Why privatise? By AHMAD WAQAS RIAZ

ARTICLE (May 23 2010): The general public has many misconceptions about the privatisation process. Most ordinary people have been misguided by political propaganda and believe that selling government owned enterprises is related to corruption and profiteering by members of the government.

In the past, except for the privatisation of the Pakistan Steel Mills, most have been reasonably successful and have ended in considerable profit to the national exchequer and in subsequent improvement of services provided by the privatised companies to the general public. However, there are lingering doubts about how above board many of those privatisation deals really were.

The most important attempt being made by the present democratic government is to ensure a completely transparent and above board privatisation process. In Pakistan we have an independent and proactive judiciary and a very free and independent media that serve as a watchdog over all official activity. It is, therefore, extremely unlikely that any future transactions can proceed in a secret manner that can benefit any individual in the government.

Before going further, it is important to say that not all state-owned enterprises can or even should be privatised. Those enterprises that are of national interest clearly fall into this category. Then there are some that should not be sold to private investors since they are of sufficient importance that allowing them to fail is not an option. This is an important downside of all private enterprise that must always be kept in mind. Private ventures can and do fail.

Keeping the above in mind, many state owned entities can, however, be privatised safely. It is, therefore, important for the public to understand the concept and the reasons behind privatisation. In a developing country, while the economy is growing, the government has to invest in many enterprises since the private sector is not developed enough to do so. More importantly, the infrastructure does not exist to attract foreign investment.

Once the infrastructure becomes available and the private sector is sufficiently mature, then many state owned enterprises could be turned over to the private sector or foreign investors that can run these enterprises much more efficiently and profitably. By selling off the state-owned enterprises, especially if the government maintains a certain part of ownership, the government reaps a considerable amount of financial benefit.

Besides the initial benefit to the national exchequer, privatisation has multiple secondary advantages. If the privatised enterprise works well then by itself it stimulates further economic activity, creates new jobs and pays more taxes. As economic activity grows in the private sector, foreign investment is attracted to the country with further increase in industrial and economic growth. All this increases the number of well paying jobs producing a wider tax base that further improves the government's tax revenues.

A hidden cost of even so-called successful public sector enterprises is that they are usually profitable because they are government monopolies and have no competition. As such, first, they provide their services and products at a much higher price to the people, especially if we include the money that the government spends on them. Second, they are much less profitable than private sector companies of the same type. This causes considerable indirect loss to the national exchequer even though the general public does not appreciate this loss.

One of the more important reasons to privatise many different enterprises, especially the ones not involved in providing basic services to the people is that in the present state of globalisation where both goods and services are freely available across national borders, only a vibrant and well-run private sector is capable of competing.

Government-run companies controlled by bureaucrats are not capable of growing and becoming more profitable when in direct competition with private enterprise. The major reason being that bureaucracies are by nature risk averse while successful businesses require re-investment and expansion that might seem risky to the public sector managers.

There is, however, one important fact that must be remembered. Businessmen are in business to make a profit. To expect them to buy state-owned ventures that are running in loss and then pump in private investment without the possibility of significant return on their investment is unreasonable. Perhaps, it might be in the national interest to devise privatisation schemes where profits from privatisation are reinvested in Pakistan and not taken out of the country.

Finally, there are two important things that need to be understood. The first one being that the socialist model of state-ownership of all means of production has been universally discredited. For this reason privatisation of former state owned enterprises is now the accepted paradigm all over the world. And in those countries where this is being done successfully, significant expansion and improvement of the national economy is visible, along with better work environment, increased employment, better services and larger government tax base.

The second thing that needs to be pointed out is that in a traditionally feudal and agrarian based economy like Pakistan, many ordinary people still think that wealth is a finite quantity and is related to ownership of land. This is no longer true in modern economies where wealth is being generated in many different sectors from manufacturing and service industries, from telecommunications and the energy sectors along with many other areas.

In summary, privatisation of many state owned-enterprises is a beneficial process, both for the national exchequer, the country and for the private sector. However, those state-owned entities that are important to national security or else are too vital in the public interest to be left to the vagaries of the free markets should not be privatised.

(The writer is a consultant with Privatisation Commission) (ahmadwriaz@hotmail.com)

Source: http://www.brecorder.com/index.php?id=1060477&currPageNo=1&query=&search=&term=&supDate=