Transparent Privatisation – Dr Ashfaque H Khan

Public-sector enterprises (PSEs) are generally considered inefficient all around the world, primarily because they serve as employment bureaus for the political leaderships that control them.

The privatisation of these PSEs is then considered to be the best solution under the belief that the private sector produces, distributes and trades goods and services more efficiently and at lower costs than the government. The role of government should, therefore, be limited to policymaking and creation of conducive environment for businesses in the country.

As part of the IMF programme, the present government has rightly embarked on a time-bound strategy for privatising 65 PSEs. Privatisation has been the hallmark of this government’s macroeconomic policies in its earlier stints as well.

Why should these bleeding PSEs, like Pakistan Steel or Pakistan International Airlines (PIA) be privatised? In simple language, these PSEs are not only inefficient and poorly managed, but are a heavy burden to the national exchequer as well. They are costing Rs400-Rs500 billion annually, while at the same time destabilising the country’s budget and adding burden to the national debt. How can a financially poor country like Pakistan continue to pay such a huge amount from the budget to keep these institutions afloat?

The issue at hand is the financial viability of these PSEs. Can they survive without budgetary support from the government? Does it make sense to add thousands of workers to already bankrupt institutions? Should we continue to oppose privatisation or restructuring of these institutions? Will the status quo work in a financially starved country? And for how long?

It is absolutely clear that Pakistan’s financial health is not in a position to support these bleeding institutions anymore. Pakistan needs resources for educating its people and providing them healthcare, safe drinking water, roads, highways, electricity, and security. Privatisation is, therefore, a necessity for prudent economic management and hence to bring Pakistan’s finances in order. The question is how to privatise the PSEs in a transparent manner.

Based on my discussion with some key members of political parties opposing privatisation, I have inferred that the reason for their resistance is not political ideology but the government’s capacity to conduct privatise in a transparent manner. They have no confidence on the capacity of the Privatisation Commission to undertake such large-scale privatisation. They have also no faith on the newly appointed members of the Privatisation Board to conduct privatisation in a transparent manner or in a manner that is free from any conflict of interests.

How should we then move forward? The government may like to consider the following steps for transparent privatisation.

Step 1: The sequencing of privatisation has to be correct (remember: wrong sequencing of power-sector reforms resulted in the re-emergence of circular debt; we paid Rs480 billion to various private-sector power companies without bridging the loopholes that gave birth to the circular debt). As a first step, the government must strengthen the regulatory bodies like the SBP, Nepra, Ogra, PTA, Competition Commission, PPRA and Securities and Exchange Commission with professionals, before undertaking any privatisation. Failure to do so will give birth to ruthless private monopolies, replacing inefficient public monopolies.

Step 2: The number of units to be privatised or restructured must be consistent with the capacity of the institution(s) undertaking or involved in the privatisation programme as well as the availability of technically sound manpower to run the privatised institutions.

Step 3: It should be to us why we are undertaking the privatisation programme. Because these PSEs cannot survive without budgetary support, they have become a burden on the national exchequer. Therefore, we should select those PSEs for privatisation which cannot survive without budgetary support – like Pakistan Steel or PIA. Why should we privatise OGDCL and PPL, which are making a net profit of Rs91 billion and Rs42 billion, respectively (FY2013) and with a combined equity of Rs473 billion with zero debt?

Step 4: Privatisation is a complex exercise. It is in this perspective that the government must strengthen the Privatisation Commission by inducting thorough professionals like chartered accountants, legal experts dealing with the intricacies of transactions, banking and financial experts, etc. To the best of my knowledge, the Privatisation Commission is weak and cannot handle such transactions in a professional manner.

Step 5: The Privatisation Board, being the most important component of the whole transaction, must consist of competent and professionally clean personalities. The government must refrain from inducting personalities that are even remotely aligned with the ruling party. No matter how transparent the privatisation process may be, politically close personalities, if inducted on the board or seen to be active behind the scenes and passing sensitive information during the privatisation process, will make the transaction controversial. In the presence of a vibrant media and an active judiciary, such transactions are liable to become controversial and hence will derail the entire privatisation programme.

How do we address the issue of appointing credible members to the Privatisation Board? We must bear in mind that the assets we intend to sell do not belong to any political party, rather these are national assets. The current Privatisation Board has already become controversial as most of its members are associated directly or indirectly with the ruling political party; this board must be changed before any privatisation is undertaken.

I would propose the following in the larger interest of transparent privatisation. We must reconstitute the Privatisation Board by inviting two to three major political parties to nominate one professional each for the board. This will give them confidence and most likely they will not oppose the privatisation process. We must include a retired judge of the Supreme Court as member of the board to take care of the legal matters. Preferably, we could ask the chief justice of the Supreme Court to nominate one judge for the board.

We must also include one person from the electronic or print media, well versed in economic matters as a board member besides selecting non-political professionals, successful corporate leaders, and men and women of integrity in the board. Anything short of this will make the transaction controversial and derail the entire privatisation programme.

Let us be very clear – the government has no capacity to run the rotten PSEs anymore. Transparent privatisation is the only solution. We must support the government in this national cause, provided the above steps are followed. The government, on its part, should be careful while selecting institutions for privatisation. Certainly, institutions like OGDCL and PPL must not be in the privatisation list. The government can use the resources (profits and equity) of these two institutions to undertake various power-sector projects.

It is in the interest of the government and the privatisation process to keep political personalities out of the privatisation process. Even a single transaction becoming controversial will derail the entire privatisation programme. We must treat the privatisation programme as a programme for economic recovery and not as a party manifesto.