Privatization; Salvation or an Incomplete Truth By Kashif Mateen Ansari - South Asian Pulse
The debate on the point of “to be or not to be”; “To privatize or not to
privatize” is relatively simple. For this part of the debate it is easy to see
the writing on the wall. These SOEs cannot survive without budgetary support
from the government. They are the mega
employment exchanges for the kith and kin of the high and mighty. Do we really
want to add thousands of workers to already bankrupt institutions? For how long
we can rely on our friends and masters to help us with funding support, debt
and grants to keep these giants afloat? Privatization is the answer to many of
these woes. But privatization as an ideology is not the solution to all the
ills that befall the public sector.
Privatization;
Salvation or an Incomplete Truth
Salvation or an Incomplete Truth
By
Kashif Mateen Ansari
These days with the news of the government’s agenda of privatization
many questions are making the rounds; why privatize? Why might privatization
fail? What is needed to make privatization work? To answer these questions, it
is usually argued that government’s intervention causes economic inefficiencies.
There are many who support privatization and there is no dearth of those who
are protesting and arguing against it.
many questions are making the rounds; why privatize? Why might privatization
fail? What is needed to make privatization work? To answer these questions, it
is usually argued that government’s intervention causes economic inefficiencies.
There are many who support privatization and there is no dearth of those who
are protesting and arguing against it.
The debate on the issue is
raging and both the camps are putting forward their arguments. According to
PIDE Vice-Chancellor Dr Rashid Amjad, “Policy stances which reflect our best
economic interests and take into account the political economic dimensions
should be adopted.” In his views there is a need for a refurbishment of the
system for increasing efficiency and productivity of loss making public
enterprises
raging and both the camps are putting forward their arguments. According to
PIDE Vice-Chancellor Dr Rashid Amjad, “Policy stances which reflect our best
economic interests and take into account the political economic dimensions
should be adopted.” In his views there is a need for a refurbishment of the
system for increasing efficiency and productivity of loss making public
enterprises
There are many pro-privatization experts like, NUST Dean Ashfaq
Hassan Khan, “Benefits of privatization help reduce the country’s debt burden
and also help improves the allocation of resources.”
Hassan Khan, “Benefits of privatization help reduce the country’s debt burden
and also help improves the allocation of resources.”
State owned enterprises (SOEs) are generally considered unproductive
all around the world, primarily because they serve the political masters and
the bureaucracy more than the business and the owner (state) they represent.
The privatization of these SOEs is considered to be the solution on the premise
that the private sector is more efficient and cost effective than the
government. The role of government should be narrowed down to policymaking and ensuring
that the right business environment exists. Efficiency of a government in
running any business can be captured in these words of Milton Friedman, “If you put the federal
government in charge of the Sahara Desert, in 5 years there'd be a shortage of
sand.”
all around the world, primarily because they serve the political masters and
the bureaucracy more than the business and the owner (state) they represent.
The privatization of these SOEs is considered to be the solution on the premise
that the private sector is more efficient and cost effective than the
government. The role of government should be narrowed down to policymaking and ensuring
that the right business environment exists. Efficiency of a government in
running any business can be captured in these words of Milton Friedman, “If you put the federal
government in charge of the Sahara Desert, in 5 years there'd be a shortage of
sand.”
Present government has embarked on a strategy for privatizing a
number of SOEs. Why should these organizations, like Pakistan Steel or Pakistan
International Airlines (PIA) be privatized? They are inefficient and poorly
managed and on top of that they are a heavy burden on the national kitty. They
are costing Rs400-Rs500 billion annually. They wear the crown of destabilizing
the budget and adding burden to the national debt. How can a financially poor
country like Pakistan continue to foot the bill of the inefficiencies of these
institutions? In the words of Margaret Thatcher “The problem with
socialism is that you eventually run out of other peoples' money.” Same is the case here that
we are running out of other people’s money to fund these giant government owned
businesses.
number of SOEs. Why should these organizations, like Pakistan Steel or Pakistan
International Airlines (PIA) be privatized? They are inefficient and poorly
managed and on top of that they are a heavy burden on the national kitty. They
are costing Rs400-Rs500 billion annually. They wear the crown of destabilizing
the budget and adding burden to the national debt. How can a financially poor
country like Pakistan continue to foot the bill of the inefficiencies of these
institutions? In the words of Margaret Thatcher “The problem with
socialism is that you eventually run out of other peoples' money.” Same is the case here that
we are running out of other people’s money to fund these giant government owned
businesses.
