Ads by Google Public Schools Prison Privatization Tupe Definition Define Socialism

On this page

• Britannica Concise
• Investment
• Finance
• Biz Encyclopedia
• Political Dictionary
• US History
• Russian History
• Wikipedia
• Copyrights

Library

• Animal Life
• Business & Finance
• Entertainment & Arts
• Food & Cooking
• Health
• History, Politics, Society
• Home & Garden
• Law & Legal Issues
• Literature & Language
• Miscellaneous
• Religion & Spirituality
• Science
• Shopping
• Sports
• Technology
• Travel
• Q&A

Privatization

Britannica Concise Encyclopedia:

Privatization
Sponsored Links
World Bank on Finance
World Bank Chief Economist blogs on finance and development
allaboutfinance.worldbank.org/
Home > Library > Miscellaneous > Britannica Concise Encyclopedia
privatization
Transfer of government services or assets to the private sector. State-owned assets may
be sold to private owners, or statutory restrictions on competition between privately and
publicly owned enterprises may be lifted. Services formerly provided by government may
be contracted out. The objective is often to increase government efficiency;
implementation may affect government revenue either positively or negatively.
Privatization is the opposite of nationalization, a policy resorted to by governments that
want to keep the revenues from major industries, especially those that might otherwise be
controlled by foreign interests.

For more information on privatization, visit Britannica.com.

English▼

•
•

Search unanswered questions...

• Browse: Unanswered questions | Most-recent questions | Reference library

Enter a question or phrase...

Search: All sources Community Q&A Reference topics
 • Browse: Unanswered questions | New questions | New answers | Reference library

Related Videos:

Privatization
Top

0:43

Aid Process Differences...

1:03

Attending Private Or Public College And...

0:41

Money Awards From Private And Public...

 •

2:48

The Best Private Instant Messenger

Investment Dictionary:

Privatization
Top
Home > Library > Business & Finance > Investment Dictionary

1. The transfer of ownership of property or businesses from a government to a privately

owned entity.

2. The transition from a publicly traded and owned company to a company which is
privately owned and no longer trades publicly on a stock exchange. When a publicly
traded company becomes private, investors can no longer purchase a stake in that
company.

Investopedia Says:
1. One of the main arguments for the privatization of publicly owned operations is the
estimated increases in efficiency that can result from private ownership. The increased
efficiency is thought to come from the greater importance private owners tend to place on
profit maximization as compared to government, which tends to be less concerned about
profits.

2. Most companies start as private companies funded by a small group of investors. As

they grow in size, they will often access the equity market for financing or ownership
transfer through the sale of shares. In some cases, the process is subsequently reversed
when a group of investors or a private company purchases all of the shares in a public
company, making the company private and, therefore, removing it from the stock market.

Related Links:
What's an IPO, and how did everybody get so rich off them during the dotcom boom? We
give you the scoop. IPO Basics Tutorial
Sponsored Links
Bahamas Telecom
Official Website of the Bahamas Telecom Privatisation
www.btcprivatisation.com
Ask for Translation Quote
Translation and Localization Worldwide professional service
www.sentrodil.com
Financial & Investment Dictionary:

Privatization
Top
Home > Library > Business & Finance > Finance and Investment Dictionary

Process of converting a publicly operated enterprise into a privately owned and operated
entity. For example, many cities and states contract with private companies to run their
prison facilities instead of managing them with municipal personnel. Many countries
around the world have privatized formerly state-run enterprises such as banks, airlines,
steel companies, utilities, phone systems, and large manufacturers. A wave of
privatization swept through Russia and Eastern Europe after the fall of Communism in
the 1990s, and through some Latin American countries such as Peru, as new, democratic
governments were established. When a company is privatized, shares formerly owned by
the government, as well as management control, are sold to the public. The theory behind
privatization is that these enterprises run far more efficiently and offer better service to
customers when owned by stockholders instead of the government.

Sponsored Links
Learn English in Urdu
Now learn English Free at home online Notes in Urdu !
www.123freenet.com
Eastern Europe Travel
Destinations, Attractions, Hotels Discover Eastern Europe!
marvaoguide.com
Small Business Encyclopedia:

Privatization
Top
Home > Library > Business & Finance > Small Business Encyclopedia

Defined in the strictest of terms, privatization means the sale of public utilities to private
concerns. But as Public Works magazine noted, "in the broader sense of the term …and
the definition that applies to most contemporary discussions, privatization is the contract
operation of a public utility or service by a private entity. It most often occurs in solid
waste management, water/wastewater treatment, fleet maintenance, road/bridge building
and maintenance, and municipal management." Small businesses that provide services in
these and other areas (for-profit school academies, for instance) have been among the
biggest winners in the growing national trend toward privatization. As Public Works
commented, "opportunities abound for private concerns to offer to manage public
services with a close eye on cost and efficiency."

Privatization efforts in America today are in large part a reaction to dissatisfaction with
government performance and/or unhappiness with the level of taxation that is levied on
individuals and businesses by municipal, state, and federal governments to pay for
services. This trend has grassroots origins, with local governments in the forefront and
state and federal levels of government trailing behind. The purpose of privatization is to
take advantage of the perceived cost efficiencies of private firms. Indeed, proponents of
the practice say that privatization results in better performance of needed services at
lesser cost. "The government usually allows the firm to choose how it will satisfy the
contract," wrote Simon Hakim and Edwin Blackstone in American City and County. "For
example, a contract may specify trash removal services for the area residents a certain
number of times per week. The firm is normally allowed to choose the methods it will
use to perform the requirements of the contract, the trash trucks, used, and the number of
workers on each trash truck. The profit motive will encourage the firm to produce the
services efficiently at the least cost, a motive absent in government provision of
services." Even after privatization, however, government monitoring is necessary in order
to ensure that satisfactory services are provided to residents.

Growth of Privatization

"Privatization may be a popular buzzword today, but the concept has been around since
the first municipality hired Joe and his wagon to pick up the trash instead of getting city
employee Frank to do it," remarked Public Works. "The difference today is that
privatization is encroaching into all areas of public administration. And governments are
expecting public agencies to compete—dollar for dollar—with private operators or
surrender management of services. For years, our country has supported the idea that a
public workforce was the best provider of essential services. Public employees would
reliably and efficiently protect the public safety and deliver water and power; maintain
roads and bridges; collect refuse and treat sewage…. In return, public employees enjoyed
a certain job stability and a wide range of desirable benefits." But proliferating
responsibilities, fiscal belt-tightening, sometimes lackluster performance by workers, and
—in the cases of larger cities, especially—festering problems with infrastructure led
increasing numbers of city planners and public policy makers to look to privatization.

Today, several of the nation's largest cities, including New York, Indianapolis,
Philadelphia, and Phoenix have contracted out a broad spectrum of services that were
previously attended to exclusively by city employees. Indeed, New York City opened up
bidding from private companies on 40 different municipal services in 1995alone. Smaller
cities and towns have instituted outsourcing philosophies as well, and many service
businesses, both large and small, have garnered significant new contracts as a result.
American City and County reported that various analyses indicate that this trend will
likely continue. "Cost pressures, both internal and external, are rated as the most
important reasons that officials decided to privatize a service," stated a report on
privatization conducted by a coalition of Illinois academic, business, and municipal
groups. "The main obstacle is the lack of information or evidence of the benefits of
privatization. Many officials also report they would like more information on certain
aspects of privatization. It can be deduced that providing additional information on
privatization to city officials will lead to increased acceptance."

Variations in Privatization

The term privatization has been applied to three different methods of increasing the
activity of the private sector in providing public services: 1) private sector choice,
financing, and production of a service;2) public-sector choice and financing with private
sector production of the service selected; 3) and deregulation of private firms providing
services. In the first case, the entire responsibility for a service is transferred from the
public sector to the private sector, and individual consumers select and purchase the
amount of services they desire from private providers. For example, solid-waste
collection is provided by private firms in some communities. The third form of
privatization means that government reduces or eliminates the regulatory restrictions
imposed on private firms providing specific services.

The second version of privatization refers to joint activity of the public and private
sectors in providing services. In this case, consumers select and pay for the quantity and
type of service desired through government, which then contracts with private firms to
produce the desired amount and category of service. Although the government provides
for the service, a private firm carries out the actual execution of it. The government
determines the service level and pays the amount specified in the contract, but leaves
decisions about production decisions to the private firm.

Advantages and Disadvantages of Privatization

The merits and drawbacks of privatization have been subjects of considerable debate
among business-people, city leaders, and public employees alike. Indeed, each element of
privatization—from its apparent cost-saving properties to its possible negative impact on
minority workers—provokes strong reaction. About the only thing that everyone can
agree on is that the trend has been enormously beneficial to owners of small- and mid-
sized businesses. Following are some privatization issues that communities, public
providers, and private providers all need to consider:

Costs and Productivity

Proponents of privatization argue that whereas government producers have no incentive

to hold down production costs, private producers who contract with the government to
provide the service have more at stake, thus encouraging them to perform at a higher
level for lower cost. The lower the cost incurred by the firm in satisfying the contract, the
greater profit it makes. On the other hand, the absence of competition and profit
incentives in the public sector is not likely to result in cost minimization. Of course,
small- and mid-sized companies also need to make sure that they do not sacrifice an
acceptable profit margin in their zeal to secure a contract.

Although private firms may pay lower wages and fringe benefits than local governments,
the major cause of the cost differences between the private and governmental sectors is
employee productivity. Lower labor costs may arise either from lower wages (which
means that the government was paying wages higher than necessary for a given skill) or
from less labor input (which means that the government retaining more employees than
necessary to fulfill need). Private firms have more flexibility than governmental units to
use part-timers to meet peak periods of activity, to fire unsatisfactory workers, and to
allocate workers across a variety of tasks. Moreover, critics of municipal governments
argue that they are less likely to reward individual initiatives or punish aberrant behavior
when compared with their private sector counterparts.

