Divestment versus privatisation

Government stalwarts are at great pains to distinguish between divestment and privatisation. The reason: Senator Raza Rabbani, Pakistan People's Party (PPP) parliamentarian, has repeatedly stated that his party will not support privatisation - a party whose support the government feels it requires given the perceived threat due to the ongoing Pakistan Tehreek-e-Insaf (PTI) jalsas. By proposing divestment instead, PML-N decision-makers' reckon, PPP concerns would be allayed. Is the PML-N surmise correct?
Divestment is defined as a share sale, which would leave control of the entity in the hands of the government while privatisation envisages transfer of ownership to whoever purchases the majority shares. Privatisation thus implies a change in ownership with management control passing on to the majority private sector shareholder(s) whose decisions would be premised mainly on financial considerations. But divestment does not mean that management control would necessarily remain with the government as a more professional independent management can be hired to deal with problems associated with over staffing, inappropriate financial decisions of the past especially with respect to procurement, using the entity as a recruitment centre or indeed following a policy of nepotism in hiring rather than basing it on merit.
The PML-N has been a major proponent of hiring professional management to turn the finances of state-owned entities (SOEs) around and in its election 2013 manifesto the party stated that "today several state-owned institutions like PIA, Railways and Pakistan Steel Mills, Wapda and other institutions are a major drag on Pakistan's economy. These loss-making entities are presently bleeding to the tune of 400 billion rupees per annum. Therefore reforming these state-owned institutions through a combination of privatisation and restructuring is fundamental." It is relevant to note that the manifesto does not mention divestment of profitable entities for example the proposed 10 percent share sale in OGDCL.
Restructuring as per the manifesto requires appointing "independent and professional boards who in turn will appoint competent CEOs of state enterprises. Professional competence and merit will be the only criteria for appointment of boards and CEOs." This approach must be fully supported, however, the PML-N government's operational policy in this regard since it formed the government is subject to one major flaw: the party leadership feels that it alone has the right and the capacity to determine the most appropriate individual to head any given SOE. This approach was initially challenged in the courts as being violative of the Chaudhry Iftikhar-led apex court's decision, but which since has been revised with the power of appointment granted to the executive.
The PML-N manifesto further commits to "stop every kind of political interference in the affairs of these enterprises," however, to fulfil this promise would require putting in place a mechanism that would ensure that appointments are made in a transparent manner, and which are delinked from the executive. It is unfortunate that while Prime Minister Nawaz Sharif did set up a three man commission consisting of men of integrity, as stipulated by the Iftikhar Chaudhry-led court, but then proceeded not to take their recommendations on board, which led to their unanimous resignation - a decision that simply reinforced their integrity.
During the current tenure of the PML-N government Raza Rabbani has emerged as the loudest PPP voice against the policy of privatisation. He, however, reflects the party position and in this context it is relevant to note that two former PPPP prime ministers, including the party chair Benazir Bhutto, expressed pride in creating jobs, notably in the PIA, with no remorse over the fact that over staffing was a financial burden on the entity, which led to the need for massive budgetary bailouts. While such a policy has been PPP-specific, however, it is noteworthy that the incumbent government too has engaged in making appointments at well above the market salary to their chosen few.
Be that as it may, Rabbani's concern is premised on the possibility of large-scale downsizing by a private sector management. Ignored is the fact that the financial cost of not downsizing these monoliths has been as high as 400 billion rupees per annum - money that could be better spent on providing housing to labour as well as other public sector projects that would generate employment.
While economists would, by and large, support the PML-N manifesto in this regard, which has not been adhered to, yet to come to an informed opinion it is also critical to determine where the proceeds of privatisation would be spent. In the past the PML-N government spent the proceeds not on any deficient sector, say energy, but on a budget whose allocations many argue, continue to be flawed. In this context it is disturbing to note that the Budget 2014-15 documents maintain that the share of current expenditure in total budgetary outlay for the current year is 80.5 percent compared to 78.8 percent in the revised estimates for 2013-14. And given that current expenditure invariably exceeds the budgeted allocation it is expected that this percentage rise may be even higher. Thus given expenditure allocations and sustained failure to raise the tax to Gross Domestic Product ratio through taxing the rich privatisation proceeds would really not make too much of a difference as past privatizations have shown, though restructuring is certainly urgently required to turn loss-making units around.