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BY

EX-CHAIRMAN: SITE ASSOCIATION OF INDUSTRY

MEMBER MANAGING COMMITTEE: EMPLOYERS' FEDERATION OF PAKISTAN. SITE, KARACHI, PAKISTAN

PRESENTED AT THE SUBREGIONAL MEETING ON PRIVATIZATION (KATHMANDU, NEPAL, NOVEMBER 24-26, 1999) ORGANIZED BY ILO-SAAT

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PRIVATIZATION is the natural outcome of the global desire to transfer those activities that have been a root cause of mismanagement, inefficiency, patronage, and financial deficits of governments in many parts of the world. The oft-repeated phrase that the business of governments is to run the nation and not industrial and trade establishments has led to a transformation in the thinking process of those in the corridors of power. Privatization became the buzzword since the late eighties and even countries with a rigid centralized economic system began to reevaluate their options and evolved processes that resulted in development of the private sector in the countries' economic activities. Privatization is thus considered the vehicle of economic growth and its four wheels are Market, Finance, Management, and Entrepreneurship.

PRIVATIZATION also became a reality when countries with many state-owned enterprises began to seriously look into their ballooning fiscal deficit, which was also a result of sustaining the losses of these enterprises. These units suffered from over-staffing, mostly due to political largesse or due to strong labor unions, "absentee landlord" syndrome, where decision making was entrusted to those bureaucrats who had no direct experience of overseeing corporations, and management of these enterprises by government-appointed officials who had no incentives that a private ownership concept would provide.

PRIVATIZATION thus became to be perceived as a remedy for the failure of state-owned enterprises, and that it would facilitate increase in efficiency, improvement in quality, reduction in prices, and enhancement of economic activity. It also was considered as a channel for foreign investment into the country. Moreover, it was determined as a dramatic and immediate approach to ensue into once-for-all gains so that either the public debt could be paid off or the national reserves be filled up.

PRIVATIZATION largely succeeded in those countries that resorted to a variety of pragmatic options to achieve preferred results. The privatization strategy was centered in making it efficient by eliminating adhoc measures and by working within a given timeframe. The institutions involved in privatization were rationalized and developed by ensuring that there were sincere decision-making efforts, that the system was properly implemented, and that monitoring was done efficiently. A well-defined legal framework was made essential, especially for removing all legal obstacles, and appropriately defining the procedures and responsibilities. The regulatory structure was substantially improved and made workable so that the objectives were met. Moreover, there was an imperative need for human resource development and this was achieved by initiating programs related to skills enhancement and vocational training and education. The public awareness campaign was evolved, more so to winning over those public interest groups that had strong reservations about the privatization process, especially in the protection of the interests of workers, environment, and consumers. More importantly, there was strong political will and total commitment towards making the program popular and attainable.

PRIVATIZATION in these countries also depended upon the development of the capital markets. The transfer of ownership was achieved by broadening the capital base, either thru greater involvement of private sector in the capital market or by attracting foreign investment thru financing of privatization initiatives or thru portfolio purchases on the stock exchanges. These countries also ensured that there were clear-cut policies to sustain the market economy thru liberalization of trade, simplification of regulatory processes, rationalization of taxation systems, and development of infrastructure.

PRIVATIZATION can be successful when countries adopt a mixture of consultative theories, experiences of other countries that went on the privatization route, and formulating homegrown remedies. Overall, the privatization programs can teach valuable lessons. The first and foremost is the reduction to a bare minimum the units under governmental control and that the divested units would be more efficient and productive. Secondly, the success of the program is also relative if the reforms are tailored to the particular country's requirements and culture. Thirdly, greater transparency in the process is essential unless speed or political tranquility is paramount. The fourth lesson is that there must be a strong capacity in the country to manage the privatization process and there must be optimal institutional arrangements to implement it effectively. Fifth, there must be a post-privatization evaluation system to monitor the economic performance of the units.

PRIVATIZATION in Pakistan needs to be addressed in an ambiguous context. The privatization process was developed thru a policy mandate with a clear vision at the Federal level as to what the goals of the program would be. There was a call for building universal consensus among all sectors so that the program could be put into practical action. There was scope for setting up of a legal framework that would ensure that the rights of stakeholders, workers, government, previous owners, new investors, and creditors were safeguarded. It was also planned to have a regulatory environment that would create a level playing field for all bidders and the system would be transparent and fair.