Finally, supporters of privatization argue that the trend has spurred improvements in
performance by public service providers. "Evidence shows that public agencies should be
allowed to bid on contracts along with private operators," wrote Blackstone and Hakim,
"since this exposure to competition has led many public agencies to improve their service
delivery and significantly reduce costs."

Service. Expected quality of service varies from community to community, depending on

a wide range of factors such as historical service levels, local taxation, and possible
changes in service requirements. Moreover, Public Works observed that good service is
sometimes defined differently by citizens, public service providers, and private service
providers. "Response time and public confidence need to be taken into account when
judging the pros and cons of private/public," stated Public Works. "Stability may be a
concern in the eyes of the public; a government agency cannot walk away at the end of a
contract period."

Operating Philosophies. Proponents of privatization state that private firms may be more
likely to experiment with different and creative approaches to service provision, whereas
government tends to stick with the current approach since changes often create political
difficulties for elected officials. In addition, private firms may use retained earnings to
finance research or to purchase new capital equipment that lowers unit production costs.
On the other hand, government may not be able or willing to allocate tax revenues to
these purposes as easily, given the many competing demands on the government's
budget.

Regulatory Realities. In some cases, local, state, and federal regulations may determine
whether a service can even be handed over to a private provider. Moreover, "the ultimate
responsibility (in the eyes of the public, if not the courts) rests with the public agency that
assigns operating rights to a private concern," stated Public Works. "The local
government will still be held responsible for the cost and quality of the service under
contract."
Competition. Supporters of privatization often cite the competitive environment that is
nourished by the practice as a key to its success. Private owners have a strong incentive
to operate efficiently, they argue, while this incentive is lacking under public ownership.
If private firms spend more money and employ more people to do the same amount of
work, competition will lead to lower margins, lost customers, and decreased profits. The
disciplining effect of competition does not occur in the public sector. Still, even
advocates of privatization agree that private ownership produces the public benefits of
lower costs and high quality only in the presence of a competitive environment.
Privatization cannot be expected to produce these same benefits if competition is absent.
Given this reality, analysts strongly encourage municipal governments to make sure that
the bidding process is an ethical one.

Monitoring and Enforcement. Critics of privatization of government services contend that

problems sometimes arise in various aspects of the process, including the bidding
process, the precise specification of the contract, and the monitoring and enforcement of
the contract. For example, some observers have raised concerns that potential suppliers
may initially offer a price to the government that is less than actual production costs to
induce the government to transfer the service to the private sector or to win the contract.
Subsequently, the contractor would then demand a higher price after the government has
dismantled its own production system. Such "low-balling" in the bidding process may be
reduced if the local government requires relatively long-term contracts, or constructs
contracts that give them flexibility in hiring and firing outside firms.

Public Personnel Management magazine also noted that governments need to take
several important precautions before handing out a contract in order to avoid litigation
and legal liability. These precautions include detailed performance specifications for
service providers, guidelines for the evaluation of competitive bids, and labor relations
strategies. For their part, private bidders need to make certain that these precautions are
reasonable ones that will not unduly impact their ability to perform both profitably and
professionally.

Commonly utilized methods of contract monitoring, meanwhile, include performance

appraisals, tracking complaints, citizen satisfaction surveys, reports from contractors,
field observations, and ongoing cost comparisons.

Employment. Privatization is understandably viewed as an alarming trend by public

employee groups. In some cases, privatization results in layoffs of public sector
employees, although governments often reassign them to other government jobs, place
them with private contractors, or offer them early retirement programs. These
possibilities have been particularly upsetting to public employee unions, which have been
at the forefront of efforts to block privatization. Indeed, one of the principal objections to
privatization is that it replaces positions that featured compensation that could be used to
support a family with private sector spots that offer modest compensation. Indeed, critics
such as the Journal of Commerce and Commercial's David Morris contend that private
companies are only able to promise meaningful financial savings over public agencies
because of the comparatively low salaries they pay their workers. Another charge leveled
at privatization initiatives is that they too often have a disproportionate impact on
minorities. "Governments often hire minorities in larger proportions than other workers,"
wrote Blackstone and Hakim. "Thus, if government size is reduced, relatively more
minority workers are likely to lose their jobs." In recognition of these fears, some service
contracts now require private contractors to hire affected public employees or give them
hiring preference.

Demographic and Geographic Factors. Smaller municipalities may incur relatively high
unit costs if they operate their own services as a result of not being able to achieve
economies of scale. These localities may benefit from turning to a contractor that serves
multiple communities. Privatization is also more acceptable in fast-growing communities.
If services are being expanded to cover new residents, private contractors are less likely
to displace existing public sector employees. Finally, contracting out varies with the
number of services provided to residents. As the number of services increases,
differences in the cost and effectiveness with which they are provided become more
apparent. Therefore, municipalities providing diverse services may be more open to
exploring private sector options than those localities where services are more limited.

Further Reading:

Blackstone, Edwin, and Simon Hakim. "Private Ayes: A Tale of Four Cities." American
City and County. February 1997.

Elam, L.B. "Reinventing Government Privatization Style—Avoiding the Legal Pitfalls of

Replacing Civil Servants with Contract Providers." Public Personnel Management.
Spring 1997.

Kodrzycki, Yolanda. "Privatization of Local Government Services: Lessons for New

England." New England Economic Review. May/June, 1994.

Layne, Judy. "An Overview of the Privatization Debate." Optimum. June 2000.

Lieberman, Ira W. "Privatization: The Theme of the 1990s—An Overview." Columbia

Journal of World Business. Spring 1993.

Morris, David. "The Downside of Privatization." Journal of Commerce and Commercial.

February 9, 1996.

"Private/Public Partnership: A Balancing Act." Public Works. September 1997.

Schine, Eric. "America's New Watchword: If It Moves, Privatize It." Business Week.
December 12, 1994.

Schriener, Judy, Stephen H. Daniels, and William J. Angelo. "Gold in the Hills of
Privatization." ENR.. October 24, 1994.
Sturdivant, John N. "Privatization: It Often Doesn't Work, Increases Costs and Lacks
Accountability." Site Selection. April 1996.

Political Dictionary:

privatization
Top
Home > Library > History, Politics & Society > Political Dictionary

The transfer of public assets to the private sector, by sale, or contracting out. After some
hesitant and small-scale experiments by the Heath Government of 1970-4, UK
privatization on a large scale was undertaken by the Thatcher Government after 1979
with the electricity, gas, and telecommunications industries being sold. The advantages of
privatization from the government's perspective included: raising large sums of money to
offset public borrowing; weakening the power of public sector trade unions; widening
share ownership; giving the management of former nationalized industries normal
commercial autonomy; and reducing the burden of decision-making imposed on
government by public ownership. Critics of the British privatizations argued that they
were undertaken so that maximizing competition was sacrificed in the interest of ensuring
the greatest possible revenue from the sales and protecting the monopolistic positions of
the existing enterprises. The perceived policy success of privatization in Britain led to its
imitation in many other countries. In particular, organizations such as the World Bank
encouraged developing countries to dispose of their loss-making state-owned industries.
Privatization in the former Soviet Union has occurred more slowly than anticipated and
has often involved acquisitions of enterprises by the managements on favourable terms.

— Wyn Grant

US History Encyclopedia:

Privatization
Top
Home > Library > History, Politics & Society > US History Encyclopedia

Privatization is the practice of delegating public duties to private firms. It is advocated as

a means of shrinking the size of government, reducing deficits, and increasing efficiency
in public services, although its success in these objectives is debated. Privatization takes
several forms in the United States: the selling of firms that were once partly owned and
regulated by government; the contracting out of public services to private companies for
production; and the funding of vouchers for use in the private sector thus introducing
competition between public and private agencies.

Historically the United States has maintained a distaste for federal government
intervention in the economy, although the Constitution does grant Congress the power to
regulate commerce. With the exception of the Progressive Era (1901–1921) and the New
Deal (1933–1945), policy was guided by the principles of laissez-faire capitalism,
articulated by economist Adam Smith in Wealth of Nations (1776).

After World War II, public agencies themselves began privatizing without legislative
guidance. In 1955, the Bureau of the Budget officially discouraged federal agencies from
producing any "product or service [which] can be procured from private enterprise
through ordinary business channels." In the mid-1970s the Ford administration proposed
legislation eliminating federal involvement in airline, trucking, banking, and gas
industries, and one aspect of President Jimmy Carter's energy policy at the end of the
decade was to end regulation of natural gas. But it was President Ronald Reagan who
made the strongest postwar push for privatization on the federal level.

Reagan established the Private Sector Survey on Cost Control (of ten referred to as the
Grace Commission) to "identify opportunities for increased efficiency and reduced costs
in federal government operations." Congress supported the Commission's
recommendations, and in the 1985 Deficit Reduction Act required "the President to report
on progress in implementing [commission] recommendations." This led to the largest
privatization in U.S. history, the sale of Conrail for $1.65 billion—and seventy-eight
other recommendations for privatization.

Since the 1980s proposals to privatize Amtrak, the U.S. Postal Service, the prison system,
health care, housing, welfare, Social Security, and education (among other programs),
have been put forth, debated, and implemented in various forms. Allowing citizens to
invest some of their social security funds in the stock market was hotly debated during
the bull market of the 1990s, yet was generally unpopular with voters, while welfare-to-
work programs tended to be supported by public opinion. By the turn of the twenty-first
century, state and local governments were contracting services ranging from operation of
public utilities to maintenance of public parks.

Perhaps the most intensely debated privatization proposals were in public education.
School voucher programs, permitting parents to use public funds to send their children to
private schools were implemented in Milwaukee, Wisconsin, and Cleveland, Ohio. In
1992, private firms began running public schools in cities across the county to mixed
reviews, while efforts to privatize five of New York City's public schools were reject by
parents in 2001.

