Interdisciplinary Journal of Research in Business

Vol. 1, Issue. 4, April 2011(pp.101-106)

Privatization in Emerging Markets: Pakistans Perspective

Mubbsher Munawar Khan (khanmubbsher@hotmail.com)
Assistant Professor, Hailey College of Commerce, University of the Punjab, Pakistan

Muhammad ZafarYaqub
Center for Business Studies, University of Vienna

Farida Faisal
Assistant Professor, Hailey College of Commerce, University of the Punjab, Pakistan

Muhammad Asim Khan

ABSTRACT Privatization is the catch word in the world now days. Alarge number of developed economies, emerging markets and under developed countries have gone through liberalizingof their SOE (State Owned Enterprises) with an intention to create more opportunities for investment in the country and to achieve sustainable growth of industrial sector. In Pakistan privatization started in the era of General Zia, and carriedon by successive regimes. This conceptual paper throws light on the process and consequences of privatization while quoting Pakistans experience. 1. INTRODUCTION

Privatization has been discussed by various authors in various ways; some more convincing thought follow as:privatization is the process of shifting assets from public possession to private ownership and/or relocating the organization of a service or activity from the government to the private sector(Jeffrey M. Schoenberg, 2006). Privatization is recommended in many cases like: agency problem prevailing in the public sector, significant market failures, and government interventions etc. (Yarrow, 1991).Privatization is intended for planned development, welfare of country and economic growth, which became quite visible in both developed and developing nations during the period between the 1950s and 1970s(Haque, 2000).Privatization aims at opening such Governmental enterprises to private participation that have been previously prohibited by law. Their objectives include removal of political and bureaucratic management from public sector, an end to investment restrictions in certain strategic agencies and doing away with such policies which restrict competition. 2. HISTORICAL PROSPECTIVE

The world economies have gone through many experiences. Seventy years back there was much praise and appreciation for nationalization, impressed by the wave of Socialism in the world which was considered to be the panacea for all ills. But as Socialism collapsed nationalization also flopped. In privatization, people are supposed to run the industrial or commercial enterprises instead of government whose role is confined to regulate the economy. In developing countries throughout the world, privatization is used as an instrument for development and bringing significant financial resources to the industry (Mehdi, 1991). Over the last thirty years the privatization has been experienced in Japan and Western Europe. In UK, during the late 1970s and early 1980s privatization of several national assets took place during Margaret Thatchers administration. The partial sale of British Petroleum in 1979began this privatization movement, followed by the sale of an airplane company (British Aerospace), a radiochemical group (Amersham International) in 1981,and a freight company (National Freight Company) in 1982. Privatization continued with the selling of Jaguar Cars, British Ports, British Telecom, and Britoil in the mid-1980s. In 1987, the British airways, was privatized with an initial public offering (IPO). During the mid-1980s Japan also adopted privatization;in 1984salt and tobacco industries were privatized, followed by the sale of its railway and telephone service in 1986(Jeffrey M. Schoenberg, 2006). Economies of different nations are adopting privatization in order to develop their economic structure.

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3.

PRIVATIZATION IN PAKISTAN

In Pakistan the decade of 1970s observed enormous transfer of business assets from the private to the public ownership. The logic presented by the then Government is increasing rich poor gap and wealth being concentrated into a few hands(Husain, 2005).All important industries like sugar, cement, textile, chemical and even rice and flour mills were nationalized. After the reign of Zulifqar Ali Bhutto, next government started realizing the importance of private sector and industries started to be given back to the previous owner. In the era of General Zia, three units namely Nowshera Engineering, Ittefaq Foundary and Halal Vegetables were given back tothe control of previous owners, on the other hand cement and fertilizers factories were privatized. Vegetable Ghee Denationalization Order was passed to denationalize cooking oil factories(Shahid-ur-Rahman). But, denationalization was restricted to certain sectors only. Large scale industries, financial sector, banks, insurance, air travel etc. still remained in the hands of government. In theearly nineties Privatization of public sector banks and other liberalization measures were announced to revive the financial system of the country(Khalid, 2006). Regime of Benazir Bhuttoalso recognized the importance of privatization by selling public sectorbanks shares to the general public. During the mid-eighties, an effort to privatize state owned enterprises was made butin 1988,selling of 14 sick industrial units did not succeed. Similarly, in 1990,out of the sixprofit-making concerns recognized for partial privatizing, only 10 per cent sharesof Pakistan International Airlines could be sold. Former Prime Minister Nawaz Sharif took the matter more seriously. As he himself belonged to a business family he could well appreciated the importance and advantages of private sector. His government streamlined a broad based program for disinvestment of public sector enterprises in order to invite the public in the sectors which were earlier considered taboo for them. A committee for disinvestment and deregulation was constituted which pinpointed the Factories to be denationalized. This committee was then turned into privatization commission. In January 22, 1991a Privatization Commission was established, which offered four banks, two development financial institutions, and 105industrial units for sale (Kemal, 2000).Denationalization procedure started through different methodologies. It included open bidding and closed offers etc. Some factories were purchased by single-groups and other through consortiums of different groups. Not only the prices offered were kept in mind but also the business experience and the reputation were questioned. Employers and previous owners were given preference. Examples of United Bank Limited and Millat Tractor Limited can be cited in this regard. Interest of employees was also safeguarded, they were given ten years employment guarantee or Golden Shake Hand if an employee wants to leave before ten years he was given handsome pecuniary benefits.An Asian Development Bank report quoted there is a relatively strong commitment to privatization in Pakistan with a policy of Government withdrawing from activities which could better be performed by the private sector(ADB, 1998). Table I. summarizes the privatization transactions in Pakistan since 1991 till June,2010.

