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Privatization & CPEC

In Pakistan experience shows that poverty did not reduce nor was there any reduction in income inequality

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Razeen Ahmed

NOVEMBER 10, 2018

Worldwide in the past two decades state owned enterprises have been privatized and transferred to the private sector in 150 countries with a negative impact on rights of the employees and compromise on their job security. Privatization remained a standard panacea prescribed for developing countries by multilateral lending agencies. Examples are replete such as scores of state owned enterprises put to the chopping block in countries including Albania, Kazakhstan, Moldova, Pakistan and Mongolia with no tangible benefits or spurt in the economy. In Pakistan experience shows that poverty did not reduce nor was there any reduction in income inequality.

In Pakistan, our Cabinet Committee on Privatization was created in 1991 to oversee privatization related activities. The Privatization Commission website reveals that Pakistan’s privatization program is focused on attracting private sector capital and managerial expertise through the divestment of identified public sector entities in a transparent manner. Benefits purportedly include, as listed on its website, improvement in operational efficiency, reduction in financial burden in order to accelerate the pace of industrialization, strengthening capital market  retirement of debt, improved power sector efficiency through competition, profit incentives, deregulation and rationalization in prices and subsidies .

From 1991 till 2015 seven banks, 27 capital market transactions, 15 transactions in the energy sector, four in telecommunications, seven industrial units, 17 in cement, 16 in the chemical sector, seven in engineering, 7 in fertilizer, 4in textile sector beside others. The total transaction amount was Rs 648,972 million includingRs54,273 million from the energy sector, Rs  41,023 million banking, Rs 16,177 cement and Rs 187,024 million from the telecommunications sector. In many transactions the buyers were common creating horizontal ownership. The privatization process has been criticized during all regimes for sale of strategic assets at throwaway prices.

The mandate of Privatization Commission was confined to industrial transactions branching out later into strategic areas in power, oil and gas, transport, telecommunications and banking sectors. The anamoly is that sick units and those units surviving on government subsidies like Pakistan Steel Mills, Pakistan International Airlines and Railways staffed by a huge number of employess remain immune from privatisation. Pakistan National Shipping Corporation managing nine ships, although not overstaffed has to be responsive to maritime commerce opputunities.

Critics argue private firms can exploit their monopoly. In the 1980’s and 1990’s, the UK privatized state owned industries such as British Petroleum, British Telecom, British Airways, electricity, gas companies and British Rail


State monoplies have been converted into private cartels and regrettably privatisation has not been accompanied by significantly increased competition with lowering of prices. The banking, cement, sugar and power sector remain virtual monopolies and no regulator bridges the demand and supply gap and despite privatisation the cost of cement escalated manifold .

Critics argue private firms can exploit their monopoly. In the 1980’s and 1990’s, the UK privatized state owned industries such as British Petroleum, British Telecom, British Airways, electricity, gas companies and British Rail. Greece recently cleared the transaction for share transfer agreement for the entire rolling stock maintenance business to an operating subsidiary of FS Group for Euros 22million with the ostensible purpose to strengthen Greece’s role as a transit hub, building on international investment in ports and motorway upgrading projects.

An emerging trend is that foreign investment by government sponsored or sovereign funds is no longer appreciated in strategic sectors on account of an apprehension that political motives may surreptitiously enter. Countries such as US, Canada, Germany, France, Australia, Japan and South Korea are resisting takeover of their strategic sectors by sovereign funds originating from the Middle East, China and Russia. Assets acquired include stakes in Citigroup Inc., Merrill Lynch and Airbus sending alarm bells ringing.

The British Rail infrastructure taught valuable lessons in terms of open access, unnecessary separation of operations and infrastructure to encourage competitive pricing, franchising, conversion from a lean mean structure to a highly encumbered one, listing on stock exchanges without adequate preparation, an annual subsidy of UK Pounds Sterling 4 billion, with passengers paying almost two thirds of the cost of additional rolling stock, fragmentation of British Rail into more than 100 companies which was the worst aspect of privatization and only now is the government looking at ways of patching together operations and infrastructure. Caution will have to be exercised in Pakistan in privatization in strategic areas such as transport, energy and transactions prudently structured in phased manner with due diligence of investors being of utmost importance.

In order to accelerate the plan to make Pakistan an international trading hub in the context of CPEC state owned operations in the energy, power and transport operations (aviation, rail and ports) need to be privatized on priority as Pakistan cannot capitalize upon its geo strategic location and Silk and Belt route from China to Gwadar and Karachi port till it has anointer connected ,digital and seamless transport infrastructure and system established. Gaps are to be filled at a breakneck pace to move ahead in the struggle for regional dominance of trade and commerce.

The writer has done Bachelor’s from London School of Economics and Political Science. Nadir Mumtaz reviewed the article

Published in Daily Times, November  10th 2018.

https://dailytimes.com.pk/320201/privatization-cpec/

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