Critics of privatization point out that the essential mandate of government is to work in
the public interest, while that of private enterprise is to maximize profits; thus
ideologically, public services are best handled by government. Others argue privatization
disproportionately hurts minority populations because they tend to rely more heavily on
employment in the public sector. When such jobs move to the private sector, workers of
ten receive lower wages and fewer benefits.

Bibliography
Pack, Janet Rothenberg. "The Opportunities and Constraints of Privatization." In The
Political Economy of Privatization and Deregulation. Edited by Elizabeth E. Bailey and
Janet Rothenberg Pack. Brookfield, Vt.: Edward Elgar, 1995.

Smith, Preston H. "'Self-Help,' Black Conservatives and the Reemergence of Black

Privatism." In Without Justice for All: the New Neo-Liberalism and Our Retreat from
Racial Equality. Edited by Adolph Reed Jr. Boulder, Colo.: Westview Press, 1999.

Swann, Dennis. The Retreat of the State: Deregulation and Privitisation in the UK and
US. Ann Arbor: University of Michigan Press, 1988.

Russian History Encyclopedia:

Privatization
Top
Home > Library > History, Politics & Society > Russian History Encyclopedia

Privatization may be pursued with different aims in mind. The political aim is to break
away from the past and create a new class of capitalists as quickly as possible. The
efficiency aim is to create a better management system for the enterprises, and to set up a
market environment. If this aim is dominant, it requires complex institution-building and
thus precludes rapid completion of the process. Privatization may have a financial aim: in
this case the state-owned enterprises (SOEs) should be sold at their highest value so as to
bring revenues to the state. Finally, an equity aim may involve returning property to those
who had been deprived of it by the nationalization process (an aim pursued in some
Central European countries), giving priority to employees for buying shares in their
enterprises, or even giving away state assets to the citizens.

In Russia, privatization began in January 1992, together with the implementation of the
stabilization program, and assumed the form of liberalization of small-scale trade (street
vending). This "small privatization" was conducted at a quick pace in the services sector,
which consisted of trade, catering, services to households, construction, individual
transportation activities, and housing. It was often marred by racketeering and crime. The
small-scale state enterprises (which had already been transferred to the local authorities in
1991) were sold to citizens, local entrepreneurs, and/or employees, basically through
auctions. At the same time, as prices and individual activities were liberalized, it became
immediately possible to create new, small-scale businesses, especially in fields where
human capital was the main requirement, such as consulting, engineering, private
teaching, and computer services. Actually, such activities were already privately
conducted in the Soviet era within the shadow economy.

The main challenge lay in the privatization of the big SOEs, or large-scale privatization.
The Russian government was clearly privileging the political objective, and hence opted
for a quick mass privatization scheme. It also favored equity considerations, so that the
people would benefit from the divestment of the state. In June 1992, the mass
privatization program was adopted, and in October the voucher system was launched. All
Russian citizens received 10,000 rubles' worth of privatization vouchers (equivalent then
to 50 U.S. dollars), immediately redeemable in cash, or exchangeable against shares in
the enterprises selected for privatization that had been transformed into joint stock
companies. These enterprises were sold at direct public auctions. The staff (employees
and management) could opt for three variants, of which the most popular was the
allocation of 51 percent of the shares to the employees at a discounted price. Seventy
percent of the enterprises were thus privatized by the end of June 1994; past this deadline
the vouchers were no longer valid. The second wave of large-scale privatization
proceeded much more slowly and was far from complete in 2002. It had to be based upon
sales to foreigners or domestic buyers. It was slowed by several factors: the Russian
financial crisis of 1998, which led to a collapse of the banking sector; the scandals linked
with the outcomes of the first wave, when several notorious deals evidenced the dominant
role of insiders who managed to acquire large assets with very little cash; and, finally, the
enormous stakes of the second wave, which involved privatization of the energy sector
(oil, gas, and electricity) and the telecommunications sector.

Who owned the Russian enterprises? The most prominent owners were the oligarchs,
who controlled the largest firms of the energy and raw materials sector, but who became
less powerful after Boris Yeltsin's resignation in 1999. More generally, the former
nomenklatura of the Soviet system, along with a small number of newcomers, took
advantage of a privatization process lacking transparency and clear legal rules.
Restructuring of enterprises and improving of corporate governance did not proceed
along with the change in ownership. Privatization was close to completion in Russia as of
2002, when 75 percent of the GDP was created by the private sector. However, the
private sector had yet to function according to the rules of a transparent market.

Bibliography

Boycko, Maxim; Shlejfer, Andrei; and Vishny, Robert. (1995). Privatizing Russia.
Cambridge, MA: MIT Press.

European Bank for Reconstruction and Development (EBRD). (1999). Transition Report
1999: Ten Years of Transition. London: EBRD.

Hedlund, Stefan. (2001). "Property Without Rights: Dimensions of Russian

Privatisation." Europe-Asia Studies 53(2):213 - 237.

—MARIE LAVIGNE

Wikipedia:

Privatization
Top
Home > Library > Miscellaneous > Wikipedia
Part of the series on
 Capitalism

Concepts
Central bank
Commercial law
Companies law
Comparative advantage
Competition law
Consumer protection
Copyright
Corporations
Deregulation
Economic freedom
Economic liberalism
Financial regulation
Fiscal policy
Free price system
Free trade agreements
Freedom of contract
Globalization
Inflation
Intellectual property
Invisible hand
Labour law
Limited government
Market
Monetary policy
Monopoly
Oligopoly
Patents
Private property
Privatization
Regulated market
Recession
Spontaneous order
Stagflation
Supply and demand
Wage labour
Economic theories
Austrian school
Chicago school
Classical economics
Keynesian economics
New Keynesian economics
 Monetarism
Neoclassical economics
Supply-side economics
Institutional economics
New institutional economics
Origins
Age of Enlightenment
Feudalism
Industrial Revolution
Physiocrats
Mercantilism
Islamic capitalism
People
Adam Smith
David Ricardo
John Stuart Mill
Karl Marx
Alfred Marshall
Thorstein Veblen
Max Weber
Ludwig von Mises
Joseph Schumpeter
John Maynard Keynes
Friedrich Hayek
Ronald Coase
Milton Friedman
Ayn Rand
Variants
Anarcho-capitalism
Consumer capitalism
Corporate capitalism
Creative capitalism
Crony capitalism
Democratic capitalism
Eco-capitalism
Finance capitalism
Global capitalism
Humanistic capitalism
Inclusive capitalism
Late capitalism
Laissez-faire capitalism
Liberal capitalism
Merchant capitalism
Mixed economy
Monopoly capitalism
Neo-Capitalism
 Philanthrocapitalism
Technocapitalism
Regulatory capitalism
Rentier capitalism
Social capitalism
Social market economy
State capitalism
State monopoly capitalism
Welfare capitalism
Related topics
Anti-capitalism
Advanced capitalism
Capitalist mode of production
Criticism
Consumerism
Corporate nationalism
Corporatism
Culture of capitalism
History
History of theory
Market fundamentalism
Periodizations of capitalism
Post-capitalism
Rate of exploitation
Trickle-down economics
Movements
Liberalism
Libertarianism
Neoconservatism
Neoliberalism
Objectivism
Objectivist movement
Ordoliberalism
Social democracy

Philosophy Portal
Economics Portal
Politics Portal
v•d•e
This article needs additional citations for verification.
Please help improve this article by adding reliable references. Unsourced material may be
challenged and removed. (January 2008)

Privatization is the incidence or process of transferring ownership of a business,

enterprise, agency or public service from the public sector (government) to the private
sector ("business"). In a broader sense, privatization refers to transfer of any government
function to the private sector - including governmental functions like revenue collection
and law enforcement.[1]

The term "privatization" also has been used to describe two unrelated transactions. The
first is a buyout, by the majority owner, of all shares of a public corporation or holding
company's stock, privatizing a publicly traded stock. The second is a demutualization of a
mutual organization or cooperative to form a joint stock company.[2]

Contents [hide]

• 1 Origin
• 2 History
• 3 Types
• 4 Difffering views
o 4.1 Supporting
o 4.2 Opposing
• 5 Intermediate views
o 5.1 Developed or minimally corrupt economies
o 5.2 Underdeveloped or highly corrupt economies
• 6 Outcomes
• 7 Alternatives
o 7.1 Public utility
o 7.2 Non-profit
o 7.3 Municipalization
o 7.4 Outsourcing or sub-contracting
o 7.5 Partial ownership
• 8 Notable examples
• 9 Negative responses
• 10 Reversion
• 11 See also
• 12 References
• 13 Further reading
o 13.1 Unindexed

• 14 External links

Origin
Edwards states that The Economist coined the term in the 1930s in covering Nazi German
economic policy.[3][4]

The Oxford English Dictionary notes usage dating from 1942 in Econ. Jrnl, 52, 398.

History
 This section requires expansion.

A long history of privatization dates from Ancient Greece, when governments contracted
out almost everything to the private sector[5]. In the Roman Republic private individuals
and companies performed the majority of services including tax collection (tax farming),
army supplies (military contractors), religious sacrifices and construction. However, the
Roman Empire also created state-owned enterprises — for example, much of the grain
was eventually produced on estates owned by the Emperor. Some scholars suggest that
the cost of bureaucracy was one of the reasons for the fall of the Roman Empire.[5]

In Britain, the privatization of common lands is referred to as enclosure (in Scotland as

the Lowland Clearances and the Highland Clearances). Significant privatizations of this
nature occurred from 1760 to 1820, coincident with the industrial revolution in that
country.

In more recent times, Winston Churchill's government privatized the British steel
industry in the 1950s, and West Germany's government embarked on large-scale
privatization, including selling its majority stake in Volkswagen to small investors in a
public share offering in 1961[5]. In the 1970s General Pinochet implemented a significant
privatization program in Chile. However, it was in the 1980s under the leaderships of
Margaret Thatcher in the UK and Ronald Reagan in the USA, that privatization gained
worldwide momentum. In the UK this culminated in the 1993 privatisation of British Rail
under Thatcher's successor, John Major; British Rail having been formed by prior
nationalization of private rail companies.

