It seems paradoxical that in the backdrop of global experiences including our own with privatisation, we still consider it as a viable option for bailing out our crisis-ridden economy.

The privatisation policy is being re-formulated for the sale of remaining state-owned enterprises (SOEs) to private firms.

Many countries, including rich ones, have recently ceased to rely on privatisation as a viable option for increasing output, improving efficiency, stepping up exports, reducing the debt burden and augmenting public revenues. This is best illustrated by Tony Kellick’s remarks that “the key issue is whether such privatisation better serves the long term interests of a nation by promoting a more sustainable and equitable pattern of economic and social progress: the evidence so far is less than compelling” (A Reaction Too Far: Economic Theory and the Role of the State in Developing Countries).

And Joseph E. Stiglitz observes that “around the world, the examples of failed privatisation are legion — from roads in Mexico to rail-rods in the UK” (The Price of Inequality, 2012).

The disillusionment has come about for several reasons. First of all, a full throttle privatisation in the 1980s and 1990s replaced competitive markets with monopolies and cartels of domestic and foreign firms. This enabled them to restrict output to earn monopoly profits — thereby reducing the rate of growth — to appropriate a major chunk of national income and to multiply their wealth. A wide gap so created between the elites and rest of the society spawned unrest and agitation.

Another reason was non-transparency in the selling of state-owned enterprises. In Latin America, privatisation through ‘fire sale’ meant sale without competitive bidding. Anyone who could offer the highest bribe to political leaders and functionaries could walk off with valuable state assets for much less than market price.

This system was not only limited to Latin America, but was visible everywhere, including in transitional economies. In Russia, “many…current oligarchs, for example, obtained their initial wealth by buying state assets at below market prices and then ensuring continuing profits through monopoly power” ( The Price of Inequality).

States all over the globe privatised SOEs indiscriminately across the board, including public utilities and services. Prior to privatisation, these entities enjoyed a monopoly, but their services were provided on the principle of social cost and benefit. Following their transfer, their monopoly power also passed onto private firms, which stated charging monopoly prices from poor consumers and turned into tycoons.

An example is that of Carlos Slim, a Mexican businessman who acquired that country’s telecommunication system after its privatisation and became the wealthiest man of the world in 2011.

Faced with huge national indebtedness and recessions in the 1980s and 1990s, the developing countries were forced to dispose of their state-owned entities to buttress their resource base. It was a period when these countries faced currency depreciation. This provided an opportunity to foreign firms to jump onto the bandwagon and buy valuable assets at throwaway prices.

In some countries, these multinational companies created monopolies and cartels, discouraged domestic investment by blocking entry of domestic companies, dictated policies to the government for their benefit, and even became an instrument of toppling and installing governments of their choice so that they could indulge in rent-seeking activities.

All the developing countries that suffered from a resource crunch adopted privatisation as a quick fix solution of their fiscal deficits. However, these countries experienced that selling public assets offered only a temporary relief, and that crises returned again and again after a temporary, brief pause. It was, therefore, realised that selling assets to meet current liabilities is mortgaging the options of future generations (Human Development Report 1993, UNDP).

Pakistan’s experience with privatisation during the last two decades has not been much different from that of the rest of the world. We privatised state-owned assets indiscriminately, including companies in the energy (oil, gas and electricity), cement, chemicals, engineering, fertiliser, telecommunication, minerals and financial sectors. The total value of the assets fetched an aggregated Rs476.4 billion during 1991-2011 — Rs57.2 billion in the first phase (1991-1999), and Rs317.2 billion in the second phase.

However, the process remained highly non-transparent. The Asian Development Bank in its report observed that “despite earlier fast progress, a lack of transparency has damaged the process” (Impact and Analysis of Privatisation in Pakistan).

The examples are many. The annulment of the contracts by the Supreme Court for the sale of Pakistan Steel Mills and the leasing of copper and gold mines in Reko Diq were entirely on account of non-transparency.

Similarly, the selling of National Fibre, Pak China Fertiliser, DG Khan Cement, Maple Leaf Cement, 26 per cent shares in Kot Addu Power Plant and shares of Attock Refinery and Pakistan Oil fields through brokers raised questions of transparency. Apart from this, the large-scale careless privatisation resulted in the closure of many SOEs after their transfer, including National Fertiliser, Zeal Pak Cement, and all engineering units, except Millat and Ghazi Tractors.

In conformity with the experience of other developing countries, the selling of state-owned enterprises to private firms, domestic and foreign, served as a catalyst for the formation of monopolies and cartels in Pakistan. Examples include cement, sugar, electricity generation, telecommunication, oil and mineral prospecting, transport etc.

This had two impacts. Firstly, there was a reduction in output. Secondly, the privatised units, including public utilities, charged monopoly prices.

As for the first impact, average GDP growth fell from 5.44 per cent to 4.15 per cent and investment from 5.5 per cent to 1.82 per cent of GDP in the post-privatisation period (1992/93-1997/98), as compared to the pre-privatisation period (1986/87-1990/91), (Impact of Privatisation in Pakistan, Dr Akhtar Hasan Khan, 2012).

Similarly, real prices more than doubled between 1990/91 and 1997/98 (Industrial Experience and Future Directions, Late Dr A R Kemal, 1997).

As in other developing countries, the sale of SOEs was undertaken by Pakistan for beefing up its resource base to curtail the budgetary deficit. However, the overall deficit remained at an unsustainable level between 6-8 per cent of GDP in the post-privatisation period. The privatisation proceeds contributed an infinitesimally small share of less than 0.3 per cent of GDP to have any substantive effect.

Privatisation had a pernicious effect on the poverty level and the distribution of income and wealth. Head count poverty grew exponentially from 22.11 per cent in 1990-91 to 43.8 per cent in 2010-11. At the same time, the ratio of the highest to the lowest household quintile, which measures the gap between the rich and the poor, continued to deteriorate, indicating a shifting of resources to the rich. This manifested in a breakdown of law and order and an unprecedented growth in the crime rate.

Despite negative experiences and the international community declaring privatisation to be a negative sum game, and coupled with our own dismal record, one wonders at the logic of our economic managers for pressing for further privatisation of the remaining SOEs as a solution to our economic crisis.

Back in the 1980s, most state-owned enterprises were running in profit, with huge reserves, and offered the government temporary relief when faced with ‘ways and means’ difficulty. The fault lies somewhere else. That fault needs to be removed, rather than going forward with the sale of assets.

E-mail: masood_kizilbash @hotmail.com