PRIVATIZATION in Pakistan became a reality since 1991 and the Privatization Commission became pro-active, working under a politically appointed Chairman, with members that were political nominees, economic advisors, and government officials. After 106 units being privatized, after realizing about Rs 60 billion, after golden handshake schemes, retirements, and termination of workers, after many privatized units being either closed down and turned into a real estate bonanza, after many defaults by successful buyers, the privatization program in Pakistan continued to be a contentious issue, with the Privatization Commission perceived as a handmaiden of successive political governments. The privatization process, at times, turned into a charade, with those in power taking advantage of the intentional non-transparency to introduce ulterior motives in off-loading the units. Privatization took a rap and for many became a curse on the nation. The negative consequences of the process were magnified and the adverse social effects were highlighted as failure of the private sector in bringing forth prosperity that privatization was touted to bring.

PRIVATIZATION in Pakistan also brought into focus the inconsistency of governmental policies and the apparent backtracking done by the political governments, especially concerning the involvement of foreign investors in the economic activities of the country. The sovereignty issue relating to the ownership by alien investors of strategic infrastructure units has also been kept on ice. Sustainable policies are seldom envisaged and there is generally an emphasis on adhocism, a bane of successive governments. The outcome of all this was the gradual slipping away and lack of interest in Pakistan's state-owned enterprises. The legal framework is imperfect and the constitutional guarantees for buyers of privatized units still gathering dust in the concerned quarters. Furthermore, the system is infested with allegations of corruption, nepotism, cronyism, and blatant abuse of discretionary powers. All in all, its effects turned out to be conspiratorial and obsessive.

PRIVATIZATION in Pakistan now requires a fresh approach. There should be total commitment to seriousness and there should be a watertight methodology to prevent shady deals and cronyism that have been the hallmark of the privatization process until now. The concentration of the government should be on ensuring that the funds realized from sale of units are channeled towards social uplift programs like poverty alleviation, education, health, and social welfare. The government can also insist on involvement of economic advisors, trade and industry representatives, and managerial and technical professionals to be part of a regulatory forum so that the privatized units are effectively monitored for a specific period and that the bona fides of the buyers are further solidified. The government must encourage rapid industrialization and promotion of indigenous industry both for defense requirements as well as for import substitution on the domestic front. The government has already established a protective arrangement for the workers of the privatized units and although the job market is not rosy, the displaced or redundant workers can be provided assistance in retraining or relocation in order to earn their daily bread. The NGOs can be effective in this respect, as they can become the medium for promoting this worker welfare activity.

PRIVATIZATION in Pakistan must be made to work and the policy makers must develop conscientiously-solid, authoritatively-capable, and economically-stable rules and regulations so that the rest of the units that are to be privatized are done in a manner that will not lead to chaos or instability. Privatization must be made to succeed and the objectives must be achieved. The stigma of nationalization and its resultant economic disaster must be removed from the fabric of Pakistan. The government can then channelize its activities to good governance and ensuring the prosperity of the citizens.

PRIVATIZATION in Pakistan sparked off a debate with various people espousing their point of view. Quotations of distinguished industrialists are presented as follows:

• "Privatization can also open up a Pandora's Box of problems, which is not to say that the move itself is not desirable. It could lead us towards monopolistic tendencies. The only way to guard against that would be for the government to be impartial. There will always be a tendency towards monopolies as long as the concept of profiteering persists among our business community."
• "Denationalization of both profitable and loss making corporations is supported not only because the government would be giving proof of its bona fide but also because in the private sector lucrative state industries would stand a bright chance of becoming even more rewarding."
• "Eventually, meaningful and fair privatization requires straight, forceful government . . . . who must have the courage and wherewithal to do this."
• "In order to be effective, privatization must be accompanied by certain measures . . . such as a moratorium on debt servicing and . . . . major conservation and poverty alleviation plans. This is the obvious and unavoidable context of effective privatization. If it is an isolated measure and not part of a cohesive over-all strategy to uplift the economy and society of Pakistan, its effects will be lopsided, causing more injury than benefit."
• "There should be as much deregulation as possible. History proves that until the industrial sector of the country begins to flourish, democracy cannot really take root."

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DR A.R.Kemal has authored a detailed 83-page presentation on the privatization process in Pakistan. The report is made in a very practical manner where the author has first given a short but pertinent theoretical write-up of each item and then focussed on the points as they relate to Pakistan. This ensures that the reader becomes oriented to the subtlety of the point under discussion and then gets the bird's eye-view of the latest position in the case of Pakistan.

The Executive Summary and Introduction give an overall recap of the privatization program and its result, and at the same time, seven suggestions are enumerated for the benefit of concerned policy makers to embark upon. The author provides a road map to the privatization scenario in Pakistan and his introduction leads one to the ultimate destination.