A major ongoing privatization, that of Japan Post, involves the Japanese post service and
the largest bank in the world. This privatization, spearheaded by Junichiro Koizumi,
started in 2007 following generations of debate. The privatization process is expected[by
whom?]
to last until 2017.

Types
There are three main methods[citation needed] of privatisation:

1. Share issue privatisation (SIP) - selling shares on the stock market - the most
common type of privatisation
2. Asset sale privatisation - selling an entire organization (or part of it) to a strategic
investor, usually by auction or by using the Treuhand model
3. Voucher privatisation - distributing shares of ownership to all citizens, usually for
free or at a very low price.

Share issues can broaden and deepen domestic capital markets, boosting liquidity and
(potentially) economic growth, but if the capital markets are insufficiently developed it
may be difficult to find enough buyers, and transaction costs (e.g. underpricing required)
may be higher. For this reason, many governments elect for listings in the more
developed and liquid markets, for example Euronext, and the London, New York and
Hong Kong stock exchanges.

As a result of higher political and currency risk deterring foreign investors, asset sales
occur more commonly in developing countries.

Voucher privatisation has mainly occurred in the transition economies of Central and
Eastern Europe, such as Russia, Poland, the Czech Republic, and Slovakia.

A substantial benefit of share or asset-sale privatisations is that bidders compete to offer

the highest price, creating income for the state in addition to tax revenues. Voucher
privatisations, on the other hand, could be a genuine transfer of assets to the general
population, creating a real sense of participation and inclusion. If the transfer of vouchers
is permitted, a market in vouchers could be created, with companies offering to pay
money for them.

Difffering views
Supporting

Proponents of privatisation believe that private market factors can more efficiently
deliver many goods or service than governments due to free market competition. In
general, it is argued that over time this will lead to lower prices, improved quality, more
choices, less corruption, less red tape, and quicker delivery. Many proponents do not
argue that everything should be privatised. According to them, market failures and
natural monopolies could be problematic. However, some Austrian school economists
and anarcho-capitalists would prefer that everything be privatised, including the state
itself.

The basic economic argument given for privatisation states that governments have few
incentives to ensure that the enterprises they own are well run. One problem is the lack of
comparison in state monopolies. It is difficult to know if an enterprise is efficient or not
without competitors to compare against. Another is that the central government
administration, and the voters who elect them, have difficulty evaluating the efficiency of
numerous and very different enterprises. A private owner, often specializing and gaining
great knowledge about a certain industrial sector, can evaluate and then reward or punish
the management in much fewer enterprises much more efficiently. Also, governments
can raise money by taxation or simply printing money should revenues be insufficient,
unlike a private owner.

If private and state-owned enterprises compete against each other, then the state owned
may borrow money more cheaply from the debt markets than private enterprises, since
the state owned enterprises are ultimately backed by the taxation and printing press
power of the state, gaining an unfair advantage.
Privatising a non-profitable state-owned company may force the company to raise prices
in order to become profitable. However, this would remove the need for the state to
provide tax money in order to cover the losses.

• Performance. State-run industries tend to be bureaucratic. A political government

may only be motivated to improve a function when its poor performance becomes
politically sensitive, and such an improvement can be reversed easily by another
regime.[citation needed]
• Increased efficiency. Private companies and firms have a greater incentive to
produce more goods and services for the sake of reaching a customer base and
hence increasing profits. A state-owned firm would not be as productive due to
the lack of financing allocated by the entire government's budget that must
consider other areas of the economy.
• Specialisation. A private business has the ability to focus all relevant human and
financial resources onto specific functions. A state-owned firm does not have the
necessary resources to specialise its goods and services as a result of the general
products provided to the greatest number of people in the population.
• Improvements. Conversely, the government may put off improvements due to
political sensitivity and special interests — even in cases of companies that are
run well and better serve their customers' needs.
• Corruption. A state-monopolized function is prone to corruption; decisions are
made primarily for political reasons, personal gain of the decision-maker (i.e.
"graft"), rather than economic ones. Corruption (or principal-agent issues) in a
state-run corporation affects the ongoing asset stream and company performance,
whereas any corruption that may occur during the privatisation process is a one-
time event and does not affect ongoing cash flow or performance of the company.
• Accountability. Managers of privately owned companies are accountable to their
owners/shareholders and to the consumer, and can only exist and thrive where
needs are met. Managers of publicly owned companies are required to be more
accountable to the broader community and to political "stakeholders". This can
reduce their ability to directly and specifically serve the needs of their customers,
and can bias investment decisions away from otherwise profitable areas.
• Civil-liberty concerns. A company controlled by the state may have access to
information or assets which may be used against dissidents or any individuals
who disagree with their policies.
• Goals. A political government tends to run an industry or company for political
goals rather than economic ones.
• Capital. Privately held companies can sometimes more easily raise investment
capital in the financial markets when such local markets exist and are suitably
liquid. While interest rates for private companies are often higher than for
government debt, this can serve as a useful constraint to promote efficient
investments by private companies, instead of cross-subsidizing them with the
overall credit-risk of the country. Investment decisions are then governed by
market interest rates. State-owned industries have to compete with demands from
other government departments and special interests. In either case, for smaller
markets, political risk may add substantially to the cost of capital.
 • Security. Governments have had the tendency to "bail out" poorly run businesses,
often due to the sensitivity of job losses, when economically, it may be better to
let the business fold.
• Lack of market discipline. Poorly managed state companies are insulated from the
same discipline as private companies, which could go bankrupt, have their
management removed, or be taken over by competitors. Private companies are
also able to take greater risks and then seek bankruptcy protection against
creditors if those risks turn sour.
• Natural monopolies. The existence of natural monopolies does not mean that
these sectors must be state owned. Governments can enact or are armed with anti-
trust legislation and bodies to deal with anti-competitive behavior of all
companies public or private.
• Concentration of wealth. Ownership of and profits from successful enterprises
tend to be dispersed and diversified -particularly in voucher privatisation. The
availability of more investment vehicles stimulates capital markets and promotes
liquidity and job creation.
• Political influence. Nationalized industries are prone to interference from
politicians for political or populist reasons. Examples include making an industry
buy supplies from local producers (when that may be more expensive than buying
from abroad), forcing an industry to freeze its prices/fares to satisfy the electorate
or control inflation, increasing its staffing to reduce unemployment, or moving its
operations to marginal constituencies.
• Profits. Corporations exist to generate profits for their shareholders. Private
companies make a profit by enticing consumers to buy their products in
preference to their competitors' (or by increasing primary demand for their
products, or by reducing costs). Private corporations typically profit more if they
serve the needs of their clients well. Corporations of different sizes may target
different market niches in order to focus on marginal groups and satisfy their
demand. A company with good corporate governance will therefore be
incentivized to meet the needs of its customers efficiently.
• Job gains. As the economy becomes more efficient, more profits are obtained and
no government subsidies and less taxes are needed, there will be more private
money available for investments and consumption and more profitable and better-
paid jobs will be created than in the case of a more regulated economy.[6]

Opposing

Opponents of privatisation dispute the claims concerning the alleged lack of incentive for
governments to ensure that the enterprises they own are well run, on the basis of the idea
that governments are proxy owners answerable to the people. It is argued[by whom?] that a
government which runs nationalized enterprises poorly will lose public support and votes,
while a government which runs those enterprises well will gain public support and votes.
Thus, democratic governments do have an incentive to maximize efficiency in
nationalized companies, due to the pressure of future elections.
Opponents of certain privatisations believe certain parts of the social terrain should
remain closed to market forces in order to protect them from the unpredictability and
ruthlessness of the market (such as private prisons, basic health care, and basic
education). Another view sees some of the utilities by which government provides benefit
to society at large as indirect and difficult to measure or unable to produce a profit, such
as defense. Still another is that natural monopolies are by definition not subject to
competition and better administrated by the state.

The controlling ethical issue in the anti-privatisation perspective is the need for
responsible stewardship of social-support missions. Market interactions are all guided by
self-interest, and successful actors in a healthy market must be committed to charging the
maximum price that the market will bear. Privatisation opponents believe that this model
is not compatible with government missions for social support, whose primary aim is
delivering affordability and quality of service to society.

Many privatisation opponents also warn against the practice's inherent tendency toward
corruption. As many areas which the government could provide are essentially profitless,
the only way private companies could, to any degree, operate them would be through
contracts or block payments. In these cases, the private firm's performance in a particular
project would be removed from their performance, and embezzlement and dangerous
cost-cutting measures might be taken to maximize profits.

Furthermore, large corporations can pay public-relations professionals to convince

decision-makers that privitazation is a sensible idea, whether or not this is actually the
case. Corporations typically have far more resources for expert testimony,
advertisements, conferences and other propaganda efforts than anti-privatisation
advocates.

Some[who?] would also point out that privatising certain functions of government might
hamper coordination, and charge firms with specialized and limited capabilities to
perform functions which they are not suited for. In rebuilding a war torn nation's
infrastructure, for example, a private firm would, in order to provide security, either have
to hire security, which would be both necessarily limited and complicate their functions,
or coordinate with government, which, due to a lack of command structure shared
between firm and government, might be difficult. A government agency, on the other
hand, would have the entire military of a nation to draw upon for security, whose chain of
command is clearly defined. Opponents would say that this is a false assertion: numerous
books refer to poor organization between government departments (for example the
Hurricane Katrina incident).

