Is privatization panacea for Pakistan?

Privatization was made fashionable by Britain’s Margaret Thatcher in the 1980s. The sale, during her reign as prime minister, of poorly performing state enterprises to the private sector was widely lauded. Acolytes included global financial institutions such as the World Bank and the IMF as well as then US President Ronald Reagan.
It seems Pakistan’s Nawaz Sharif was also impressed. In his earlier two terms as prime minister he was known for his penchant for selling state organizations. And now as he starts a record third term, noises emanating from the corridors of power allude once again to an impending wave of privatization.
But is privatization a panacea? If a state organization is losing money or performing poorly, is selling it to private investors the solution? And, in the context of Pakistan, does privatization make sense for poor countries?
In examining these questions a distinction needs to be made between nationalized industries and public utilities.
In the early 1970s then Prime Minister Zufiqar Ali Bhutto initiated a wave of indiscriminate nationalization of the private sector. This brought into public ownership thousands of factories ranging from small flourmills to heavy engineering works. In doing so he did irreparable damage to Pakistan’s economy. There is very little logic or justification for the government, any government, to be in the business of running factories. And the government of Pakistan has done well to return nationalized factories to private ownership.
But privatization, as distinct from de-nationalization of industry, is another matter. Privatization calls for the transfer to private ownership of public service companies that have always been government owned. The term “public service companies” is used here in a broad sense to include public utilities such as power generation and distribution, intercity rail, urban transport, water supply, roads and the national airline.
The justification for privatization is straightforward and oft-repeated: Privatization promotes efficiency, customer service is improved and the government gets a large injection of cash to meet its escalating debt obligations. But no mention is made of the cost to the consumer. It is clear that private investors who acquire a public service company do so with the view to making a profit. Simply improving efficiency by cutting headcount and streamlining operations is not generally sufficient to generate a market based return on their investment. This inevitably means raising prices charged to consumers.
In rich countries, such as the UK with a per capita income of $28,000, even a substantial increase in the cost of public services, such as electricity or a railway ticket, can only have a marginal impact on consumers. In poor Pakistan, with a per capita income of $1100, it can mean a family going without electricity or being obliged to forgo even essential travel.
It would seem that in poor countries public service companies should not be operated to generate a profit but precisely to provide the great majority of the general public with a service that they would otherwise not be able to afford. Indeed if these services are provided efficiently, intelligently and without waste, pilferage and misfeasance then there is a good chance that they can be provided without loss to the exchequer. And even if loss is inevitable, the government has to assume responsibility and choices have to be made. Governments are empowered to use the fiscal system to redistribute income in a way that equitably serves all of its citizens. What governments cannot do is to throw up their hands and say: Privatize!
There is also the issue of financing. The asset values of Pakistani public service companies are very large compared to the typical average asset values of private sector companies. Compound this with the small size and sophistication of existing capital market intermediaries, such as the local stock exchanges, and it becomes clear that any substantial privatization is difficult to fund from domestic resources. Money must come from either, already overextended local banks, or foreign investors.
Foreign investors are a matter of particular concern. Public service companies in addition to providing essential services at affordable rates are tools through which the government can develop, control and implement industrial and development policy. If a certain industry, for example, is deemed important it can be charged for power at a lower rate to encourage its development. Or, if the government determines for political, economic or strategic reasons that a certain remote region should be developed, then rail service can be extended to it. Clearly such actions cannot be taken by foreign or even local private owners who are interested in maximizing their profits not in providing loss-making services to support the broad national interests of the host government.