Reluctantly seeking an IMF bailout for its balance-of-payments crisis, Imran Khan’s nascent government in Pakistan has already devalued its currency, hiked utility rates and imposed new taxes in an effort to be “ready” for IMF reforms. As if these measures were not enough to make the government sufficiently unpopular, it now faces demands to immediately privatise large loss-making state-owned enterprises.
For a few reasons, the government has so far been reluctant to sell these off. Two reasons stand out in particular. First, selling of these state-owned enterprises is likely to generate significant unemployment. Politically speaking, this would be a highly unpopular move, as Khan’s new government promised to create millions of jobs within five years. Second, given the outstanding debts of Pakistan’s state-owned enterprises, there will be few takers unless the government clears up the balance sheets first.
Whichever course the government takes, it would be foolish to ignore the lessons from Pakistan’s troubled history of previous
1. Telecoms and homegrown talent
First, do not sell a state-owned enterprise because you are getting a good price. The 2005
After painting the highly profitable corporation as an inefficient, incompetent, out-of-date behemoth, the government sold off a 26
Within four years of its
PTCL’s privatisation not only destroyed a treasure trove of technological capabilities that the enterprise had nurtured over decades, but it also deprived Pakistan of a chance to turn a national champion into a regional, South Asian one.
2. Energy sector and competition
From 1994 onwards, investors were invited to set up power plants in exchange for a guaranteed US dollar-based internal rate of return of 15-18
The plants were reimbursed for all the fixed costs of the power plant including debt servicing, and handed the highly lucrative equity return on top. These payments were to be made irrespective of whether or not the independent power producer was asked to produce electricity. Plus, the investors were reimbursed for all variable costs of production, regardless of the type of fuel used and its market price.
3. Banks and profitability
The third lesson comes from the
There is little point having private banks if all they do is lend to the government, which could easily own those banks and lend to itself without having to factor in an equity return. The allocation of credit to different sectors of the economy did not improve either. Manufacturing, agriculture, and small businesses – the sectors which were supposed to benefit from privatisation – continued to be deprived of credit.
But, consistent with the general history of privatisation in Pakistan, banking privatisation was great for the new owners. Many got bargain basement deals – while doing little for the cause of national economic development.
Above all, the government should realise that in the absence of a broader national development policy, privatisations are not going to yield the desired benefits. Before contemplating any sell off, the government needs to first figure out the roles it needs various institutions to play and devise appropriate regulatory and monitoring frameworks.
Goals such as
This article was originally published in The Conversation.