4.

PERFORMANCE OF BANKING SECTOR BEFORE AND AFTER PRIVATIZATION

Banking sector serves as backbone of the economy. In early 1970s, nationalization of banks started under Banks Nationalization Act 1974. And all banks were grouped into 6 big national commercial banks and many specific credit organizations. Many financial sector reforms were executed in 1990s. Up to the year 2000, 31 private and foreign banks were competing with 8 public banks with their share in total banking assets dropped to 70% (Abid A. Barki, 2003). Privatization resulted in the better quality; better availability and larger assortment of productsin the case of Pakistan (ADB, 1998). As shown in Table II, banking sector in the country demonstrated a sustainable growth after being privatized. Two state owned banks, MCB and ABL depicted remarkable efficiency after privatization.(Khan & Kamal, 2006) 5. FUTURE PRIVATIZATION IN PAKISTAN

The last privatization transaction was the sale of International Advertising (Pvt) Ltd. This was sold for Rs.5 million to EMG in April 2005.After this transaction no privatizations are witnessed in the country. Highly recommended candidates for privatization are eight public sector entities (PSEs), making an annual loss of around Rs200 billion.

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These eight corporations include: Pakistan International Airlines (PIA), Pakistan Electric Power Company (Pepco), Pakistan Steel, Pakistan Railways, Utility Stores Corporation (USC), and National Highway Authority (NHA), Trading Corporation of Pakistan (TCP) and Pakistan Agricultural Storage and Services Corporation (PASSCO). Though the present government wants privatization of these loss making units on urgent basis, yet it has not been succeeded in convincing all the stake holders like judiciary, cabinet, employees and trade unions of the concerned corporations. Resistance by employees of these corporations is the major hindrance in the process of privatization.

DISCUSSION Developed countries like: United Kingdom, Spain, Canada, Australia and Italy along with developing countries like Malaysia. Sri Lanka. Tongo and Chile have experienced privatization. There are lessons to learn from their experience. But perhaps single most influential exponent of privatization has been Margaret Thatcher in recent years. Her successful program not only turned around loss making units but also achieved more consumer satisfaction through better performance of newly privatized industries. It was an example which led many third world countries in the Eastern Bloc to emulate. In her own words as declared in the book The downing street years Mrs. Thatcher writes Through privatization the states power is reduced and the power of people increased. When the industries are given in the private hands their performance is increased manifold. Private entrepreneur has the incentive and derive because of personal interest. He leaves no stone unturned to improve the performance, production, working environment and profitability of the concern. In this way a sense of competition develops in the members of same industry or trade which ultimately benefit the consumer. In this way consumer is able to buy better quality goods at cheaper prices. Similarly employees are given better wages and salaries in order to improve their productivity and retentionin the business. Entrepreneur is an experienced man of his field and he knows how to make it profitable. As the quantum of trade & Industry increases, share of the government in the shape of taxes also increases. Wherever the experiment of privatization of public sector has been conducted it brought fruits of welfare and prosperity for economy and the nation as a whole. On the whole, mixed results are observed from the privatization process in Pakistan. In some sectors like automobile, power generation, financial and cement, the performance of the privatized units is appreciable. New management is successful in improving not only the quality of products and services but also financial health of the concerns. However, in some other sectors like roti plants and edible oil privatization experience has not gone very promising (Bokhari, 1998). Nationalization of industries and commerce has always resulted in chaos, turmoil and disaster for the economy. This important sector is rested in the hands of bureaucrats who do not have any business acumen. Business needs special insight and foresight which come with experience, certainly government office are devoid of it. They try to run the offers of the business as routine office work. Decision making is centralized which deny immediate decision making. Through delays in decision making chances of profit are lost. All the public sector enterprises are over employed which are constant burden on meager profits. Employees consider themselves government servants with a peculiar permanency in mind. They are usually sluggish, incompetent agitating and have a specific mindset. On the other hand there is no personal incentive at any stage to run the business successfully. Resultantly products and services cannot withstand competition. Often they need to be subsidized by the government. Most of the public sector industries run into losses which are ultimately being born by the government. Absence of healthy competition result into inferior goods so the choice spectrum of consumer in also reduced. Moreover, as the public sector industries remain static, there is negative development which is unable to absorb more employees. RECOMMENDATIONS In developing world state owned enterprises are the manifestation of great inadequacy; they usually fail to deliver the social benefits they were established to provide, privatization is a solution to these problems(Trebilcock, 2001).Although privatization is beneficial for the country but its application needs due care and diligence as for example privatization programs of large-scale bank witnessed an outcome generally positive in an economic sense, but challenging politically(Megginson, 2005). So, privatization process should be transparent, owner ship should be spread to the masses, and methodology adopted should be well debated and carefully looked into. Bang,( 2007)