Furthermore, opponents of privatisation regard it is undesirable to transfer state-owned

assets into private hands for the following reasons:

• Performance. A democratically elected government is accountable to the people

through a legislature, Congress or Parliament, and is motivated to safeguarding
 the assets of the nation. The profit motive may be subordinated to social
objectives.
• Improvements. the government is motivated to performance improvements as
well run businesses contribute to the State's revenues.
• Corruption. Government ministers and civil servants are bound to uphold the
highest ethical standards, and standards of probity are guaranteed through codes
of conduct and declarations of interest. However, the selling process could lack
transparency, allowing the purchaser and civil servants controlling the sale to gain
personally.
• Accountability. The public does not have any control or oversight of private
companies.
• Civil-liberty concerns. A democratically elected government is accountable to the
people through a parliament, and can intervene when civil liberties are threatened.
• Goals. The government may seek to use state companies as instruments to further
social goals for the benefit of the nation as a whole.
• Capital. Governments can raise money in the financial markets most cheaply to
re-lend to state-owned enterprises.
• Lack of market discipline. Governments have chosen to keep certain
companies/industries under public ownership because of their strategic
importance or sensitive nature.
• Cuts in essential services. If a government-owned company providing an essential
service (such as the water supply) to all citizens is privatised, its new owner(s)
could lead to the abandoning of the social obligation to those who are less able to
pay, or to regions where this service is unprofitable.
• Natural monopolies. Privatisation will not result in true competition if a natural
monopoly exists.
• Concentration of wealth. Profits from successful enterprises end up in private,
often foreign, hands instead of being available for the common good.
• Political influence. Governments may more easily exert pressure on state-owned
firms to help implementing government policy.
• Downsizing. Private companies often face a conflict between profitability and
service levels, and could over-react to short-term events. A state-owned company
might have a longer-term view, and thus be less likely to cut back on maintenance
or staff costs, training etc, to stem short term losses. Many private companies
have downsized while making record profits.
• Profit. Private companies do not have any goal other than to maximize profits. A
private company will serve the needs of those who are most willing (and able) to
pay, as opposed to the needs of the majority, and are thus anti-democratic. The
more necessary a good is, the lower the price elasticity of demand, as people will
attempt to buy it no matter the price. In the case of price elasticity of demand is
zero (perfectly unelastic good), demand part of supply and demand theories does
not work.
• Privatisation and Poverty. It is acknowledged by many studies that there are
winners and losers with privatisation. The number of losers —which may add up
to the size and severity of poverty—can be unexpectedly large if the method and
process of privatisation and how it is implemented are seriously flawed (e.g. lack
 of transparency leading to state-owned assets being appropriated at minuscule
amounts by those with political connections, absence of regulatory institutions
leading to transfer of monopoly rents from public to private sector, improper
design and inadequate control of the privatisation process leading to asset
stripping.[7]
• Job Loss. Due to the additional financial burden placed on privatized companies
to succeed without any government help, unlike the public companies, jobs could
be lost to keep more money in the company.

Intermediate views
Others don't dispute that well-run for-profit entities with sound corporate governance
may be considerably more efficient than an inefficient governmental bureaucracy or
NGO, however many implementations of privatization can - in practice - lead to the
firesale of public assets, and/or to inefficient or corrupt - for profit management.

Developed or minimally corrupt economies

A top executive can readily reduce the perceived value of an asset – due to information
asymmetry. The executive can accelerate accounting of expected expenses, delay
accounting of expected revenue, engage in off balance sheet transactions to make the
company's profitability appear temporarily poorer, or simply promote and report severely
conservative (e.g. pessimistic) estimates of future earnings. Such seemingly adverse
earnings news will be likely to (at least temporarily) reduce sale price. (This is again due
to information asymmetries since it is more common for top executives to do everything
they can to window dress their earnings forecasts). There are typically very few legal
risks to being 'too conservative' in one's accounting and earnings estimates.

When the entity gets taken private - at a dramatically lower price - the new private owner
gains a windfall from the former top executive's actions to (surreptitiously) reduce the
sales price. This can represent 10s of billions of dollars (questionably) transferred from
previous owners (the public) to the takeover artist. The former top executive is then
rewarded with a golden handshake for presiding over the firesale that can sometimes be
in the 10s or 100s of millions of dollars for one or two years of work. (This is
nevertheless an excellent bargain for the takeover artist, who will tend to benefit from
developing a reputation of being very generous to parting top executives).

When a publicly held asset, mutual or non-profit organization undergoes privatization,

top executives often reap tremendous monetary benefits. The executives can facilitate the
process by making the entity appear to be in financial crisis - this reduces the sale price
(to the profit of the purchaser), and makes non-profits and governments more likely to
sell.

Ironically, it can also contribute to a public perception that private entities are more
efficiently run reinforcing the political will to sell of public assets. Again, due to
asymmetric information, policy makers and the general public see a government owned
firm that was a financial 'disaster' - miraculously turned around by the private sector (and
typically resold) within a few years.

Underdeveloped or highly corrupt economies

In a society with substantial corruption, privatization allows the government currently in

power and its backers to siphon a large portion of the entire net present value of state
assets away from the public and into the accounts of their favored power brokers.
Without privatization, corrupt officials would have to slowly harvest their corrupt
earnings over time. As such, efficient privatization depends on their being a very low of
current corruption among the current government officials since it allows for far more
'efficient' extraction of corrupt rents.

Of course, corrupt governments can also extract corrupt rents quite efficiently in other
ways - particularly by borrowing extensively to engage in spending on overly favorable
contracts with their backers (or on tax shelters, subsidies or other give-aways).
Generations of subsequent taxpayers are then left with paying back the debt incurred for
corrupt transfers made decades previously. Naturally, this may lead to the sale of public
assets....

In the end, the public is left with a government that taxes them heavily, and gives them
nothing in return. Debt repayment is enforced by international agreements and agencies
such as the IMF. Infrastructure and upkeep is sacrificed - leading to a further decay in the
economic efficiency of the country over time.

Outcomes
This article has multiple issues. Please help improve the article or discuss these
issues on the talk page.

• Its neutrality is disputed. Tagged since March 2008.

• Its factual accuracy is disputed. Tagged since March 2008.

Literature reviews [8][9] find that in competitive industries with well-informed consumers,
privatisation consistently improves efficiency. Such efficiency gains mean a one-off
increase in GDP, but through improved incentives to innovate and reduce costs also tend
to raise the rate of economic growth. The type of industries to which this generally
applies include manufacturing and retailing. Although typically there are social costs
associated with these efficiency gains[10], many economists argue that these can be dealt
with by appropriate government support through redistribution and perhaps retraining.

In sectors that are natural monopolies or public services, the results of privatisation are
much more mixed, as a private monopoly behaves much the same as a public one in
liberal economic theory. In general, if the performance of an existing public sector
operation is sufficiently bad, privatisation (or the threat thereof) has been known to
improve matters. Changes may include, inter alia, the imposition of related reforms such
as greater transparency and accountability of management, improved internal controls,
regulatory systems, and better financing, rather than privatisation itself.

Regarding political corruption, it is a controversial issue whether the size of the public
sector per se results in corruption. The Nordic countries have low corruption but large
public sectors. However, these countries score high on the Ease of Doing Business Index,
due to good and often simple regulations, and for political rights and civil liberties,
showing high government accountability and transparency. One should also notice the
successful, corruption-free privatisations and restructuring of government enterprises in
the Nordic countries. For example, dismantling telecommunications monopolies has
resulted in several new players entering the market and intense competition with price
and service.

Also regarding corruption, the sales themselves give a large opportunity for grand
corruption. Privatisations in Russia and Latin America were accompanied by large-scale
corruption during the sale of the state-owned companies. Those with political connections
unfairly gained large wealth, which has discredited privatisation in these regions. While
media have reported widely the grand corruption that accompanied the sales, studies have
argued that in addition to increased operating efficiency, daily petty corruption is, or
would be, larger without privatisation, and that corruption is more prevalent in non-
privatised sectors. Furthermore, there is evidence to suggest that extralegal and unofficial
activities are more prevalent in countries that privatised less.[11]

Alternatives
This article may contain original research. Please improve it by verifying the
claims made and adding references. Statements consisting only of original research
may be removed. More details may be available on the talk page. (January 2010)

Public utility

The enterprise can remain as a public utility.

Non-profit

A private non-profit organization could manage the enterprise.

Municipalization

Transferring control to municipal government

Outsourcing or sub-contracting
National services may sub-contract or out-source functions to private enterprises. A
notable example of this is in the United Kingdom, where many municipalities have
contracted out their garbage collection or administration of parking fines to private
companies. In addition, the British government has involved the private sector more in
the workings of the National Health Service principally through outsourcing the
construction and operation of new hospitals to private companies. There are also moves
to refer patients to private surgeries to ease the load on existing NHS human resources,
and covering the cost of this.

See also: private finance initiative

Partial ownership

An enterprise may be privatised, but with the state retaining a number of shares in the
resultant company. This is a particularly notable phenomenon in France, where the state
often retains a "blocking stake" in private industries. In Germany, the state privatised
Deutsche Telekom in small tranches, and still retains about a third of the company. As of
2005, the state of North Rhine-Westphalia is also planning to buy shares in the energy
company E.ON in what is claimed to be an attempt to control spiraling costs.

Whilst partial privatisation could be an alternative, it is more often a stepping stone to full
privatisation. It can offer the business a smoother transition period during which it can
gradually adjust to market competition. Some state-owned companies are so large that
there is the risk of sucking liquidity from the rest of the market, even in the most liquid
marketplaces: this may favor gradual privatization. The first tranche of a multi-step
privatisation would also in the first instance establish a valuation for the enterprise to
mitigate complaints of under-pricing.

In some instances of partial privatisation of contracted services, some portion(s) of the

state-owned service are provided by private-sector contactors, but the government retains
the capacity to self-operate at contract intervals, if it so chooses. An example of partial
privatisation would be some forms of school bus service contracting, such as
arrangements where equipment and other resources purchased with government capital
funds and/o those already owned by a governmental entity are used by the contractor for
a period of time in providing services, but ownership is retained by the governmental
unit. This form of partial privatisation eases concerns that once an operation is
contracted, the government may be unable to obtain sufficient competitive bids, and be
subjected to terms less desirable than the prior operation under state-ownership. Under
that scenario, a reverse privatisation would be more feasible for the government. (see
section below)

See also: Public-private partnership

Notable examples
See also: List of privatisations
The largest privatisation in history involved Japan Post. It was the nation's largest
employer and one third of all Japanese government employees worked for Japan Post.
Japan Post was often said to be the largest holder of personal savings in the world.

