Is privatisation a panacea?

In the most simple terms, privatization means the selling of government-owned businesses and assets to the private sector.

Thanks to the massive corruption of ‘mismanagement’ over the years of the state-owned enterprises (SOEs), it has almost become fashionable to believe that if the ailing asset is jettisoned from the books of the government, it will lead to a profitable adventure for both the government and the private sector.

Such thought process precedes any sound analysis; hence is entrenched almost conclusively that private sector companies are better than public sector enterprises. Nay, it isn’t so.

Governments in developing countries, especially those with precarious economic stability, resort to privatization with the hope that the major benefit to the country will be a reduction in public sector debt. Rarely does anyone indulge into walking through the maze of mis-management that leads to creation of debt of the state institutions.

Organisations borrow not merely to sustain growth but to enhance productivity, profitability and growth. So, if institutions have debt on their books, where are the matching assets? The fundamental question is where was the debt deployed? If debt is obtained for operating expenditure, it may not create enough revenue streams.

The borrowing of short-term nature, which is working capital, mustn’t be confused with long-term debt obtained to make the business viable. Economics is not about one-night stand. If the debt is misused for administrative and daily operating expenses, is it anything to do with ‘ownership’? Or, is it a reflection of the ‘quality of management’ deployed to run the state owned entity?

Privatisation presumes that the ‘State’ is incapable to conduct business; this is mostly true, running business should not be the business of the State. But once a decision has been taken to create a business enterprise in the domain of the public sector, the requirement is to place the management in the hands of ‘professionals’ who are not only trained but have the experience of having run similar businesses.

A failure to do so doesn’t make privatisation look attractive, charming and economically seductive form of ownership.

Businesses are undertaken for profit. Governments are generally expected to provide ‘services’ to the populace without a profit motive. But again once it decides to keep some sectors of the economy under public ownership domain it must meet the litmus test of being a profitable venture.

The expectations from privatisation stem from lapses of judgment by the bureaucrats who are nominated to manage business of the government. Ask any student of economics what are the benefits of privatisation; they would rant off: it increases business efficiency, it helps introduce new technologies, it puts in place policies to counter privatization - all of these and other such types of issues relate to management of businesses and are not issues of the ownership.

Resources inherently are scarce. And government resources are even more limited, especially where parallel economy is either equal to or is more than formal economy. Consequently, once the SOEs start to make losses, repeatedly, year after year, they dig into scarce resources for keeping the entity afloat.

The losses are a consequence of either misreading markets or just stupidity of whimsical decision-making. In some cases due to inertia, there’s inability to take a decisive action on the moment. Management inertia is not the result of who owns the enterprise!

Immediately after the disastrous nationalisation of key industries in the 1970s, the demand for privatisation of these very entities had begun. What the socialist-oriented government wished to achieve through nationalisation was failed by corruptive minds. Nepotism and favouritism took roots in the SOEs.

What essentially was operating profitably was ruined through wrong (deliberate) human resources policy. The Boards formed were members who were either square pegs in round holes or were driven by political agenda. Boards that are subservient to the dictates of ownership, be it the State or private sector, invariably end up as “liabilities” to sell.

In the wake of sale of such type of assets (read liability) the seller (government) has to concede yards and miles of negotiating ability for a better price in favour of the buyer. The privatisation of the national airline is a case in point. The “sweeteners” are an endless wishlist.

Commercial banks (nationalised) were suffering huge losses during the eighties and the nineties. Today, they are making vulgar profits, which are slated to be over Rs 100 billion, each year. So what’s different now? Is it mere transfer of ownership? Or, is there something more that we in our collective foolishness wish to ignore and overlook? What has privatisation of banks brought to the table a massive injection of Capital? No.

The differentiating factor is deployment of professional management that subscribes to good governance, where they do not allow interference, either from the Owners or the State. The professional management operates with independence. There is no more political loaning or hordes of hiring of substandard quality of human resources. That’s all.

The government only needs to decide to stop influencing the operations of state-owned institutions. Why can’t this be done? It requires a resolute resolution not to tinker with their businesses. For the misdeeds of government interference we lend credence and respect to privatisation. To achieve and ensure independence and an equally effective oversight, the Boards must be constituted of professionals alongside strong regulatory framework, which must remain non-negotiable, all the time.

Of all the privatisation done thus far, where have the proceeds been deployed? Sunk into the bottomless pit of debt management? Did we sell an ‘asset’ to create a ‘new asset’ or merely indulged in lavish expenditure; we can still call it ‘debt management’!

If a family refrains from selling its silver, how can a country do so with persistent vengeance? To save the SOEs from losses, we must put in place a professional management to run the enterprise as per prevalent business models; it will start to earn its own growth.

Failure, if any, must be met with strong system of accountability, coupled with change in management and not of ownership. We take the longest time for arranging ‘corporate funerals’. In the parlance of treasury operations, we must be quick to cut the losses. Learn to bite the bullet with speed.

No nation should sell its strategic assets. We try to solve problems of today by constructing problems for the future. If the entity is not viable shut it down.

Copyright Business Recorder, 2026