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Privatization of what? SOEs or governance

Privatization paranoia is not going anywhere. Government seems to be obsessed to go for privatization at any cost like previous governments. The argument for privatization has same ingredients, which are we hearing for long time. State Owned Enterprises (SEOs) are loss making entities. It is burden on national exchequer. SOEs have become bottomless buckets, which cannot be filled. Government has to offer billion of rupees to sustain the functioning of SOEs.Business is not job of government. Business is job of private sector, as they are best to run it. Then stories are being told how private sector is pulling business up across the world and here comes the global statistics, which usually show one side of picture. Growth is being projected but development and in-equalities are less talked about. Hence, government is going to privatize the SOEs and private sector will turn these SOEs into profit making machines.

These arguments are being used to justify the privatization. But the fundamental questions are not being discussed or highlighted, leave alone the answers. Like, why SOEs are loss making entities? Why private sector wants to invest in loss making entities? What is motive? How it will help country?Who will pay for it? Let’s decode these questions and try to find some answers.

First, yes, SOEs are loss makingentities but why and who is responsible for it. The answer is bad governance and political economy of power are responsible for it. Political economy of power dictates to ruling elite to use SOEs as instrument of power grabbing. Thus, the successive governments used SOEs to buy loyalty, votes and benefit the cronies. They hired people in huge number, beyond the need and carrying capacity of these entities. The executive management, which was usually hand-picked, was offered hefty packages. It served dual purpose, first the loyalty was bought.Second, the executives facilitated ruling elite to run the SOEs according to political preferences of ruling elite. It resulted in crossing the threshold of carrying capacity of SOEs which brought SOEs to their knees and turned them into loss making entities.

Although, the privatization and tax relief may will turn these organizations into profit generating entities, but the wealth will be concentrated in few hands

Rather than learning from the mistakes, government or state want to punish people for theirown mistakes of bad governance and political gambling. It is not justifiable act. Further, the argument of bad performance is not so convincing. If we have to buy this argument, then what about the performance of ruling elite for more than 70 years. Pakistan is facing multifaceted problems due to the bad performance.People are paying price in the form of higher poverty, food insecurity and lack of the basic facilities.

In this context, can we ask that the governance of country should be privatize? No. certainly not. Then why we are advocating the privatization of SOEs, which can be good source of earning, if managed properly. It is bad proposition because every state needs non-tax income to provide basic necessities of life to people at wider scale. Non-tax revenue is also required to run the state and state apparatus.

Second, private sector is interested in these entities because they know that these organizations have potential to turn into profit making machines. They only needto focus on governance and get rid of extra employees and liabilities. Government is helping them by shedding off the burden by laying off employees and paying other liabilities. It is a win and win proposition for them, as they will buy entity with zero liabilities and huge potential to earn profit. However, it would be loss and loss proposition for state. As on one hand it will lose earning opportunity and on other hand state will have to offer incentives to private sector.

Third, the private sector works on single motive, the profit. Profit for whom? Off course for themselves. Besides, they are free from all obligations of common good or sharing profit with others. They are always in search ofopportunitiesto enhance profit and privatization will create another opportunity for them. The story will not stop here. The real game will start after privatization, as they will ask for incentives to fasten the recovery. Tax cut would be a perfect choice. It is a favorite word of private sector and they do not waste any chance to avail it. Whenever, government talks to them they complain about higher taxes and need to lower the taxes.

Although, the privatization and tax relief may will turn these organizations into profit generating entities, but the wealth will be concentrated in few hands. It will lead to K-type recovery.To counter the argument here comes the theory of trickle down into play. However, the empirical evidence points in opposite direction. The most recent study on the subject was conducted by researchers from London School of Economics and the King’s College London.

The researcher analyzed 50 years data to find correlation between tax cuts and trickle down, growth and employment. They came up with the conclusion that there is no trickle down associated with tax cut for rich. Further, tax cuts led to in-equalities in advanced economies.Study also suggested that the contribution of tax cuts does not correspond in national growth or reduction in unemployment. It did not contribute according to hype created around it.

Fourth, people will pay the real price in short term and state will bear the brunt in long term. As, private sector does not have responsibility to serve the interest of state or people. They are only concerned about the profit. In future, if they feel that business incentives are not good, they will move to a destination with better business incentives.

Hence, government needs to ponder on real questions and reasons of downfall of SOEs. Privatization is not a solution. It can be “get rid strategy” but it cannot be a good strategy to achieve sustainable growth and development. The analysis suggests the fundamental problem is political economy of power, which is very dear to ruling elite. The ruling elite is using these entities as source of bribe or influence. By applying these tools, they are making sure to secure the votes for next election. We can find the practical examples in the case of Pakistan International Airline and Pakistan Steel Mills. The two organizations have been stuffed with political appointees. It led to cross the carrying capacity of these organization, which is haunting these organization. The overstaffing is one of the seriousproblems, but political parties are determined to save their associates and supporters.

Lastly, state needs to ponder on this dimension and re-think privatization strategy and work on the real problems. Pakistan can learn from the different models, which different countries adopted to grow and combat the challenge of loss making SOEs. We can look at China, how it runs SOEs and acquired the place of second biggest economy of world. The simple conclusion is that China run the SOEs on the principles of market and rules of business. China introduce competition among SOEs and made sure that there should be no comfort zone for SOEs except the competition. We can also look at the example of Malaysia, how they fixed the problem of loss making SOEs.

In the conclusion, government and private sector, should try to make a difference between private business and privatization. Off course, Pakistan needs to facilitate private business, it is required for economic growth but it should not be mixed with privatization.a

This article was originally published at: https://dailytimes.com.pk/711330/privatization-of-what-soes-or-governance/

The opinions expressed in this article are the author's own and do not necessarily reflect the viewpoint or stance of SDPI.