The Prime Minister Junichiro Koizumi wanted to privatise it because it was thought[by
whom?]
to be an inefficient and a source for corruption. In September 2003, Koizumi's
cabinet proposed splitting Japan Post into four separate companies: a bank, an insurance
company, a postal service company, and a fourth company to handle the post offices as
retail storefronts of the other three.

After the Upper House rejected privatisation, Koizumi scheduled nationwide elections for
September 11, 2005. He declared the election to be a referendum on postal privatisation.
Koizumi subsequently won this election, gaining the necessary supermajority and a
mandate for reform, and in October 2005, the bill was passed to privatise Japan Post in
2007.[12]

Nippon Telegraph and Telephone's privatisation in 1987 involved the largest share-
offering in financial history at the time.[13] 15 of the world's 20 largest public share
offerings have been privatisations of telecoms.[13]

The United Kingdom's largest public-share offerings were privatisations of British

Telecom and British Gas. The largest public-share offering in France was France
Telecom. Privatisation in Europe has led to genuine competition: the former state-owned
enterprises lost their monopolies due to legislation and technological change, competitors
entered the market, and prices for broadband access and telephone calls fell dramatically.
[citation needed]

Negative responses
Privatisation proposals in key public service sectors such as water and electricity in many
cases meet with strong resistance from opposition political parties and from civil society
groups, many of which regard them as natural monopolies. Campaigns typically involve
demonstrations and democratic political activities; sometimes the authorities attempt to
suppress opposition using violence (e.g. Cochabamba protests of 2000 in Bolivia and
protests in Arequipa, Peru, in June 2002). Opposition is often strongly supported by trade
unions. Opposition is usually strongest to water privatisation — as well as Cochabamba,
recent examples include Haiti, Ghana and Uruguay (2004). In the latter case a civil-
society-initiated referendum banning water privatisation was passed in October 2004.

Reversion
A reversion from contracted ownership of an enterprise or services to governmental
ownership and/or provision is called reverse privatisation or nationalization. Such a
situation most often occurs when a privatisation contractor fails financially and/or the
governmental unit has failed to purchase satisfactory service at prices it regards as less
than with state-ownership or self-operation of services. Another circumstance may occur
when greater control than viable under privatisation is determined to be in the
governmental unit's best interest.

National-security concerns may be the source of reverse privatisation actions when the
most likely providers are non-domestic or international corporations or entities. For
example, in 2001, in response to the September 11th attacks, the then-private airport
security industry in the United States was nationalized[citation needed] and put under the
authority of the Transportation Security Administration.

See also
• Cooperative
• Corporatization
• Deregulation
• Gated community
• Marketization
• Megaproject
• Megaprojects and risk
• Nationalization - the reverse process
• Private sector development
• Privatisation in Russia
• Privatisation of British Rail
• Privatization of public toilets
• Public ownership
• Securitization
• Special Economic Zone
• Too Big to Fail
• Urban Enterprise Zone
• Voucher privatisation
• Welfare state

References
1. ^ Chowdhury, F. L. ‘’Corrupt Bureaucracy and Privatisation of Tax
Enforcement’’, 2006: Pathak Samabesh, Dhaka.
2. ^ "Musselburgh Co-op in crisis as privatisation bid fails.yeah of corse". Co-
operative News. 2005-11-01. http://www.thenews.coop/index.php?
content=story&id=835. Retrieved 2008-05-21.
3. ^ Edwards, Ruth Dudley (1995). The Pursuit of Reason: The Economist 1843-
1993. Harvard Business School Press. pp. 946. ISBN 0-87584-608-4.
4. ^ Compare Bel, Germà (2006). "Retrospectives: The Coining of 'Privatisation'
and Germany's National Socialist Party". Journal of Economic Perspectives 20
(3): 187–194. doi:10.1257/jep.20.3.187.
5. ^ a b c International Handbook on Privatization by David Parker, David S. Saal
 6. ^ Central Europe's Mass-Production Privatization, Heritage Lecture #352
7. ^ Dagdeviren (2006) "Revisiting privatisation in the context of poverty
alleviation" Journal of International Development, Vol. 18, 469–488
8. ^ "Privatisation in Competitive Sectors: The Record to Date, World Bank Policy
Research Working Paper No. 2860". John Nellis and Sunita Kikeri (World Bank).
June 2002. http://ssrn.com/abstract=636224.
9. ^ "From State To Market: A Survey Of Empirical Studies On Privatisation"
(PDF). William L. Megginson and Jeffry M. Netter (Journal of Economic
Literature). June 2001. http://faculty-staff.ou.edu/M/William.L.Megginson-
1/prvsvpapJLE.pdf.
10. ^ "Winners and Losers: Assessing the Distributional Impact of Privatisation,
CGD Working Paper No 6" (PDF). Nancy Birdsall & John Nellis (Center for
Global Development). March 9, 2006.
http://www.cgdev.org/docs/cgd_wp006.pdf.
11. ^ Privatisation in Competitive Sectors: The Record to Date. Sunita Kikeri and
John Nellis. World Bank Policy Research Working Paper 2860, June 2002.
Privatisation and Corruption. David Martimort and Stéphane Straub.
12. ^ Takahara, "All eyes on Japan Post"Faiola, Anthony (2005-10-15). "Japan
Approves Postal Privatisation". Washington Post (The Washington Post
Company): p. A10. http://www.washingtonpost.com/wp-
dyn/content/article/2005/10/14/AR2005101402163.html. Retrieved 2007-02-09.
13. ^ a b The Financial Economics of Privatisation By William L. Megginson, p. 205 -
206

Further reading
• Alexander, Jason. 2009. Contracting Through the Lens of Classical Pragmatism:
An Exploration of Local Government Contracting. Applied Research Project.
Texas State University. http://ecommons.txstate.edu/arp/288/.
• Dovalina, Jessica. 2006. Assessing the Ethical Issues Found in the Contracting
Out Process. Applied Research Project. Texas State University.
http://ecommons.txstate.edu/arp/108/.
• Segerfeldt, Fredrik. 2006. Water for sale: how business and the market can
resolve the world’s water crisis. Stockholm Network. http://www.stockholm-
network.org/downloads/events/d41d8cd9-Amigo%20Segerfeldt.pdf

Unindexed

• Zullo, Roland. (2009). Does Fiscal Stress Induce Privatization? Correlates of

Private and Intermunicipal Contracting, 1992-2002. Governance 22.3 (July): 459-
481.
• Kosar, Kevin R. (2006), "Privatisation and the Federal Government: An
Introduction", Report from the Congressional Research Service
• Bel, Germà (2006), "The coining of `privatisation´and Germany's National
Socialist Party", Journal of Economic Perspectives 20(3), 187-194
 • Clarke, Thomas (ed.) (1994) "International Privatisation: Strategies and Practices"
Berlin and New York: Walter de Gruyter, ISBN 3-11-013569-8
• Clarke, Thomas and Pitelis, Christos (eds.) (1995) "The Political Economy of
Privatisation" London and New York: Routledge, ISBN 0-415-12705-X
• Nico Perrone (2002), Economia pubblica rimossa, Milan, Giuffrè ISBN 88-14-
10088-8
• Mayer, Florian (2006) Vom Niedergang des unternehmerisch tätigen Staates:
Privatisierungspolitik in Großbritannien, Frankreich, Italien und Deutschland,
VS Verlag, Wiesbaden, ISBN 3-531-14918-0
• Juliet D’Souza, William L. Megginson (1999), "The Financial and Operating
Performance of Privatised Firms during the 1990s", Journal of Finance August
1999
• von Hayek, Friedrich, (1960) The Constitution of Liberty
• Smith, Adam (1994) The Wealth of Nations
• Stiglitz, Joseph Globalization and its Discontents
• David T. Beito, Peter Gordon, and Alexander Tabarrok (editors); foreword by
Paul Johnson (2002). The voluntary city: choice, community, and civil society.
Ann Arbor: University of Michigan Press/The Independent Institute. ISBN 0-472-
08837-8.
• von Weizsäcker, Ernst, Oran Young, and Matthias Finger (editors): Limits to
Privatisation. Earthscan, London 2005 ISBN 1-84407-177-4
• Jeb Sprague, 2007. Haiti: Workers Protest Privatizatin Layoffs. Inter Press
Service.
• Roger L. Kemp, PhD, "Privatization: The Provision of Public Services by the
Private Sector," McFarland & Co., Jefferson, NC, USA; and London, UK., 2007.

External links

Look up privatization in Wiktionary, the free dictionary.

• Reports of the Public Services International Research Unit at the University of

Greenwich Research database with many articles on the effects of privatisation

This entry is from Wikipedia, the leading user-contributed encyclopedia. It may not have
been reviewed by professional editors (see full disclaimer)

Donate to Wikimedia

Learn More
Economy, Post-Soviet
Liberalism
 Shock Therapy

What is a privateer? Read answer...

What is private military? Read answer...
What is privatization? Read answer...

Help us answer these

How do get private?
Why do you have privates?
What is privatation?

