolies – intensifying private wealth, rather than creating national growth”.
Once the restructuring of SOEs has been done under professional management, those considered non-strategic can then be privatised. Transparency and accountability must be ensured and a detailed third party audit of SOEs must be undertaken before launching privatisation.
Until the above steps are undertaken we cannot support the PML-N’s sale of the century and will oppose moves to sell off public enterprises without due process and transparency.
Asad Umer - PTI