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Privatization: a viable policy option.

Privatization: A Viable Policy Option

Privatization mainly has become a pragmatic response to budgetary, problems. Economic realities are catching up with history. The centrally planned approach in Pakistan came with the dawn of Independence. The state dominated planned economy showed signs of deterioration during the 1980s. Pakistan has recently shown an inclination to introduce privatization because her budgets will not stand a high level of government expenditure. Privatization has been put on the economic map of Pakistan as a highly visible way of changing the balance between government and the private sector as far as determining where the nation's economic productivity makes the desired improvement. There is a growing feeling in Pakistan that some of the problems that have their origins in high government spending can be solved by moving them away from government into private sector.

Time and time again, experience has demonstrated that human talent, ingenuity and creativity are basic to development. It has also been demonstrated that human talent and endeavour adapt and improve in the presence of appropriate incentives and rewards. Human creativity does not come from machines or buildings or dams or electric typewriters or computers; it comes from people. They have to have incentives and rewards and recognition. Intrigues against talented people and secret efforts to deprive the institutions of the really competent persons by means of leg pulling and factional politics carry us nowhere. This explains the sudden urge for the insurgence of the private sector as a partner, a very important partner, with the public sector, in the developmental process.

Privatization is something specific, something people can understand, something they can deal with; it is the real world. Privatization brings government face to face with the fundamental question: "Is ours a country people want to invest in? If not, what can be done to improve it?"

The objective of privatization is to see that "good things happen". If good things do not happen, nothing solid can be accomplished. The move towards privatization is directed at attaining the requisite accomplishments. It is not an end in itself, rather it is a means to economic betterment for the country. The merit of privatization lies in the fact that state enterprises offer a big opportunity to expand capital markets. It would not be possible to accomplish privatization unless the policy reforms are made to improve the investment climate, to reduce government subsidies and other interference with free markets, and to encourage entrepreneurship.

The global nature of privatization and its acceleration in 1980s are the outcome of the tacit knowledge that socialistic approach to economy can lead to stagnation. Privatization offers the possibilities of raising living standards by introducing competition, which brings about efficiency, lower costs and better services. Privatization has appeared as a quite revolution that is sweeping around the world and around Pakistan. More than fifty countries have engaged in some form of privatization either by selling off state enterprises; or by deregulating agricultural and industrial sectors or by contracting out government services. Since 1981, the trend has accelerated, until now, it now impresses political systems of all ideologies as well as nations at all stages of development.

A principal motivation for the acceptance of the idea of privatization in Pakistan has been an awareness born of budgetary crises that state-run enterprises are usually "white elephants" causing loss of billions of rupees each year. Instead of accumulating surpluses or supplying services efficiently, these enterprises have become a drain on national exchequer. A policy is emerging that the role of the private sector should be enhanced.

Since the Federal and the Provincial Governments in this country are running out of money and the people are disenchanted with the performance of public enterprises, pragmatism is appearing on the national scene. The importance of privatizationn is being realized because government ownership of the means of production has not brought about what it was expected to bring about in the form of less hierarchy and greater utilization of national manpower. Government ownership and control could not provide the needed incentives to hold down costs and to restrain inflation.

Is Privatization a viable policy option? This question is being asked with great force in Pakistan. The answer lies in response to another question. What are the goals of the present rulers in this country? If their goals include achieving a rising level of national prosperity, greater national economic power, and an open competitive society, privatization will be regarded as attractive.

An exciting development in privatization can occur in Pakistan with the realization that the competitive free market system offers an escape from poverty. For example, privately operated urban transport systems in cities such as Islamabad, Karachi, Lahore and Peshawar are said to be more widely available, more efficient, and more relevant to the transportation requirements of their populace than are the more heavily subsidised government transport services. The public transportation systems are viewed as mere bureaucratic "show-pieces".