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opines that privatization mechanisms become proficient governments budget is stressed and when the present capital markets are bottomless. Government at the time of denationalization may keep similar industries under its own patronage to provide an automatic check on the private sector and resist exploitation. Trebilcock (2001) suggests that a developing country must design a privatization reform strategy, most suited to its own political and economic environment. In our opinion, any future privatization in Pakistan should take into account a few suggestions: share ownership must be dispersed to the maximum, hastily erected consortiums should not be given priority for transferring management control, privatization methodology be scrutinized to meet the needs of the industry being privatized, most importantly sale proceeds be judiciously utilized. In the previous government these proceeds were considered as a boon. It can be utilized to pay back internal and external debts of the country.

REFERENCES 1. 2. 3. 4. 5. Bang, J. T. (2007). Determinants of the method of sale in privatization. Economic Systems, Vol: 31, pp. 272-291 . Bokhari, S. A.-u.-H. (1998). History and Evolution of Privatisation in Pakistan. National Seminar on Privatisation. International Labour Organisation and Pakistan National Federation of Trade Unions. Bonaccorsi di Patti, Emilia and Daniel Hardy (2003). Bank Reform and Bank Efficiency in Pakistan. Presented at World Bank Conference on Bank Privatization, Nov. 20-21. Haque, M. S. (2000). Privatization in Developing Countries: Formal Causes, Critical Reasons, and Adverse Impacts. Privatization or Public Enterprise Reform? pp.217-238 . Husain, I. (2005). Why Privatization is Necessary for Economic Growth in Pakistan? Address of the State Bank Governor delivered as Chief Guest at the 11th Get Together of the Overseas Universities Alumni Club and the 21st Century Business & Economics Club on August 12, 2005 at Karachi. Impact Analysis of Privatization in Pakistan, (1998).Asian Develpment Bank, pp. 1-121. Jeffrey M. Schoenberg, T. R. (2006). Government Privatization History, Examples, and Issues. Illinois: Commission on Government Forecasting and Accountability. Kemal, D. A. (2000). Privatization in Pakistan.Privatization in South Asia, Minimizing Negative Social Effects through Restructuringpp. 143-173, South Asia Multidiscipilnary Advisory Team (SAAT) International Labour Organization (ILO).New Delhi, India Khalid, U. (2006). The Effect of Privatization and Liberalization on Banking Sector Performance in Pakistan. SBP Research Bulletin Vol: 2 (2) pp. 403-425 . Khan, B., & Kamal, S. (2006). Does privatization improve efficiency? (A Case Study of MCB and ABL). Gomal University Journal of Research Vol:22 (2) pp. 75-80 . Megginson, W. L. (2005). The economics of bank privatization. Journal of Banking & Finance Vol: 29 pp. 1931-1980 . Mehdi, I. (1991). Privatization-A Device for Reforming Public Enterprise Sector in Pakistan. The Pakistan Development Review Vol: 30 (4) pp. 895-905 . Progress to Date. (2010). Retrieved 05 19, 2010, from Privitisation Commission: http://www.privatisation.gov.pk/about/Progress-in-PC%28latest%29.htm Shahid-ur-Rahman. Who Owns Pakistan? Retrieved 05, 18, 2011, from http://www.haqeeqat.org: http://www.haqeeqat.org/ext/articles/Who-Owns-Pakistan.pdf Trebilcock, D. A. (2001). State-Owned Enterprises in Less Developed Countries: Privatization and Alternative Reform Strategies. European Journal of Law and Economics, Vol: 12, pp. 217252 . Yarrow, J. V. (1991). Economic Perspectives on Privatization. The Journal of Economic Perspectives, Vol: 5 (2) pp. 111-132 .

6. 7. 8.

9. 10. 11. 12. 13. 14. 15. 16.

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Table I

Source: Privatization Commission of Pakistan (Progress to date, 2010)

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Table II

Resource: (Khan & Kamal, 2006)

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