The Effects Of Privatisation On Government Economics Essay
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Published: Mon, 5 Dec 2016
Privatization is the act of reducing the role of government, or increasing the role of private sector, in an activity or in the ownership of assets. Privatization has been prescribed as a means of improving the efficiency and profitability of public enterprises, which are not performing well. The privatization of government owned enterprises is nowadays a large-scale process for the transfer of state owned enterprises to the private sector.
The major aim of this policy is to reduce the drain on the government resources, caused by the persistent losses of public enterprises, and to create greater opportunities for private investors to expand and modernize these enterprises with the aim of liberalizing the economic environment for rapid industrialization.
Privatisation of SOEs is a multi-faceted, complicated as well as politically and socially sensitive process. A well-devised privatisation plan of SOEs essentially takes care of all the stakeholders, which include labour, consumers, investors, government and the economy. It helps to promote capital, goods and labour markets in the country. The privatisation process in Pakistan has passed through different phases and it has been very instrumental to redefine the relationship of private and public business with the government institutions.
The concept of privatisation is not new to the policy makers of this country. It may be traced as back as in 50s, when Pakistan Industrial Development Corporation (PIDC) was established in 1952 to boost up the industrial development in the country. During the 50s and the 60s, public sector used to invest in non-traditional activities especially where the gestation period was long and
private sector was reluctant to invest. The tide of nationalisation, which swept the whole economy in the first half of 70s, was reversed in 1977.
While a large number of private sector units were nationalized and public sector expanded at a rapid rate in the 70s, an effort to divest public
sector enterprises were made during the mid-eighties. However, the efforts to divest shares
worth Rs 2 billion of various profit making public enterprises in the mid-eighties and 14 loss
making industrial units for divestiture in 1988 did not succeed. Similarly, out of the six
profit-making corporations identified for partial divestiture in 1990, only 10 per cent shares
of Pakistan International Airlines could be divested. The slow pace of privatization led to
the establishment of a Privatization Commission on January 22 1991, which offered 105
industrial units, four banks, and two development financial institutions for sale. Subsequently,
initiatives were undertaken for privatization of thermal power units of the Water and Power
Development Authority (WAPDA), private sector managment of some sections of Pakistan
partial divestiture of the Telecommunications Corporation of Pakistan (TCP).
Although the PC mandate initially restricted to industrial transactions, by 1993 it had expanded to also include Power, Oil & Gas, Transport (aviation, railways, ports and shipping), Telecommunications and Banking and Insurance. all the remaining manufacturing units with the exception
of Pakistan Steel, have been placed on the privatization list.
To date, Government of Pakistan had completed or approved 167 transactions at gross sale price of Rs 476.421 billion.
Some of the Recent examples are Kot Addu Power Plant (KAPCO), Oil & Gas Concessions, United Bank Limited, Habib Bank Limited, KESC and PTCL.
Objectives of privatization at different points in time have varied. During the period
1988-90, privatization was pursued to divest 14 loss making manufacturing units and raise
funds by selling shares of profit making units for retiring public debt and thus reducing debt
servicing (See Rothschild, 1990). Privatization Commission in 1991 did not explicitly spell
out the basic rationale for privatization. Nevertheless four major objectives that could be
discerned from various statements issued by the government are:
â€¢ Improvements in the level of efficiency in the production processes;
â€¢ Reduction in the debt burden of the government and fiscal deficit;
â€¢ Broad-basing equity capital; and
â€¢ Releasing resources for the physical and social infrastructures.
The objectives of privatization outlined in the publication cited in the privatization commission’s Mission statement are:
â€¢ Creation of market based economy
â€¢ Promoting the expansion and efficiency of private sector enterprises
â€¢ Encourage competition, specially by abolishing the monopolies and promote
integration of the domestic economy into the world economy
â€¢ Support wider capital ownership and encourage employee owner relationship
â€¢ Establish and develop capital markets for mobilization of domestic savings
â€¢ Reverse the flight of capital abroad and repatriate capital already transferred
â€¢ Mobilization of private sector resources for future investments
â€¢ Promote economic flexibility
â€¢ Maintain or create employment
â€¢ Improve the quality of goods and services
â€¢ Maximise receipts from privatization to pay off public debt and reduce the public
â€¢ Substantially reduce the size and scope of the public sector
â€¢ Substantially reduce the financial drain of public enterprises on the government
â€¢ Decrease the opportunities for misuse and corruption of public property by government
officials and public sector managers.
These objectives are indeed laudable but quite ambitious. Though, privatization is
neither necessary nor sufficient for realization of some of these. For example, mobilization
of savings, reversing the flight of capital and promotion of savings and investments do not
need privatization and they can not be achieved just by pursuit of privatization. In the
following we examine the arguments that privatization lead to reduction in fiscal deficit,
improvement in the efficiency levels, broad base the ownership and higher level of investment
in the physical and social infrastructures.
Reduction in fiscal deficit
Privatization in a perfectly competitive market with complete foresight may have no
impact on fiscal deficit because the expected sale price determined as the reserve price of
assets would be exactly equal to the discounted flow of net benefits. If the private sector
offers higher prices than the reserve price, fiscal deficit situation would improve. However,
the private sector’s willingness to do so, of course, depends upon the assessment of profits
in the post-privatization period and willingness to share the expected higher profits with the
Increase in the efficiency levels
While private producers are forced to reduce their cost to minimum for their survival,
public firms may not make sufficient efforts to reduce production costs as they are under no
compulsion to ensure an acceptable return to the equity holders. Similarly, private managers
have more flexibility in taking the decisions than the public sector firms. Moreover, public
investments may be influenced by political considerations, thus adversely affecting the
allocative efficiencies. While in a competitive framework, privatization would always help
in realising allocative efficiency, X-efficiency and non-market efficiency gains, in a
monopolistic framework this is not necessarily true. The cost in public monopoly at equilibrium
point may not be minimal unless it is effectively regulated. Whether privatization would
result in higher level
of efficiency or not is an empirical question. For conflicting evidence see Stigler (1975);
Wolf (1979), Baumol (1996) and Kemal (1996).
Releasing the resources for physical and social infrastructures
A well functioning and profit making public enterprises can also be divested for releasing
the resources for development of infrastructures if the resources for infrastructure are not
Broad-basing of ownership of equity capital
Broad-basing the ownership of equity capital is for the reasons of distributive justice.
But it presupposes that small investors have sufficient investible funds to buy the shares of
public industrial enterprises and that unless the public enterprises are divested shares are not
available to them. Both of these assumptions may not always be valid. Moreover, the
assumption is that allocating a part of the shares at face value for the workers would result
in improvement in the welfare for these workers.
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