A state entity cannot be as efficient as a private entity in the production of the same output. State controlled and regulation transfer wealth mostly to the elite group of bureaucrats who build huge mansions in the E-7 sector at Islamabad, in Gulberg at Lahore, in the University Town at Peshawar and in the Housing Societies at Karachi. State entities are usually unprofitable because of the tendency of their managers to amass wealth which they would like to make use of in their old age by building one house after another in urban centers. In such a situation, the option is for the State Bank of Pakistan to print money. This was once a popular alternative, but it is now widely seen as inflationary, leading to unemployment and economic decline. Vigorous economic growth offers a possible escape from the cash constraints. Privatization is the only viable solution.

One responsibility of the nation to the new realities can be for the state to privatize telecommunications and reinvigorate the National Highways Authority. The consolidation of the National Highways Authority would facilitate the access of citizens to information and would reduce dependency on foreign innovation for the future. The Ministry of Communications has taken the right step in the right direction.

Most obviously, undertaking privatization represents new grounds for Pakistan. The basis of success in privatization in our country lies in recognizing that the structure of ownership in society determines the pattern of incentives. Private ownership provides incentives for people to create wealth rather than merely redistribute what already exists.

The immediate advice for privatization may come from the World Bank, the International Monetary Fund, or the United States Agency for International Development which seek a commitment by debtor countries to reduce government expenditure as a price for obtaining additional loans or financial assistance. The obvious solution to this requirement is to dispense with activities in which the cash outflow is greatest. The issue, then, is how to go about this? Once the Government embarks on this idea, it would be necessary to restructure the private business and create a new operating framework out of its existing assets. In this connection, the state should be prepared to accept the valuation the market puts on assets to be sold. Since state entities do not maintain capital assets on their books at market value, some account of net capital gain or loss can result from the first stage of privatization. If the process of liquidation and re-creation of a private entity is well planned and totally integrated, ensuring that the uses of specific fund are identified clearly, the problem of apparent surpluses will not arise.

The timing of anticipated cash flows is of great significance in this connection. Two factors must be kept in view on this score: The timing and potential sources of future needs, and the tax, implications of the new private firm's chosen capital structure. The complexity and size of the new companies and the nature of the markets in which they will compete are of crucial importance. As a first approximation of a desirable capital structure, it would be worthwhile for the state to sell equity and to incur long term debt for the private companies in approximately the ratio that exists for the similar companies already in operation.

Capitalisation can be first handled by local private sector financial agents whose commissions are determined on the basis of the savings achieved in raising appropriate quantities of funds. The process of raising funds for privatization can be the means of recognising the existence of unofficial financial markets and can serve as an incentive to permit the emergence of official ones. Shares of stock can be sold initially through retail stores. Major loans can be raised from private sources and from the sale of national savings certificates by the National Savings Centers with liberal rates of profit made available to the purchasers of certificates. Loans should be marketed in small units with sufficient guarantees for their security. It may be realistic to issue shares in the new companies to the present stakeholders, on the same terms as other citizens whose savings have gone to support the entities during the years they were in the public sector.

It has been observed that managers of government agencies have conflicting goals, making it difficult to induce them to innovate and take risks at the local level. Bureaucrats usually favour the maintenance of status quo in the organizations to which they belong. It is for this reason that quite a few officers oppose the functioning of the Wafaqi Mohtasib and other corruption control mechanisms. The opposition also emerges from the fact that government officials are made to relinquish assets, available to their positions, without any visible reward.

Well defined ownership is the single most important pre-condition for free market systems to exist. If a financially restructured state entity is to be successful in the competitive private sector, assurance of ownership must be clear and definite. The new owners must have creditable guarantee of their right to alter the product and its price as they see fit in response to competitive conditions, and they must have the freedom to restructure the new organization in any way they feel it would be appropriate. Moreover, the new owners must have the right to sell or shut down the firm in the light of alternative investment opportunities.

A business strategy requires that a firm understand and define its role explicitly. It requires a definition of industry in which it will compete and a determination of the nature of existing and anticipated competition within the industry. An effective strategic plan requires the examination of potential new entrants into the business, possible substitute products that may emerge, and examination of the role played by customers and suppliers in the life of the firm.

The budget, makes and the formulators of policies at the national level have to be conscious of the fact that the timing and regulation of cash flows determine the ability of the business to offset liabilities and assets on the balance sheet. The pattern of cash flows determines the proportion in which the business firm chooses to issue the debts and equity. Subjective estimates of risk have to be left to the buyers and operators of the firm created through privatization.

