Let private sector run the show

It’s not a myth that in Pakistan the government is poor while people are cash rich. The public debt is five times the private sector’s formal credit. There is little need to substantiate that private sector is efficient and public is inefficient. The government must engage private sector in running businesses currently operating in the public domain.

There is a perception in Islamabad – particularly among senior bureaucrats - that private players are rent seekers, and they abuse market. Yes, they do. But it is in fact a regulatory failure. Private sector anywhere in the world exploits regulatory gaps; it is the job of the regulator to ensure that does not happen. Regulatory failure cannot be blamed as market failure. Private sector should be given space. It’s efficient in resource allocation. And in a vibrant regulatory regime, rent seeking turns market into efficiency seeking.

The other argument against private sector running businesses is that they accumulate wealth, but the benefit is not passed on to rest of the population. Wealth consolidation is an issue, and it is a global problem. But the benefit is passed on to the economy at large in the form of efficiencies that private sector brings. And losses in the public domain result in paying that created wealth to the lenders as debt servicing.

Some have anti-business sentiments based on perception that there will be job losses once any public entity is given to private hands. That is not true. There is enough evidence that privatization in the 1990s and 2000s reaped fruits and created many new jobs. Yes, the deadwood in the public sector will lose but these would be replaced by higher number of efficient and capable employees. The argument of saving jobs by not privatizing is just like not using machinery or mechanization in any industry to save jobs.

Pick up any sector and see the benefits of privatization since the 1990s. Banking was plagued with willful defaults and jobs were offered on political whims. In the 1990s, the privatization and deregulation process started and there was no looking back since then. These banks are now profitable and have created tens of thousands of jobs. These are the biggest tax contributors in the country. There is no match in services.

Another example is cement sector. In the 1990s, when cement sector deregulation and privatization had started, the sector had a capacity of 9-10 million tons. Today, it is operating at 70 million and in two years it will cross 90 million tons. The sector is internationally competitive and exporting 8-10 million tons a year. The industry has moved from wet process to dry and moved from furnace oil to coal. Then they started using waste heat recovery and other efficient ways to reduce cost.

Yes, cement companies made profits and their motive is profit maximization. But in the process, billions of dollars were invested by the private sector. Numerous jobs were created. Consumers have benefited in terms of better pricing – inflation in cement prices is miniscule as compared to many other commodities. Prices in north region were between Rs500-600 per bag in 2015 and same is the case today. Just compare it with wheat, sugar or any other commodity’s price. Competition and improvement in processes have yielded those results. Yet today, the sector is in news due to its cartelization. Yes, cartel may exist. But that cartel in private sector is certainly better than operating inefficiently in public sector.

Telecom is another sector where privatization and deregulation have revolutionized the industry. Think about getting landline connection in the 1990s and compare it to buying a SIM card today. Yes, technology is paying dividends, and its private sector that has invested in technology for the betterment of all.

Fertilizer, edible oil, and many other industries boomed after privatization. Now look at the sectors operating in public domain. Country’s biggest economic headache is the circular debt in power sector. Here, deregulation and privatization in electricity and gas markets is being resisted for three decades. Wapda was unbundled in the 1990s, but the control is still in the hands of Power Division Islamabad. Discos are reeking with inefficiencies. Nepra’s regulatory structure is questionable.

In case of Sui gas distribution companies, they resist private sector in RLNG handling and distribution as they will lose market share. They have bureaucratic clout and influence on Ogra, the regulator, and other public decision makers. The reason is simple, as they fear competition from private sector. How can efficiency come when regulator and market operators collude to resist new entrants?

Bureaucracy loves control. That is human nature. Bureaucrats enjoy being on board of companies. They give employment favours to friends and family. Political actors do this in an ugly form. That control, public possession and weak regulation cost billions of dollars in the form of circular debt and expensive energy for all. That is the cost of regulatory capture.

Just compare SBP with Nepra. When SBP was under bureaucratic control, willful defaults were a norm. If IPPs are milking, one needs to ask Nepra why it allowed that absurd return structures to happen and how costs were artificially inflated. Nepra has four members representing each province. What do provinces have to do with regulation? Think what a mess it would be if monetary policy was also handled in a similar fashion.

The bottom line is that government should come out of running businesses and put its efforts in forming strong regulatory frameworks and have best people implement it. Let private sector take risks and earn returns. Let private sector innovate and make it beneficial for all.

Copyright Business Recorder, 2021