Part 2 of his report deals with the rationale of privatization. In this chapter, the author gives the various pro-privatization concepts that have been introduced to induce countries to venture on this path. He highlights the Mission Statement of the Privatization Commission that reflects the government's commitment to facilitate the deregulation and liberalization of the national economy thru transparent and equitable privatization of state-owned enterprises.

The next Chapter is about the various options available to off-load units. These models can be considered on a case-to-case basis and the results of each can be evident from the eventual functioning of the units privatized under these options. The author makes passing remarks on the methods used by the Privatization Commission in effecting sale of the units.

Privatization is an important tool in reducing the fiscal deficit and the next Chapter deals with the country's own situation. A Privatization and Fiscal Deficit Chart depicts a 19-year history of the fiscal deficit as a percentage of GDP, the nation's interest payments, and the quantum of money supply.

Part 5 of the paper is a very detailed presentation on privatization and the levels of efficiency. This is a very informative and technical guideline as it takes the reader on a journey of what privatization has been able to do in context of the nation's GDP, the productivity factor, the investment and employment scenarios, the power and telecommunications sector, and the performance of the two banks that were privatized, one to the bank's employees and the other to a consortium of industrialists.

A perusal of Chapters 6 and 7 is of prime importance. These chapters provide a profound insight into the ramifications of privatization on the employment of workers, the wage structure, and the challenges faced in ensuring an equitable package for these workers. The obvious threat to the workforce due to social and economic imbalance, displacement, and insecurity, has been mentioned in the report. The terms and conditions of the golden handshake scheme have been dutifully enumerated and give a true picture of the prevailing conditions.

The author talks about the macro economic aspects of privatization in Chapters 8 and 9. The six mechanisms of regulation that must be avoided as suggested by Professor Baumol in 1996 are given for the benefit of the reader and then the author examines the extent to which Pakistan has followed these suggestions. The six points need to be mentioned here:

1. Breaking the monopoly by injecting more competition by introduction of additional firms into market especially when the economies of scale are significant.
2. Maintaining cross subsidies thus driving out of line the prices required for economic efficiency.
3. Imposing exclusive territories for different competitors and thus increasing the cost.
4. Inconsistencies in the regulators' policy.
5. Delays in decision in accordance with the market conditions by the producers just because the regulators have not been able to make the decision in time.
6. Regulating thru accounting conventions such as fully distributed cost boils down generally to cost plus formula for prices and eliminates any incentives for reducing the cost.

The author provides a very detailed conclusion in Chapter 10 and in this part, he brings into focus the whole privatization scenario prevailing in Pakistan. He further seasons the conclusion by proposing pragmatic policy suggestions for the consideration of the readers as well as the policy makers. The readers are also given a reference checklist to study for their own benefit.

The reader then becomes the recipient of very relevant, informative, well-researched, and distinctly placed tables in Annexure 1, that complement the views presented by the author. These tables dwell on various aspects of the subject under discussion and they can be frequently referred to in the future. Annexure 2 is the agreement that the Government and All Pakistan State Enterprise Workers Action Committee signed on October 15, 1991 thru which the interests of the workers have been protected. Annexure 3 has two valuable tables. The first one is the Data on the privatized units and contains the name of the units, the revised total bids, the dates of transfer, and the name of the buyers. The second table is a detail of the bid values and payments on golden handshake of selected industries.

Dr A.R.Kemal has also presented the objectives of privatization as outlined in the publication of the Privatization Commission. These are:

• Creation of market based economy.
• Promoting the expansion and efficiency of private sector enterprises.
• Encourage competition, especially by abolishing the monopolies and promote integration of the domestic economy into the world economy.
• Support wider capital ownership and encourage employee ownership.
• Establish and develop capital markets for mobilization of domestic savings.
• Reverse the flight of capital abroad and repatriate capital already transferred.
• Mobilization of private sector resources for future investments.
• Promote economic flexibility.
• Maintain or create employment.
• Improve the quality of goods and services.
• Maximize receipts from privatization to pay off public debt and reduce the public sector deficit.
• Substantially reduce the size and scope of the public sector.
• Substantially reduce the financial drain of public enterprises on the government.
• Decrease the opportunities for misuse and corruption of public property by government officials and public sector managers.

The reader has to contemplate whether the objectives of the privatization program have been achieved or not, whether they are attainable or not, and whether they are sustainable or not. The reader has to contemplate whether the paper delves in detail the successes and shortcomings of the program. The reader has to contemplate whether there will be a fundamental restructuring in the privatization process, especially for the units that have not yet been divested and whether the government, that came into power on October 13, 1999, will ensure that cronyism, racketeering, and corruption will not be allowed to pollute the purity of Pakistan's Privatization Program. Going thru the paper of Dr A.R.Kemal, one can understand and comprehend the desired perceptions.