The goals of Federal Ministers and of others who control the policies of the government will determine whether or not privatization would appear as a viable policy option in Pakistan. The question that they may keep in view is a question of efficiency: Can the competitive private sector produce the desired output at lower cost to society than the state sector? If the answer is yes, then privatization should take place.

Atleast 22 different methods of transferring government entities partially or wholly into private sector have been identified. These techniques range from selling or giving away state enterprises to contracting out services, establishing user charges, selling public housing to its occupants at Islamabad, Lahore and Karachi, etc. etc. and repealing state monopolies to enable competition to spread.

The budgetary pressures in Pakistan are spurring the Federal Government to allow private competition in the delivery of once public services. Entire economic sectors are likely to undergo privatization transformation. It is now being appreciated that limiting privatization to the lifting of price control or the sale of a few state assets will not serve the purpose of revitalizing the entire economy. If privatization is to succeed in Pakistan, then it will need to be broadened.

Privatization must be understood as a creative process, a process designed to shift whole areas of economic activity from the non-commercial state sector to the consumer-responsive profit making private sector. The state is called upon to eliminate government subsidies, price and wage controls and inefficient state owned enterprises. We must get rid of similar forms of interferences with market solutions. It is foreign investment that offers the greatest assurance of success for policies to encourage self-sufficiency, sustained economic growth and political responsibility.

Creation of free ports and free trade zones can be facilitated by using debt conversions to direct investment capital. By reducing tax burdens permitting the duty free movement of goods and deregulating foreign exchange controls, free zones can create islands of prosperity within Pakistan. The state may consider the possibility of privatization airports, railways and information services. Pakistan can make use of employee buy-outs of state owned firms as a way of avoiding huge continuing subsidies or other payments to these firms. Ownership can also reshape the work standards and expectations of employees previously inclined to a narrow "labour" point of view.

Opposition to privatization usually comes from the bureaucrats who, because of their suspicion of highly qualified technical staff, indulge in secret designs to throw them out of the system. They feel secure in a situation which provides them a safe environment for the investment, in house building of crores of rupees which they have usurped by unfair means. The bureaucrats who fall in this category sense a threat in the company of professional counterparts. Constituencies must, therefore, be created for reform in order for privatization to succeed which means that workes and managers must encourage the professionalization of the system and must facilitate the acquisition of skills needed for the success of the business enterprise.

It has also been observed in Great Britain and the United States of America that providing employees with stock makes them responsible for managing costs and improving services. If Pakistan lacks sufficient private capital markets to finance the buy-out of state-owned firms, the firms could simply be given away to the management and employees, giving workers a state in the company's future and eliminating any further subsidy burdens on taxpayers. The emerging incentives will ultimately benefit both the company and the public by allowing them to participate directly in the dynamism and opportunity of a competitive economy.

Social institutions must be devised in Pakistan to synchronize private incentives in an efficient, cost effective manner which also promotes moral imperatives. Public spirit can be harnessed in this country to make the delivery of services connected to policy goals. Using profit delivery mechanisms, the bureaucrats may actually reinforce norms of public spiritedness by offering policy makers wide and wiser choice in how to implement decisions designed to advance the common good.

Needless to repeat, privatization offers promise of rising standards, of living by introducing competition that brings about efficiency, lower costs, and better services. Selling assets provides opportunities to the Government for availing of large one-time capital gains. Privatization merely recognises that what matters most in the quality and cost of the product or service provided, not who provides it.

In many developing countries, including Pakistan, government management became thinly spread across thousands of diverse product lines, and quality and efficiency suffered as a sequence. From the prospective of government budgets, inefficiencies and mismanagement manifested themselves in higher costs to produce government services. This leads to more government spending and to larger deficits. Many developed and developing countries have, therefore, begun to seek ways to diminish the role of government bureaucraciess and enhance the responsibility of the private and the commercial sectors. Tax cuts and liberalization of international trade restrictions have become the economic reforms needed for attaining this objective.

