Can Privatisation Drive Transformation?

January 27, 2025 Mahi Bukhari

Introduction

Privatisation has long been touted as a transformative economic strategy for struggling economies. In Pakistan, where loss-making state-owned enterprises (SOEs) continue to drain fiscal resources and undermine economic efficiency, the debate over privatisation is both timely and essential. According to the recently unveiled Prime Minister’s Economic Transformation Agenda, cumulative losses from these SOEs amounted to $3.7 billion (1% of GDP) in FY21 and $2.9 billion (0.9% of GDP) in FY22. This article explores whether privatisation can truly drive transformation, examines the challenges in the process, and proposes actionable strategies to ensure success.

The Current Landscape of SOEs in Pakistan

H2: Financial Burden of SOEs

Loss-making SOEs impose significant fiscal costs on the government while stifling private sector growth. These enterprises not only consume public funds inefficiently but also restrict market opportunities for more capable private firms.

Cumulative Losses: SOEs cost the government $6.6 billion in just two years.
Efficiency Issues: Inefficient management and lack of accountability hinder their potential for profitability.
Example: Pakistan International Airlines (PIA) exemplifies the failure of attempting to privatise deeply loss-making enterprises.

Challenges in the Privatisation Process

H2: Why Privatisation Often Fails

The privatisation of loss-making enterprises is particularly susceptible to failure for several reasons:

Lack of Investor Confidence: Loss-making SOEs rarely attract serious buyers.
Political Resistance: Privatisation is often met with opposition due to fears of job losses and mismanagement.
Inadequate Policy Frameworks: An absence of robust strategies for privatisation leads to poor execution and outcomes.

H3: Lessons from PIA

The failed attempt to privatise PIA highlights the pitfalls of prioritising loss-making enterprises. It demonstrated the necessity of developing a comprehensive and phased privatisation strategy.

A Proposed Framework for Successful Privatisation

H2: Prioritising Profit-Making SOEs

To kick-start the privatisation process effectively, the government should prioritise profit-making SOEs. These enterprises are more likely to attract buyers, establish investor trust, and set a positive tone for subsequent privatisation efforts.

H3: Benefits of Starting with Profit-Making SOEs

Magnet for Investors: Profit-making entities are more appealing to both domestic and international buyers.
Restores Trust: Demonstrates the government’s commitment to creating opportunities for the private sector.
Sets a Precedent: Successful transactions encourage further investment and participation.

Categorising SOEs for Privatisation

H2: A Four-Tier Approach

The government can streamline the privatisation process by dividing SOEs into four categories:

H3: 1. Profit-Making SOEs

These entities should be at the top of the list for privatisation. Selling them to private investors ensures immediate returns and instills confidence in the market.

H3: 2. Mixed-Performance SOEs with Potential

For SOEs with inconsistent financial performance but strong business prospects, the government can opt for strategic divestment. This involves selling shares to qualified private sector players while granting them management control.

H3: 3. Asset-Rich but Inefficient SOEs

Some SOEs have outlived their utility but possess valuable assets, such as land. The government should allow asset stripping to realise their commercial value.

Approach: Auction or lease the land to private sector players or transfer it to provincial governments.
Utilisation of Proceeds: Use the revenue to settle liabilities and reduce the fiscal deficit.

H3: 4. Consistently Loss-Making SOEs

SOEs with consistent financial losses should be fully privatised through open auctions or negotiated sales. These enterprises often require buyers within the same industry to maximise their utility.

Addressing Key Concerns in Privatisation

H2: Transparency in the Process

Transparency is crucial for gaining investor confidence. Measures to ensure transparency include:

Signing non-disclosure agreements (NDAs) with potential buyers.
Sharing sensitive corporate data with qualified bidders under strict confidentiality.

H2: Preventing Monopolies

Privatisation of monopolistic SOEs must not lead to a mere change of ownership from public to private hands. The government should:

Deregulate and liberalise the sector before privatisation.
Enforce competition laws to prevent private monopolies.

H2: Managing Job Losses

Job losses are a significant concern during privatisation. To mitigate this impact, the government can adopt the following strategies:

Equity Offers: Provide retrenched employees with shares in the privatised company.
Voluntary Redundancy Packages: Offer attractive golden handshake schemes.
Reassignment: Transfer deserving employees to federal departments until retirement.

The Economic Benefits of Privatisation

H2: Fiscal Stability

Privatisation reduces the government’s fiscal deficit by eliminating loss-making enterprises and generating revenue through asset sales.

H2: Private Sector Growth

A robust privatisation framework creates opportunities for private sector investment, unleashing competition and innovation.

H2: Improved Service Delivery

Private management often leads to better service delivery, higher efficiency, and enhanced profitability.

FAQs About Privatisation in Pakistan

1. What is privatisation?

Privatisation is the process of transferring ownership and management of state-owned enterprises (SOEs) to the private sector to improve efficiency and reduce fiscal burdens.

2. Why is privatisation necessary in Pakistan?

Privatisation is essential to reduce the financial burden caused by loss-making SOEs, foster private sector growth, and improve economic efficiency.

3. What challenges does privatisation face in Pakistan?

Challenges include lack of investor confidence, political resistance, and inadequate policy frameworks.

4. How can job losses during privatisation be managed?

Job losses can be mitigated through equity offers, redundancy packages, and reassignment to federal departments.

5. What role does transparency play in successful privatisation?

Transparency builds investor confidence by ensuring fair and open transactions, ultimately leading to successful privatisation deals.

Conclusion

Privatisation has the potential to drive economic transformation in Pakistan, but its success hinges on a carefully crafted strategy. Prioritising profit-making SOEs, ensuring transparency, addressing job losses, and fostering competition are essential steps to achieving this goal. By adopting a phased and deliberate approach, the government can reduce its fiscal deficit, promote private sector growth, and ensure long-term economic sustainability.