Post a question - any question - to the WikiAnswers community:

Copyrights:

Britannica Concise Encyclopedia. Britannica

Concise Encyclopedia. © 1994-2010 Encyclopædia
Britannica, Inc. All rights reserved. Read more
Investment Dictionary. Copyright ©2000,
Investopedia.com - Owned and Operated by
Investopedia Inc. All rights reserved. Read more
Financial & Investment Dictionary. Dictionary of
Finance and Investment Terms. Copyright © 2006 by
Barron's Educational Series, Inc. All rights reserved.
Read more
Small Business Encyclopedia. Encyclopedia of Small
Business. Copyright © 2002 by The Gale Group, Inc.
All rights reserved. Read more
Political Dictionary. The Concise Oxford Dictionary
of Politics. Copyright © 1996, 2003 by Oxford
University Press. All rights reserved. Read more
US History Encyclopedia. © 2006 through a
partnership of Answers Corporation. All rights
reserved. Read more
Russian History Encyclopedia. Encyclopedia of
Russian History. Copyright © 2004 by The Gale
Group, Inc. All rights reserved. Read more
Wikipedia. This article is licensed under the Creative
Commons Attribution/Share-Alike License. It uses
 material from the Wikipedia article "Privatization".
Read more

Related answers

• Why are private parts private?

• What were privateers?
• WHat is it private practice or private practise?
• Is a first private the same as private?

» More
Answer these

• Why is a private soldier called private?

• When were the privates on people considered private?
• What are privaters?
• Who is privator?

» More

Mentioned in

• Denationalization (finance term)

• Qualities of Adult Youth Ministers (Spirituality & Philosophy Film)
• Federal Property Fund (Russian history)
• The Big Sellout (2006 Culture & Society Film)

• Major, John Roy (British banker and conservative politician)

• The Giant Awakes, Vol. 3: The Path of Chinese Privatization (1994 History Film)
• The Navigators (2001 Drama Film)
• privatize
• El Alto (city, Bolivia)
• Internet Corporation for Assigned Names and Numbers (ICANN) (in marketing)
• spatial monopoly
• Who Killed Maggie? (2008 History Film)
• Anatoly Borisovich Chubais (Russian history)
• Branko Crvenkovski (Macedonian president)

» More» More

Related topics

• Laissez-Faire
• Economy, Post-Soviet
• Liberalism
 • Shock Therapy

• Transition Economies.

» More
Site

• Help
• Sitemap
• ReferenceAnswers
• WikiAnswers

Company

• About | Jobs
• Press Room
• Blog |
• Investor Relations

Legal

• Terms of Use
• Privacy Policy
• IP Issues
• Disclaimer

Webmasters

• AnswerTips
• Widget Gallery
• Badges
• More…

Downloads

• 1-Click Answers
• Browser Toolbar
• More…

Updates

• Email
• Watchlist
• RSS
• What's New
International Sites English Deutsch Español Français Italiano Tagalog

Copyright © 2010 Answers Corporation

PAKISTAN: DR. A.R. KEMAL 143

Privatization in Pakistan
DR. A.R. KEMAL*
1. Introduction
Despite frequent changes in the governments since 1985, five regularly elected and six
care takers, there has been consensus on the continuation of privatization policy and as such
it is expected to be cornerstone of all the future government policies, at least in the near
future1 . Instead of arguing the merits or demerits of the privatization policy, we explore
policy measures that help the levels of efficiency and at the same time have the minimal
adverse social impact.
A large number of public sector units have already been divested and a number of other
public enterprises including telecommunications and thermal power stations have been placed
on the privatization list. Nevertheless, serious doubts have been expressed about transparency
of the bidding process and the impact of privatization on efficiency, investment, production,
prices, employment and fiscal deficit. Accordingly, there is a need to identify constraints
in realising various objectives of privatization with a view to suggesting concrete policy
measures that may be taken to overcome the constraints.
Divestiture of assets is not new to Pakistan though the motivation for divestiture has
not been the same in different time periods. During the 50s and the 60s, public sector used
to invest in non-traditional activities especially where the gestation period was long and
private sector was reluctant to invest. While a large number of private sector units were
nationalized and public sector expanded at a rapid rate in the 70s, an effort to divest public
sector enterprises were made during the mid-eighties. However, the efforts to divest shares
worth Rs 2 billion of various profit making public enterprises in the mid-eighties and 14 loss
making industrial units for divestiture in 1988 did not succeed. Similarly, out of the six
profit-making corporations identified for partial divestiture in 1990, only 10 per cent shares
of Pakistan International Airlines could be divested. The slow pace of privatization led to
the establishment of a Privatization Commission on January 22 1991, which offered 105
industrial units, four banks, and two development financial institutions for sale. Subsequently,
initiatives were undertaken for privatization of thermal power units of the Water and Power
Development Authority (WAPDA), private sector managment of some sections of Pakistan
Railways and
* Chief Economist, Planning Commission, Pakistan.
1 The new government has announced that public enterprises shall be made more efficient. It does not suggest if

privatization policy still continues or shall be abadoned.

