The privatization dilemma

When you hear senior government officials repeatedly declare that “business is not the business of the state,” you can see that they are not only grappling with the problem: what do you do when the news is bad on virtually all economic fronts; they also demonstrate their basic belief in free-market orthodoxy and their determination to follow a pro-business playbook.

Figuring out how best to stimulate economic growth today is undoubtedly a real policy issue. But will this goal be achieved by privatizing profitable state-owned enterprises? Or is the government simply determined to privatize them? It seems that this is certainly the case, even if the reasons for this are, as stated on the Privatization Commission website, by no means clear: “Privatization will improve the relative efficiency of all sectors by promoting alternative choices, competitive prices, technological modernization and improved services.”

Simply put, this means that state ownership of companies somehow casts an evil spell over them – or, in economic jargon, that they are intrinsically inefficient. And the spell is conjured by giving it to private players, which is absurd because it’s hard to see what magic serves the private players. Yet the prevailing storyline is that state-owned enterprises must be an unmitigated disaster and a burden on the national budget, and that failure to privatize them will mean continued economic malaise. Which is far from reality. And people tend to see what they believe, even if it isn’t always real. But more later about why people’s perceptions are so skewed.

Now let’s look at the reality of privatization and see what we get from it? Well, the reality doesn’t match the privatization storyline. For example, the privatization of Pakistan Telecommunications Company (PTCL) in 2006 has made us poorer. Here is the proof: In the January-March period this year, PTCL lost Rs4.8 billion. But before privatization it was hugely profitable: its profits in 2005 were Rs39 billion. It was not a fiscal burden; it was a national champion – a leading telecommunications player in Asia. It paid Rs5.2 billion in taxes and its share was sold at Rs70 per unit. Now the stock is selling for less than Rs15 (April 25).

Since the state – that is, we, the Pakistani people – still owns 3.17 billion shares or more than three-fifths of PTCL, the fall in share price alone makes us poorer by Rs174 billion.

You cannot offset such damage against the storyline of privatization. Also, the privatization storyline bears no resemblance to two other state-owned companies that will be privatized: Oil and Gas Development Company (OGDC) and Pakistan Petroleum Limited (PPL). The figures show that both companies are hugely profitable: last year their after-tax profits amounted to Rs321 billion – more than the entire budget of the Benazir Income Support Program last year. And in the last seven years, they generated a profit of Rs1.2 trillion.

Simply put, OGDC and PPL, like PTCL before privatization, are like the proverbial goose that lays golden eggs. If you screw them up, like Aesop’s idiots, to get all the golden eggs at once, it will only make us poorer. So if the question is what to believe – the privatization storyline or reality – reality says you should judge a policy based on what it delivers.

But that doesn’t seem to stop the government from selling them. Evidence and public interest do not matter. And if we choose not to learn from PTCL’s experiences, it only means that the privatization storyline replaces both. And the orthodoxy of the free market reigns.

Still, the question remains: If the profitability of PTCL, OGDC and PPL is so clear, why are people’s perceptions of SOEs so skewed? Why do they get their fundamental interests so wrong? Perhaps because the much-hyped storyline that all state-owned enterprises must be an unmitigated disaster and a burden on the national budget has become deeply ingrained in their minds, aided by a complicit media, which sidesteps the negative and amplifies the storyline.

And today, stories determine everything in Pakistan. And a properly hyped strategy that gives the government the impression that it is fighting a persistent and serious fight against budget deficits is more convincing than the facts or reality. This also explains why loss-making PIA is making headlines, and OGDCL and PPL are being sold alongside it without anyone noticing the difference. In any case, whatever the public perception, at this point we have enough facts under our belts to expose the flaws in the privatization storyline and determine the real objectives of the government’s privatization efforts.

In a broader context, this means that it is not the state’s job to sell state-owned enterprises. It aims to empower them and grow the economy with bold investments, building factories, dams, schools, hospitals, roads and infrastructure. We need such investments to strengthen our economic backbone, and because the invest-and-grow economy increases productivity and employment.

The writer makes freelance contributions. He can be reached at: Khwaja.Sarmadgmail.com