Thursday, July 28, 2022
The cabinet has approved the ‘Inter-Governmental Commercial Transactions Ordinance, 2022’ which gives the federal government sweeping powers to privatize state assets. Surprisingly, there is a very little public discussion on the subject.
If the premise is that we have run out of options with regard to foreign reserves and that with friends not willing to deposit dollars and defer payments, we should enter into G2G agreements to divest state assets speedily to raise money to pay a debt, then this is not only farfetched in terms of timelines, and procedurally dangerous, but also a poorly conceived policy in a context of low stock value due to the current stock market plunge. And is contradictory to the State Bank of Pakistan’s recent statement, which has not raised any red flag, the merits of that statement notwithstanding.
If the premise is providing a legislative cover to facilitate bureaucrats, who have become risk averse with regard to decision-making owing to the manner in which policymaking has been subject to criminalization recently, then the ordinance has really gone too far out. It has eliminated all safeguards and has bypassed all procedures for selling assets, with unprecedented overriding of six laws.
The ordinance bars legal proceedings against those involved in selling assets and indemnity has been extended to procedural lapses or omission in performance. Similarly, no investigating agency or court can initiate inquiry into any procedural irregularity unless there exists “evidence” of personal monetary gain. There is also immunity for action taken in official capacity. Sweeping immunity coupled with ouster clauses and an exceptionally high standard of proof sets a dangerous precedent. Moreover, the ordinance raises many transparency concerns, as it opens doors for noncompetitive G2G arrangements and bypasses Public Procurement Regulatory Authority Rules for appointing transaction advisors.
Privatization must not be viewed through the narrow lens of sale of state enterprise to service debt. Privatization is deeply linked to the fundamental question of the role of the state in the economy. It is a policy choice, which a government can espouse to make the private sector the engine of growth with the understanding that the role of the government is to provide an enabling policy, impartial regulation, and a level playing field for market entities.
There must also be clarity about what a government can and cannot privatize. Policymaking and regulation are core government functions from which it cannot divest. Running an enterprise is not a core government role, unless there are exceptional circumstances, such as lack of incentive for the market to operate in an area or the pursuit of a strategic objective. Other than these exceptions, enterprise should be left to the market.
Pakistan has a long list of inefficient and parasitic public-sector enterprises (PSEs), which are outside the list of exceptions. Governments can either structurally reform them while continuing to exercise control or privatize them. For Pakistan, both options remain challenging. The country has a bad track record of PSE reform on the one hand and has also been unable to augment public confidence in the process of privatization, on the other.
The current state of PSEs is reflective of decades of poor governance, evidenced in crony appointments, recruitments without regard to competency or organizational needs, overstaffing, politically motivated postings, half-hearted action against collusive practices and lack of decision-making accountability. Despite trying, governments have not been able to structurally reform PSEs. Companies are disallowed to price properly, which leads to bad balance sheets and low value of shares.
Privatization can indeed be an option to reform many of the parasitic PSEs. External investors bring in discipline when they have a seat at the table; however, it is critical to protect public interest. The opponents of privatization are often not ideologically opposed to the idea but are fearful that transactions may be carried out in a non-transparent and unfair manner, state assets could be sold at throwaway prices, political cronies could be rewarded for allegiances, that in the process of ‘stabilizing’ these enterprises state resources may be unnecessarily spent and that strategic objectives could be compromised.
Before the next round of privatization is planned, we must draw on lessons from past experiences to gauge the magnitude of positive impact vis-à-vis foreign direct investment and employment opportunities versus monopolistic trends and collusion in valuation of assets. Privatization vests enormous power of patronage in governments and these concerns are a real risk.
How many privatized units actually functioned? What was the motivation of the buyers? There are reports that allege that the primary motivation in some of the privatization deals was to strip the assets of their real estate value. Have we prioritized privatization of the loss-making enterprises before putting the profit-making ones up for sale, which is a cardinal rule in privatization? Have we insulated sectors and organizations that are strategically dangerous and economically unjustifiable to privatize? When the government retained an influence in the PSE following privatization or management divestment, was the right accountability of state functionaries ensured who represented the government’s interest on the board? What about staff welfare?
The Pakistan post-privatization experience has been plagued by inconclusive resolution of labour issues, with the case of PTCL pensioners being illustrative. Was a shares’ ‘buy back’ option ever introduced in contracting arrangements? What kind of contractual weakness compromised public interest in the first place?
Privatization is an important economic policy tool, where decisions need to be taken on a case-to-case basis with regards to respective PSEs. Many can benefit from the policy but clarity of objectives, sound strategy and a transparent process are essential for its success. This involves identifying and resolving policy tradeoffs and choosing the right methods. Implementation involves decisions on the restructuring of PSEs prior to sale, creation of an appropriate regulatory framework for the privatized entity/mandate, a transparent mechanism to price assets and shares, and appropriate institutional capacity within the government for managing the transaction and its outcomes.
Privatization should best be pursued through multi-partisan consensus in a stable political context. Executed in haste, in a non-competitive manner, in a context of extreme political uncertainty, at a time of stock market crash, and under a ‘cover’ of sweeping ouster clauses, it is a recipe for disaster.
The writer is a senator and former SAPM. She tweets @SaniaNishtar
Originally published in The News