As a developmental tool, privatization achieves it by transferring government services and enterprises to private sector. If done properly, privatization can provide a blue print for the orderly withdrawal of the state from activities that can best be managed and provided by private enterprise.

It is essential to understand that privatization does not imply the abrogation of government responsibilities for essential services and for general welfare of the people. Privatization simply recognises that all that matters most is the quality and cost of the product or service rendered, not who renders it.

Among the dynamics that can be made use of in the implementation of privatization programmes, mention can be made of the process of divestiture in which the assets or rights to a government activity or enterprise are sold or transferred to private owners. By means of this practice, the new owners would be another private business enterprise, the public at large, the existing employees or some combination thereof. The process of divestiture is appropriate for those government activities in Pakistan that can be easily defined. Such activities and enterprises should also possess commercial potential to assure economic viability after divestiture. Divestiture can be the major form of privatization in Pakistan. Divestiture can be accomplished through open sale of share to investors.

Contracting out should be the second major technique that the Government of Pakistan may use to privatize a government service or enterprise. Under this technique, the Government may enter into contract with privately owned firms to provide goods and services and to manage certain government activities. Contract might be preferred to divestiture for those activities for which there are no well defined assets or operations to sell, when the activity is inherently governmental and requires close public supervision.

Public health facilities and medical clinics for the poor are activities that the Federal and the Provincial Governments in Pakistan must provide because a free market, left to itself, would probably provide such services at less than adequate levels. But government responsibility need not extend to actually operating the facility with government employees. The governments in this country, could, for example, contract with a professional health care company that would manage the facility, hire the employees, and provide the needed services. The Pakistan Government can provide eligible persons with the equivalent of medical vouchers that can allow them to choose private doctors and hospitals at government expense. The responsibility of the Federal and Provincial Governments would be to properly manage the contract and make sure that the private firm provides the agreed upon services.

Many professional government services can be contracted out in Pakistan for considerable savings. Pakistan may consider it worthwhile to contract out airline services to professional aviation companies, thereby saving the scarce foreign exchange. The state can also contract out the nation's customs service as a way of both reducing costs and increasing revenues through better compliance and less corruption.

A programme of housing vouchers can be implemented to replace costly and poorly managed government housing projects. The ownership rights can be transferred to the present occupants. This can be done, for instance, in the case of residential quarters constructed by the Government of Pakistan in F-6/1, G-6/2, and G-9/2 sectors at Islamabad. These vouchers can be given to the occupants and can be used like cash to transfer ownership to the occupants. Similarly, food stamps that can be used to buy food from private merchants can be distributed to the poor. Through such vouchers, the Government can ensure the availability of certain goods and services to the poor, without having to actually provide and manage the housing, the food distribution or the medical services.

In Pakistan, education at the college and university levels can be provided to eligible students with education vouchers that can be applied to the universities of their choice. Such a change would relieve overcrowding in certain universities and would permit educational diversity.

Certain elements of the health care process can also lend themselves to limited voucher applicability in Pakistan. The distribution of medicines and other health care products, certain elective medical procedures, and specialized care can be better provided through vouchers than through costly government operated facilities.

The Pakistan Government may find it worthwhile to follow a policy of deregulation which lowers the cost of producing goods and services. It can offer a wider array of choices to the Pakistan citizens. It can also substantially bolster the international competitiveness of the national economy. Deregulation will provide the present policy makers with an opportunity to curb the escalating inflation in a way that does not involve a trade-off with jobs. Deregulation would also result in simplification and streamlining of rule making. Depositors in financial institutions would receive higher return of their money. The economy as a whole would benefit from deregulation in Pakistan. The public interest would thereby be better reserved.

The business strategy for dealing with those persons who oppose privatization is to devise ways to turn potential losers into winners. To be successful in a privatization programme, the Government should move forward with clear ground rules, so that all the debtors know what the exchange ratio will be. Thus, the nation can be placed on the road to progress and prosperity.
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Title Annotation:answer to Pakistan's economic problems
Author:Haider, S.M.
Publication:Economic Review
Date:Jun 1, 1991
Previous Article:Privatisation strategy will lead to higher savings, investment and grwoth - Dadabhoy.
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