By Dr. Nayyer Ali

Big Successes in Privatization

April 07 , 2006

Since coming to power, President Musharraf has left the handling of the economy to Shaukat Aziz, who first served as Finance Minister, and now has been Prime Minister for the last two years. Aziz has put Pakistan’s economic house into order, and he has followed some commonsense free market economic policies.
Among the most important of these has been the obvious concept that in a free economy, the government should not own companies. The government’s role is to create a level playing field for all companies, and allow competition to force every company to improve services and lower prices. In response, Aziz has sold to the private sector vast chunks of the state-owned sector. Just recently there have been two major successes, the sales of Karachi Electric Supply Corporation (KESC) and the Pakistan Telecommunications Limited (PTCL).
What is shocking about Pakistan is that despite it being a nominally free-market economy, almost all of the largest businesses in Pakistan before 1999 were owned by the government. Much of this was the legacy of Zulfikar Ali Bhutto’s nationalization of the economy that took place in the 1970’s. None of the elder Bhutto’s successors reversed what he had done.
Prior to 1999 the entire banking sector, the large fertilizer companies, the monopoly phone company, the power companies, the gas companies, the airline sector, the railways, the only steel mill, and a whole host of smaller firms including sugar mills, cement factories, and even individual hotels, were owned and managed by the government.
Even in well-run societies with professional management, these state-owned enterprises (SOEs) would be relatively inefficient, but in Pakistan the SOE’s were crippling the economy. They exerted their negative effects in four different and profound ways. First, the government had a perverse incentive to limit competition against its SOEs, so not only were the SOEs inefficient, but the public was deprived of a more efficient private sector option. Second, the SOEs were used by corrupt governments as a source of patronage and corruption. Political supporters were given phantom jobs on the payrolls of these companies, and there was corruption in purchasing.
The biggest source of corruption was in the banks, where loans were steered toward political cronies rather than productive businesses. This large source of corruption became the obsession of politicians who vied for power in order to control the lucrative companies. Third, SOEs served two masters. In addition to the public, for whom they were supposed to provide useful services at low prices, they also needed to serve the government’s need. This particularly meant that no attempt at efficiency could be made that resulted in reduction of the workforce. As such, the payrolls of these companies would become bloated with unnecessary workers. The phone company had twice as many employees per phone line as comparable private companies in other Third World countries. Finally, the heavy losses of some of the SOEs, particularly in the power sector, needed to be subsidized by the Treasury. In effect, taxes were raised to cover the losses of these companies. These subsidies amounted to almost 100 billion rupees per year, a staggering sum of money that otherwise could have been used to provide for badly needed social services like primary education and rural healthcare.
Over the last five years, over half the SOEs have been sold, including many of the largest ones. Two very difficult transactions were just recently completed. The first, the sale of the Karachi Electric Supply Corporation, was initially done over a year ago, but fell through when the original winning Saudi consortium got cold feet. Aziz was able to salvage the deal and get the KESC sold to the second bidder, but for the original winning bid price. They are now running the KESC.
The second transaction was the sale of PTCL. That too occurred last year for the very high price of almost 2.5 billion dollars. The buyer, Etisalat of the United Arab Emirates, also became skittish of the price. After prolonged negotiation, they finally took control of the company in exchange for stretching out the payments from one lump sum to a five-year plan.
Aziz has said his goal is that the government have no SOEs at all. He is more than halfway there. The largest remaining companies under government management now are PIA, Pak Railways, the other electric companies, the two gas companies, Pak Steel Mills, and the oil sector firms (OGDCL, PPL, PSO). Currently the selling process is underway for the Steel Mills, and the Sui gas companies, and one of the power companies. For those who are still skeptical of privatization, I would point out that Pakistan has experienced the most rapid four-year stretch of economic growth in its history since 2002. That is no coincidence.
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