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Public Sector Enterprises & Privatization

Privatization suddenly seems to have become the new buzz word being freely used by this new PML(N) government, citing it as a cure for almost all economic ills currently facing the country. In a short span of less than 60 days one can sense the music of privatization already being composed and no it does not sound like installing professional management or privatizing certain operational functions in order to curb corruption and enhance efficiencies, but instead seems tuned for out-right sale of the big-ticket public sector enterprises of Pakistan. Economic managers egged on by their predator advisors make a case that if companies like PIA, Steel Mills, PSO, etc need to be saved and if the government has to rid itself of recurring losses (assumingly around Pak Rupees 500 billion per annum or more) from these institutions then the only way out is to sell them to the highest private bidder. Without thinking the matter through and without realizing the resulting implications cum long term systemic fall-outs – one is already hearing sweeping statements from government functionaries such as, “how people of Pakistan are fed up with PIA and will not tolerate it any more”; “Government should not be in the business of running businesses”; etc – the push from the ruling quarters continues towards selling the ‘family silver’. What the Sharif government does not realize is that the matter is not as simple as it may think it to be.

The notion that, the government should not be in the business of running businesses, though partially true, needs to be looked at from the perspective of ‘history of economic management’, which tends to define the strengths and weaknesses at a given period of government’s role in a management chain. The history of the dawn of capitalism is full of ventures where governments took upon themselves to assume investment risks for services and product innovations that otherwise would either have just become non-starters or remained confined to only a few select segments of people without yielding benefits to the mankind in general. Over time the industrialized nations of the West, mainly the USA and Western Europe, realized that since efficiencies are primarily driven by installing managements that are committed to maximizing shareholders’ return they gradually went about facilitating ownerships that ensured selection of such executive, thereby aligning the interests of both, the private sector and the masses. While the underlying assumption of this endeavor was that the interests of businesses and nations ultimately coincide, the challenge it presented was to somehow ensure that while the resulting businesses do get the freedom to pursue economies of scale they do not at any stage compromise on national interests. To achieve this the USA followed a more open model of creating large ‘professional management’ driven corporations devoid of specific ownerships (no single person held stock large enough to yield control), whereas, Europe’s larger entities on the other carried visible elements of socialist tendencies owing to significant stakes retained by respective governments or through stricter governmental oversight. As both the models competed for industrial excellence and economic dominance these large companies almost always enjoyed state patronage and backing of the state’s might to capture global markets through the sheer size of their capital and influence, other than of course using their competitive edge acquired via management skills, superior technology, and a culture of innovation.

What however remained constant was the State’s overall control over the industrial parameters. Numerous examples that can in this context be sighted are: a) USA Senate intervening to stop the Gulf Ports and Shipping Corporation from assuming the managing contracts of America’s west coast ports. b) Constraints faced even today by any overseas investor in accessing ownerships in key USA’s financial houses or for an outsider to even emerge as a serious competitor within the US to its mighty financial institutions – Agha Hussain Abidi learnt this the hard way. c) The European Union government’s recent passing of a number of legislations restricting Chinese companies’ access to key European assets; etc.

Lately, though the crisis of Western liberal capitalism has coincided with a challenge of a different kind from the new aspirants in this great economic game – A tool itself used sometime back by the likes of East India Company: the rise of powerful new form of state capitalism in emerging markets. State capitalism tries to meld the powers of the state with the powers of capitalism. It depends on government to pick winners and promote economic growth by using capitalist tools such as listing state owned companies to ensure management’s accountability and by embracing globalization. Nearly two to three decades (depending upon the country) back, as western states abandoned the commanding heights of their economies in the name of privatization and deregulation it looked as these public-private hybrids were doomed. Today they are flourishing in the world’s emerging dynamic economies and also striding out onto the global stage. State-owned companies account for 80% of the market capitalization of the Chinese stock market, more than 60% of Russia’s, and 35% of Brazil’s. They make up 19 of the world’s 100 biggest multinational companies and 28 of the top 100 among emerging markets.

In the developing world where large corporations outside the domain of the government tend to be few, their role is not merely limited to competing with the western global heavyweights. More importantly (in countries like Pakistan) they also tend to provide a sense of equilibrium in the domestic markets. If run competently and used effectively they perform crucial national functions like helping check inflation through supply side, provide employment, aid growth, strengthen anti-trust legislations, ensure equitable distribution of resources and opportunity, and by using the umbrella of their national ownership to help keep the nation gelled. Further, if some privatization experiences in Africa and Eastern Europe are anything to go by, their results have not been very encouraging. Instead of helping employment generation and alleviating poverty the sales merely created oligarchs, promoted rent seeking and concentrated wealth in a few hands thereby widening the gap between the rich and the poor. More dangerously, a wrong privatization push or an unhealthy mix between the private and public sector market presence can end up seriously compromising the power of the regulator. Recently, an ex-Governor of the State of Pakistan (SBP) privately conceded to me that during his brief stint he had little leverage over the private sector banking players simply because between themselves they virtually controlled the domestic financial market.

Indian state as we know still jealously guards its control over its banking industry and in-turn its power to intervene in domestic financial markets, as and when necessary. Indian Railways, as another example, is not only the largest employment provider in the world, but churns out a profit in spite of its services being the cheapest in the world on the famous “Big-Mac” scale.

The challenge for us also lies in turning around the key public sector enterprises to use them for safeguarding and promoting larger national interests. Critical sectors like oil and communications and mainstay corporations like the PSO (Pakistan State Oil) are too important to be doled out to foreigners or to a few individuals. History tells us that when the power of the state to exercise its writ and to bring about people friendly reforms gets seriously marginalized owing to greed and monopolization of a select few, the state sooner or later fights back to claim its rightful balance. And when it does the implications can be grave all around. Hitler’s philosophy in going after the Jewish community in Germany reflected the draconian side of such reactions and I am told on good account that Mr. Bhutto also had his work ‘Mien Kampf’ placed at a very prominent place in his library. Pakistan can surely do without another reactionary trauma of the 70s!

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