The debate on the point of “to be or not to be”; “To privatize or not to
privatize” is relatively simple. For this part of the debate it is easy to see
the writing on the wall. These SOEs cannot survive without budgetary support
from the government. They are the mega
employment exchanges for the kith and kin of the high and mighty. Do we really
want to add thousands of workers to already bankrupt institutions? For how long
we can rely on our friends and masters to help us with funding support, debt
and grants to keep these giants afloat? Privatization is the answer to many of
these woes. But privatization as an ideology is not the solution to all the
ills that befall the public sector.
Privatization for the sake of privatization is not the answer.
Privatization has worked in many cases and it has failed in many other
instances. According to Kevin R. McDonald who published his article “Why Privatization
Is Not Enough” in Harvard Business Review; that most newly privatized companies
need dominant, experienced shareholders to compensate for the weaknesses of
managers. Without the backing and nudging of such shareholders, companies tend
to operate in the same inefficient ways they have learnt over the years.
Privatization has worked in many cases and it has failed in many other
instances. According to Kevin R. McDonald who published his article “Why Privatization
Is Not Enough” in Harvard Business Review; that most newly privatized companies
need dominant, experienced shareholders to compensate for the weaknesses of
managers. Without the backing and nudging of such shareholders, companies tend
to operate in the same inefficient ways they have learnt over the years.
Kevin further noted based on his research that the positive effects
of privatization are not spontaneous. Investors earn outstanding returns only
when they themselves add value in the form of leadership, systems, experience
and direction.
of privatization are not spontaneous. Investors earn outstanding returns only
when they themselves add value in the form of leadership, systems, experience
and direction.
Privatization taken as the salvation of all the woes of state-owned
enterprises, seen as a panacea for improving corporate governance, management,
and performance may be an incomplete truth and therefore, in Kevin’s words “it’s
like a runway that is just a bit too short, extremely dangerous.”
enterprises, seen as a panacea for improving corporate governance, management,
and performance may be an incomplete truth and therefore, in Kevin’s words “it’s
like a runway that is just a bit too short, extremely dangerous.”
Developing on the stories that Kevin R. McDonald put forward through his research in Poland, there
were many success stories like Thomson Polkolor which was a joint venture post
privatization between Thomson, the French electronics giant that acquired RCA
in 1987, and Polkolor, a Warsaw-based producer of picture tubes for color
television sets. Problems were the same
as we see in our SOEs, very big payroll but there was no cash to pay the
employees. There was urgent requirement of capital, better management, better
work attitudes, and an injection of basic business skills and procedures. The
main sources of operational difficulties were the lack of sense of
responsibility in the employees and lack of motivation to improve productivity.
were many success stories like Thomson Polkolor which was a joint venture post
privatization between Thomson, the French electronics giant that acquired RCA
in 1987, and Polkolor, a Warsaw-based producer of picture tubes for color
television sets. Problems were the same
as we see in our SOEs, very big payroll but there was no cash to pay the
employees. There was urgent requirement of capital, better management, better
work attitudes, and an injection of basic business skills and procedures. The
main sources of operational difficulties were the lack of sense of
responsibility in the employees and lack of motivation to improve productivity.
Nevertheless, the Thomson Polkolor joint venture achieved impressive
financial results in first 16 months of operation. Its sales doubled, the joint
venture generated an operating profit in the same period. It started paying
taxes, whereas the former state-owned enterprise paid no taxes at all.
financial results in first 16 months of operation. Its sales doubled, the joint
venture generated an operating profit in the same period. It started paying
taxes, whereas the former state-owned enterprise paid no taxes at all.
An example of privatization gone wrong is
Krosno Glass Works (Krosnienskie Huta Szkla). Krosno
was privatized in November of 1991. Important aspect of this privatization was
the way the ownership was distributed between the government, employees,
development bank and general public. After the government which held 35% of the
shares; 28% of the shares were widely dispersed among the public. The remaining
shares were held by the employees, bank and another company purchasing the
products from Krosno.
was privatized in November of 1991. Important aspect of this privatization was
the way the ownership was distributed between the government, employees,
development bank and general public. After the government which held 35% of the
shares; 28% of the shares were widely dispersed among the public. The remaining
shares were held by the employees, bank and another company purchasing the
products from Krosno.
