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.
Comments can reach me at Nali@socal.rr.com
