Privatization in Pakistan: Is it enough?

On November 16th, Pakistan’s privatization commission instructed officials to guarantee that the process of privatizing loss-making state-owned enterprises moves at a “fast pace.”

But is privatization in Pakistan enough to make the structural changes the economy needs?

First, let’s explain what privatization is.

What is privatization?

In simple words, when a government-owned firm, enterprise, or property is privatized, it is acquired by a private, non-government party.

Privatization of certain government activities occurs in several ways, but in general, the government transfers control of specific assets or operations to a for-profit private enterprise. In general, privatization assists governments in saving money and increasing efficiency.

The need for privatization

For years, many of Pakistan’s SOEs (state-owned businesses) have been losing money due to a difficult combination of overstaffing, bad administration, mismanagement, corruption, and entrenched interests. The government faces a major struggle to revive its finances.

For instance, in September of this year, a group under Pakistan’s government utilized temporary authority to employ financial experts to arrange the privatization of Pakistan International Airlines (PIA) over the following four months.

The decision was made as PIA continues to incur massive losses, which are expected to total 153 billion rupees ($550 million) in 2023 alone. Since 2012, PIA has lost $7.1 billion.

With the government short on finances and racing to put out economic catastrophes, the International Monetary Fund is putting pressure on Pakistan to reorganize loss-making state-owned firms like PIA under a $3 billion standby loan agreement.

The internal sources

IMF is not the only player that is pushing for the privatization drive in the country. There are plenty of internal factors that want privatization in Pakistan.

To begin, there is stress about the budgetary situation, with continuous government deficits. The popular wisdom assigns a significant percentage of these deficits to losses experienced by state firms, giving rise to the notion that a privatization program may alleviate budgetary constraints.

Second, internal pressure is based on ideologies about the function of the state. In the late 1980s, economic theory was centered on themes such as government failure and market effectiveness.

Furthermore, pressure is coming from the business sector, which is motivated by the potential to generate big financial advantages through privatization agreements.

Is privatization in Pakistan the holy cure?

In the paper published in 2017, Privatization in the Land of Believers by Kamal Munir and Natalya Naqvi said that privatization programs have had mixed success at best since the 1980s, and foreign financial institutions continue to prescribe privatization as a cure for developing countries.

In the 1990s, privatization was carried out in two main economic sectors in Pakistan: energy and banking.

The privatizations did not work not only in terms of their stated goals, resulting in a decrease in national productive capacities, but also had negative distributional implications, shifting the benefits to the buyers while the risks and expenses were still with the public sector.

Also, the poor results of the privatizations went largely unopposed, aided by a prevailing neoliberal view among the country’s economic policymakers and the elite.

So, should Pakistan privatize?

Privatization may be viewed as essential, but it will not be sufficient to provide the efficiency advantages claimed by its supporters.

Privatization’s apparent success in decreasing the budget deficit may be overstated, owing to the private sector’s reliance on subsidies to maintain efficiency both locally and in overseas markets.

The eventual success of privatization is determined by the structure of Pakistan’s private sector rather than by ownership of any one enterprise.

So, privatization in Pakistan alone won’t fix all the problems. A comprehensive plan that includes strong regulatory and structural reforms as well as a better incentive system is critical.

This method not only helps small and medium-sized businesses expand, but it also inspires individuals to start new businesses.

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