Full Speed Ahead on Privatization One year into the military government there has been some progress in Pakistan. The wholesale looting of the banking sector has been ended, and the deceleration of growth has apparently bottomed out and started to tick back up. The government has laid out an ambitious reform agenda, but with a third of its time expired it will have to move quickly to accomplish significant change in the remaining two years.
The single most effective reform the government can undertake, after funding primary education of course, is a major withdrawal from the economy by privatizing the government companies. The Musharraf regime has made a long list of major companies it wants to unload from the government and turn into private firms. These include the banks, Pakistan State Oil, PIA, Saudi Pak Fertilizer, and the phone company PTCL. Other smaller firms are also on the list.
There are several important benefits that come from privatizing a state owned company. When a company is controlled by the government, it is primarily concerned with serving the interests of its owner. This means that the company is used as a means of patronage and corruption by politicians and bureaucrats. The company is overstaffed as cronies and lackeys are thrown onto the payroll. Service is poor, as the managers don’t gain anything by providing good service or expanding their business. Efficiency is lost and the company runs at a loss to meet its bloated payroll. This results in the general revenue being used to balance the company’s books and make up the losses. Precious tax receipts are flushed down the toilet to maintain the company. Private sector competition is stifled or constrained as it would hurt the government company and so the consumer loses out again. Without competition the government company has no incentive to shape up.
When these firms are privatized, all these negatives are turned into positives. The company has to stand on its own, so it improves its management and pares down its staff to a more appropriate level. But it also seeks to make a profit and expand sales, so people are hired who actually add value to the company. If PTCL were private, it is almost certain that phone availability and cost would be much more widespread and affordable than PTCL has made it. And service would be better.
The job losses that are feared are probably overstated and certainly don’t justify the current situation. One of the first banks to be privatized has actually increased its total workforce, as it became a real business intent on expansion and growth. The difference is that its workforce is actually there to work rather than collect a government check.
The other major benefit of privatization has to do with the banking sector. In any capitalist economy the single most important function is the provision of credit to those able to make the most productive use of it. One of the major strengths of the United States is its highly developed capital markets that allow anyone with a good idea to get access to adequate financing. No modern economy can grow if capital is consistently wasted, and this holds doubly true for a country like Pakistan where there is only a small amount of capital available each year. For the last 25 years the banks have been under control of the government, and in Pakistan with its very small stock and bond markets, the banks control the flow of capital almost completely.
In the 1990’s the major reason for Pakistan’s economic collapse was that the banks were hijacked by the Bhutto and Sharif governments. They took their turns forcing these state-owned banks to lend their limited capital to cronies at below market interest rates for nonsensical purposes. In general, these loans were not ever intended to be repaid, and essentially constituted a looting of the state Treasury. It is critical that this never happen again. The only way to do that is to get the government out of the banking business. Privatizing the banks is a critical reform and must be carried out.
The final benefit to the country of privatization is its effect on the budget. With all these lossmaking companies running to the government for help, the budget has to be used to cover their failings. Every rupee spent on that is one less available to build roads or schools or health clinics. Much of the current budget gap could be closed by getting those companies private. In addition, privatization will allow the government to sell the companies and raise real money in return. The total market value of companies on the books for privatizing is about 4.5 billion dollars. The government hopes to raise that much by sales of these firms. Even if it only gets 3 billion for these firms it will mean a significant reduction in the national debt as it appears that these funds will be earmarked for debt retirement.
There are three main hurdles the government must now overcome. First, it has to be clearly committed to privatization as the employees and managers of many of these firms will oppose privatization on grounds that it will cost jobs. Secondly, it must find willing buyers and may have to allow foreigners the opportunity to buy if it wants to get the highest possible dollar price. Finally, the privatization process must be kept free of corruption and done through transparent and open bidding. Selling the assets at fire sale prices to friends of Musharraf would be just as bad as what happened under Sharif. I wish Musharraf the best in carrying out this difficult but absolutely necessary task.
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