Krosno’s revenues fell dramatically after privatization. One of the reasons
was the worldwide recession but that was not the only reason. The management of
the company failed to respond to the falling sales and was unable to exploit
the only profitable business of hand-blown glass.
was the worldwide recession but that was not the only reason. The management of
the company failed to respond to the falling sales and was unable to exploit
the only profitable business of hand-blown glass.
Management’s failure to exploit their profitable line of business
hurt the company. Unfortunately, there
was no dominant investor with sufficient experience to turn this around. Replacing
the company president twice in two years was the board’s response to this
problem. The inadequacy of the corporate
governance revealed itself and the dispersed share ownership was seen as the
reason behind this lackluster performance. Contributing reasons were no
market-oriented governance; board members lethargic participation, government
nominated members failing to attend the key board meetings. This pointed to one big flaw that there was no
strong third voice in the shape of strong sponsor guiding the management.
hurt the company. Unfortunately, there
was no dominant investor with sufficient experience to turn this around. Replacing
the company president twice in two years was the board’s response to this
problem. The inadequacy of the corporate
governance revealed itself and the dispersed share ownership was seen as the
reason behind this lackluster performance. Contributing reasons were no
market-oriented governance; board members lethargic participation, government
nominated members failing to attend the key board meetings. This pointed to one big flaw that there was no
strong third voice in the shape of strong sponsor guiding the management.
In various other studies it has been
pointed out that certain
positive effects are evident from all privatizations many of these related to
sales effort. But the overall performance is more linked to a dominant
shareholder whose intervention is the key to improving corporate performance
and governance.
pointed out that certain
positive effects are evident from all privatizations many of these related to
sales effort. But the overall performance is more linked to a dominant
shareholder whose intervention is the key to improving corporate performance
and governance.
Privatization as an ideology that has to be followed for the sake of
it would not work. Also the experience of privatization has given out mixed
results all across the globe. Evidence suggests that privatization which
results into distributed and fragmented shareholding has less chances of
success as compared to the instances where we have a strong, capable
shareholder in the form of a local or foreign business house with sound
expertise and exposure in the same sector.
it would not work. Also the experience of privatization has given out mixed
results all across the globe. Evidence suggests that privatization which
results into distributed and fragmented shareholding has less chances of
success as compared to the instances where we have a strong, capable
shareholder in the form of a local or foreign business house with sound
expertise and exposure in the same sector.
So the debate is not about privatization itself, rather it is about
how we do it. Privatization is more akin to selling the family silver. We can
do it once. It will surely give us the much needed funds but we must do it
right the first time. Otherwise the future generations will find neither the
silver nor the benefit of the funds. Privatization can energize the economy and
put right many institutions that were once great. We may find PIA again
training the leading twenty plus airlines in the world or we may find Pakistan
Steel turning the wheel of our infrastructure and economy.
how we do it. Privatization is more akin to selling the family silver. We can
do it once. It will surely give us the much needed funds but we must do it
right the first time. Otherwise the future generations will find neither the
silver nor the benefit of the funds. Privatization can energize the economy and
put right many institutions that were once great. We may find PIA again
training the leading twenty plus airlines in the world or we may find Pakistan
Steel turning the wheel of our infrastructure and economy.
In the words of top manager of one of the privatized entities in
east Europe, “Privatization alone is like throwing a person into the water and
calling it a swimming lesson.”
east Europe, “Privatization alone is like throwing a person into the water and
calling it a swimming lesson.”
Privatization alone is not the answer. We have to be very careful
about the process and the results both. Just throwing the shareholding away to
scattered shareholders may result into a change in the ownership but it will
not result into the change in the performance of these institutions. Privatization
must be done in a manner that large institutions, both local and foreign are attracted
and they take up sizeable stakes in the privatized entities. This will ensure
new management thinking and active board governance by the new shareholders. Otherwise
in the case of scattered holding our institutions will remain rudderless and
drift away on the currents of economic distraction one after the other.
about the process and the results both. Just throwing the shareholding away to
scattered shareholders may result into a change in the ownership but it will
not result into the change in the performance of these institutions. Privatization
must be done in a manner that large institutions, both local and foreign are attracted
and they take up sizeable stakes in the privatized entities. This will ensure
new management thinking and active board governance by the new shareholders. Otherwise
in the case of scattered holding our institutions will remain rudderless and
drift away on the currents of economic distraction one after the other.
(The writer is the CEO of a
power project and can be reached at kashifmateenansari@post.harvard.edu)
power project and can be reached at kashifmateenansari@post.harvard.edu)
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