EDITORIAL: The World Bank has cautioned the government of the distinct possibility of litigation in divesting/ privatising state-owned entities through sale to foreign governments, advising instead to a gradual public offering of State shares through stock exchanges under a special oversight committee of parliament, which would require a regulatory framework to promote efficiency, investment and improve service delivery.
This standard multilateral suggestion ignores two patently evident features prevalent in Pakistan today. First, the National Assembly remains dissolved effective 9 August 2023 and till such a time as general elections are held in the country there is no National Assembly and therefore no parliamentary committee.
The Senate is still functional though half of the members will retire by March 2024, however, as the upper house of parliament it is representative of the strength of political parties in the National Assembly and provincial legislatures, which is likely to change subsequent to the general elections. This situation raises the prospect of a political party, especially one that is in opposition, challenging the process.
And second, the lead role in negotiating government to government contracts - foreign direct or portfolio investments - will be taken by Special Investment Facilitation Council (SIFC) and sector committees (with sector experts) staffed by senior members of the establishment as well as federal and provincial civilian administrations with the objective of ensuring a seamless process of approvals to facilitate within the shortest possible time (as opposed to the gradual offloading of state-owned shares suggested by the World Bank).
SIFC is projected to attract investment from friendly countries to the tune of around 25 billion dollars in the short term, though the duration of short term is not defined, and 100 billion dollars in the long run. It has been repeatedly cited as the perceived engine of growth for dealing with the ongoing ever-deepening economic impasse, which would eventually take the country out of its debt trap.
While one can fully support such an approach because red tape coupled with security issues have been a major deterrent to foreign investment inflows into Pakistan, yet, it must be borne in mind that domestic, economic and political factors are also critical determinants of foreign inflows from other governments/investors.
In the event that these factors are not prevalent as they clearly are not in Pakistan today, foreign investors may seek a more attractive country/location; however, in instances where investment in a specific entity is expected to provide a steady significant stream of future income, say a copper or gold mine extraction, then the foreign government/company may demand fiscal and monetary concessions that may not be in the long-term interests of the general public – an example being the power generation projects’ contracts signed during the PML-N (Pakistan Muslim League-Nawaz) government in 2013-18 which are the root cause of high electricity tariffs today and the low foreign exchange reserves’ position (attributable to former Finance Minister Ishaq Dar’s decision to artificially control the rupee dollar parity that led to 4 billion dollar lower remittance inflows in 2022-23) accounts for the failure of the government to pay for the fuel imports required to run many of these plants.
The World Bank, however, did not identify one other major factor that has caused unsuccessful privatisations in Pakistan: lack of empirical studies that not only must recommend how to deal with all mitigating factors but also take account of the loss of a future stream of income, if any, for the government; and more importantly to take appropriate measures to ensure that the sale does not create a monopoly for the purchaser that may well allow setting a price/tariff well above the income range of the average domestic consumers.
To cite the case of the power sector the government’s policy decision to provide a uniform administered tariff throughout the country has necessitated subsidies to not only the state operated companies in the sector but also the privatised K-Electric, which negates the very purpose of the privatisation process.
Privatisation as the way forward has been supported by administration after administration on the grounds that it would not only eliminate the nearly one trillion rupee annual budget support required but also help in reducing the country’s debt as per the stated policy with a positive impact on lowering the fiscal deficit that has been unsustainable for more than five years.
True but without the proper economic environment and without reading the fine print in all contracts before agreeing to terms that may have negative reverberations on the average consumer at some point in future is a recipe for disaster that may lead to more socio-economic unrest in times to come.
Copyright Business Recorder, 2023
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