5
144 PRIVATIZATION IN SOUTH ASIA
partial divestiture of the Telecommunications Corporation of Pakistan (TCP). At present, as
many as 46 industrial units, including all the remaining manufacturing units with the exception
of Pakistan Steel, have been placed on the privatization list. Furthermore, two banks and six
non-bank financial institutions; four units in the oil and gas sector; Karachi Electric Supply
Corporation; six thermal power units and three area electricity boards of WAPDA; Pakistan
Telecommunications; Pakistan Shipping Corporation and National Tanker Corporation; and
Pakistan Railways are also on the privatization list.
During 1991-92, 69 manufacturing units and two commercial banks were successfully
privatized. So far 91 industrial units, majority shares of two major banks and three non-bank
financial institutions (NBFIs), 10 per cent shares of Pakistan International Airlines, 12 per
cent shares of Pakistan Telecommunication and 26 per cent of Kot Addu power station have
been divested. All in all 106 units have been divested, and so far government has received
Rs. 59.6 billion through the sale of these enterprises. Total employment in the manufacturing
units, which were privatized by sale of assets and where the management was transferred,
was around 35,000, out of which 63.3 per cent opted for golden handshake scheme. If the
retrenched workers are also taken into consideration, employment in privatized units may
have gone down by at least three-fifth.
2. Rationale for privatization
Objectives of privatization at different points in time have varied. During the period
1988-90, privatization was pursued to divest 14 loss making manufacturing units and raise
funds by selling shares of profit making units for retiring public debt and thus reducing debt
servicing (See Rothschild, 1990). Privatization Commission in 1991 did not explicitly spell
out the basic rationale for privatization. Nevertheless four major objectives that could be
discerned from various statements issued by the government are:
• Improvements in the level of efficiency in the production processes;
• Reduction in the debt burden of the government and fiscal deficit;
• Broad-basing equity capital; and
• Releasing resources for the physical and social infrastructures.
Whereas in the initial stages of its establishment Privatization Commission did not
spell out the objectives of privatization, it has recently come up with a very clear Mission
Statement contained in the Privatization in Pakistan (1998):
“Privatization is envisaged to foster competition, ensuring greater capital investment, competitiveness,
and modernisation, resulting in enhancement of employment and provision of improved quality of
products and services to the consumers and reduction in the fiscal burden”.
The objectives of privatization outlined in the publication cited above are:
• Creation of market based economy
• Promoting the expansion and efficiency of private sector enterprises
• Encourage competition, specially by abolishing the monopolies and promote
integration of the domestic economy into the world economy
PAKISTAN: DR. A.R. KEMAL 145
• Support wider capital ownership and encourage employee owner relationship
• Establish and develop capital markets for mobilization of domestic savings
• Reverse the flight of capital abroad and repatriate capital already transferred
• Mobilization of private sector resources for future investments
• Promote economic flexibility
• Maintain or create employment
• Improve the quality of goods and services
• Maximise receipts from privatization to pay off public debt and reduce the public
sector deficit
• Substantially reduce the size and scope of the public sector
• Substantially reduce the financial drain of public enterprises on the government
• Decrease the opportunities for misuse and corruption of public property by government
officials and public sector managers.
These objectives are indeed laudable but quite ambitious. Though, privatization is
neither necessary nor sufficient for realization of some of these. For example, mobilization
of savings, reversing the flight of capital and promotion of savings and investments do not
need privatization and they can not be achieved just by pursuit of privatization. In the
following we examine the arguments that privatization lead to reduction in fiscal deficit,
improvement in the efficiency levels, broad base the ownership and higher level of investment
in the physical and social infrastructures.
2.1 Reduction in fiscal deficit
Privatization in a perfectly competitive market with complete foresight may have no
impact on fiscal deficit because the expected sale price determined as the reserve price of
assets would be exactly equal to the discounted flow of net benefits. If the private sector
offers higher prices than the reserve price, fiscal deficit situation would improve. However,
the private sector’s willingness to do so, of course, depends upon the assessment of profits
in the post-privatization period and willingness to share the expected higher profits with the
public sector.
2.2 Increase in the efficiency levels
While private producers are forced to reduce their cost to minimum for their survival,
public firms may not make sufficient efforts to reduce production costs as they are under no
compulsion to ensure an acceptable return to the equity holders. Similarly, private managers
have more flexibility in taking the decisions than the public sector firms. Moreover, public
investments may be influenced by political considerations, thus adversely affecting the
allocative efficiencies. While in a competitive framework, privatization would always help
in realising allocative efficiency, X-efficiency and non-market efficiency gains, in a
monopolistic framework this is not necessarily true. The cost in public monopoly at equilibrium
point may not be minimal unless it is effectively regulated. Whether privatization would
result in higher level
146 PRIVATIZATION IN SOUTH ASIA
of efficiency or not is an empirical question. For conflicting evidence see Stigler (1975);
Wolf (1979), Baumol (1996) and Kemal (1996).
2.3 Releasing the resources for physical and social infrastructures
A well functioning and profit making public enterprises can also be divested for releasing
the resources for development of infrastructures if the resources for infrastructure are not
available.
2.4 Broad-basing of ownership of equity capital
Broad-basing the ownership of equity capital is for the reasons of distributive justice.
But it presupposes that small investors have sufficient investible funds to buy the shares of
public industrial enterprises and that unless the public enterprises are divested shares are not
available to them. Both of these assumptions may not always be valid. Moreover, the
assumption is that allocating a part of the shares at face value for the workers would result
in improvement in the welfare for these workers.
3. Modes of privitization in Pakistan
Public enterprises may be liquidated or divested partially or completely, and the
divestiture may take different forms including flotation of shares in the stock exchange
market, sales through financial institutions and equity tap and outright auction.
• Liquidation: Public enterprises making losses due to a number of factors such as
inappropriate location, poor technology, etc. cannot be divested, and as such they
are prime candidates for liquidation and not divestiture. However, losses due to
poor management may be overcome through transfer of management and control
with or without transfer of the assets.
• Sale of Assets: The divestiture of public enterprises may be pursued through
following four methods.
(a) Flotation of Shares: The shares of public enterprises are floated in the Stock
Exchange Market, and government progressively reduces its share holding in
such enterprises. Such flotation has three distinct features. First, induction of
private capital may result in higher levels of productivity. Second, government
retains sufficient control if the firm is of strategic importance. Third, gradual
divestiture would not have an adverse impact on the prices of the shares.
(b) Equity Tap: The only difference in equity tap and floatation of shares is that
the amount of shares being offered is not restricted. Whatever the demand,
shares would be automatically supplied by the government.
(c) Sales through Financial Institutions: Since capital markets in many developing
countries are quite limited, it is feared that off-loading of shares in a big way
may significantly depress the share prices. With a view to alleviating such
PAKISTAN: DR. A.R. KEMAL 147
fears, financial institutions may be appointed underwriters to avoid a run on the
share prices.
(d) Auction: Auction may be done through sealed bidding or open bidding.
Similarly, bidding may be done for a part of the shares or for the entire company.
• Privatization: By-passing the Sale of Divestiture: Besides liquidation and sale of
assets through any of the four methods, the public sector may take certain measures
to realize the intended objectives without selling the assets.
(a) Franchising: Government may offer a franchise to private sector, but control
the prices.
(b) Repealing Monopoly: Government may remove the restrictions on entry of the
private sector in all activities.
(c) Contracting out: Instead of carrying out certain services in the public sector,
private contractors may be hired to do the specified work.
(d) Leasing: Public assets are leased to the private sector with a view to improving
productivity.
Following are the six different modes through which public enterprises in Pakistan
were divested until 1997:
(i) Divestiture through bids;
(ii) Sale of suitable amounts of shares through the stock exchange;
(iii) Sale to Workers’ Management Group on the basis of an evaluation of assets,
liabilities and net worth and matching the maximum bid received;
(iv) Sale to modaraba companies, working on the Islamic profit-and-loss sharing
principle, which raise funds for purchasing shares;
(v) Management contracts with modaraba companies, leasing or contracting of
management to private entrepreneurs for a specified period; and, finally,
(vi) Lease management contract with the workers for a specified period to enable
them to buy out the enterprises they have been working in.
The privatization policy of 1998 outlines following four modes for privatization:
• Total disinvestment through competitive bidding
• Partial disinvestment with management control
• Partial disinvestment without management control
• Sales/Lease of assets and property
These measures may be grouped into:
(i) Sale of assets through bidding to individuals, to workers-management groups, and
to modaraba companies (those working on the profit and loss sharing principle);
and
(ii) Sale of assets through the floatation of shares in stock exchange and leasing.
Liquidations have rarely been used; probably the roti corporation units are the only
ones so far liquidated. Privatization Commission insisted that the units should be operated
after the
148 PRIVATIZATION IN SOUTH ASIA
take over. Nevertheless, a large number of loss making units have been converted into
essentially real estate.
In the eighties, government appointed financial institutions as underwriters but no unit
could be divested. Similarly shares have not been put on tap. A limited number of shares
of Pakistan International Airlines (PIA) and Pakistan Telecommunications have been offered
for sale. PIA divested 10 per cent of the shares through the stock exchange, and Pakistan
Telecommunications divested 12 per cent of its shares. Twenty six per cent shares of Kot
Addu thermal power station have been divested with the change in management as well.
Profitability in these organizations have increased sharply after the divestiture but not
necessarily through improvements in efficiency.
The principal method of divestiture in Pakistan has been sealed bidding. Where bid
was below the fixed price, the open bidding has been used. Sales have been generally to
individuals or groups of individuals, but in nine specific cases sales have been made to the
worker- management groups. On average the manufacturing units taken over by the
workermanagement
groups have outperformed the units taken over by other private sector groups.
In the banking sector, however, the performance of worker-management group has been
inferior to the other divested bank.
Leasing, franchising, liquidation and other possible modes of privatization have been
used only sparingly. A couple of railway sectors were offered to the private sector for
operation but with not much success. Similarly there was a proposal to let private sector run
the goods trains against the payment of track charges, but the experience has not been very
successful. An exercise for unbundling of both WAPDA and railways was carried out but
so far not much has resulted from such exercise.
The methods employed to privatise the public assets and their valuation, cost of disposal,
and sources and timings of cash flows, and post-privatization capital structure play an
important role in the realisation of various objectives of privatization. For example, the bid
price offered by the prospective buyer depends on the perceptions regarding the net future
benefits. In the absence of complete information, the expected profits are randomly distributed
with subjective probabilities. The shape of probability distribution varies across individuals;
risk averters would under-bid and risk plungers would overbid. Withholding the information
has also serious implications for the levels of productivity. The firms, which is able to buy
the unit at a price lower than the reserve prices,1 may feel as if its operations are efficient
but in fact they may not be, and as such may develop inertia to improving productivity. The
over-bidders, on the other hand, may run into losses and cash flow problems with the result
that unit may close down and overall productivity of the economy may fall.
4. Privatization and fiscal deficit
One of the main objectives of the privatization has been reduction in fiscal deficit.
Privatization is presumed to help in retiring the public debt and thus in reducing the debt
1 It assumes that reserve prices have been correctly perceived by the government agency.
PAKISTAN: DR. A.R. KEMAL 149
servicing. At the same time the surplus of autonomous enterprises also tends to fall. If
reduction in debt servicing exceeds the fall in surplus of autonomous bodies, budgetary
deficit tends to fall.
The Stabilization and Structural Adjustment Programmes of IMF being implemented
since 1988-89 also aim at a reduction in fiscal deficit through resource mobilization and
reduction in public expenditure. Therefore, reduction in the fiscal deficit in the postprivatization
period cannot be attributed to privatization only.
The fiscal deficit increased upto 8.5 per cent of GDP by 1987-88 when Pakistan signed
three year Stabilisation and Structural Adjustment Program (1987-88 to 1990-91). Fiscal
deficit declined to 6.5 per cent of GDP over the first two years of the program. However,
despite the divestiture of a large number of manufacturing units and two banks in the 1990-
93 period, fiscal deficit increased sharply though it declined to a level of around 6.5 per cent
in the subsequent years. Cumulative privatization receipt of Rs 59.6 billion compared to a
debt of Rs 2,500 billion is rather small. The interest payments savings by retiring Rs 59.6
billion may not even be sufficient to compensate for the decline in surplus of autonomous
bodies. It may, however, be added that privatization of large banks and telecommunication
can have significant influence on the fiscal deficit (Figure 5.1).
Figure 5.1
Privatization and fiscal deficit
Percentage
5. Privatization and levels of efficiency
While it is generally believed privatization results in higher level of efficiency such
claims cannot be substantiated always. Alam (1989), Beesley (1997), Candoy (1989), Caves
and Christensen (1980), CIDA (1987), Dotgson (1987), Foreman Peck (1989), Kemal (1993,
1996), Naqvi and Kemal (1991, 1994, 1998), Sen (1992), Selim (1988) and Walle (1989)
0
5
10
15
20
25
30
1980-81
1981-82
1982-83
1983-84
1984-85
1985-86
1986-87
1987-88
1988-89
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
Fiscal Deficit/ GDP Interest
 Payments _ Money Supply
Years
150 PRIVATIZATION IN SOUTH ASIA
have provided examples that privatization did not necessarily improve the level of efficiency.
Kikeri, Nellis and Shirley (1992) have shown, on the other hand, that while in most of the
cases privatization led to improvement in efficiency, at least in 25 per cent of the cases it
did not. The general conclusion emerging from these studies is that the quality of
management and the market structure and not privatization per se determine performance of
a firm.
Competitive market structure forces producers to reduce the cost to minimum and
increase the output to a level where marginal cost is the minimum. Accordingly privatization
in a competitive framework results in higher levels of production and lower level of prices
with favourable impact on employment, real wages and investments. On the other hand, in
a monopolistic framework producers restrict the output to a level where price exceeds the
marginal costs which are still falling and may lead to lower level of output, higher prices
and loss of consumer surplus. By regulating the prices, a monopolist may be forced to lower
the prices to marginal cost. While tradable goods industries can be regulated through changes
in the import duties on competitive imports, in case of non-traded goods efficient regulation
may not even be feasible.
The decreasing cost in industries results in natural monopolies and the producers make
losses if production is expanded to a level where marginal cost is the minimum. Unless
private sector firms are compensated for the loss, no regulation can force a firm to increase
the output to a level where marginal cost is the minimum. Subsidy can be avoided if firm
is allowed to restrict output and charge a price equal to the average cost. The assumption
that an efficient regulatory agency capable of determining and enforcing marginal cost or
average cost pricing would exist may not be valid (See Baumol, 1996).
5.1 Increase in efficiency in manufacturing
Comparison of efficiency in public industrial enterprises and private sector firms in the
manufacturing industries of Pakistan where both the sectors simultaneously operated prior
to the divestiture of manufacturing industries failed to substantiate higher levels of efficiency
of the private sector firms compared to public sector firms. (See Naqvi and Kemal, 1991).
Comparison of investment, production, efficiency, employment, wages and prices in the preand
post-privatization has been made somewhat difficult because of the IMF deflationary
stabilisation programs implemented over the same period. The comparative picture, therefore,
needs to be viewed keeping that caveat in mind.
For comparison purposes the 1986-91 is taken as pre-privatization period and the 1992-
97 as post privatization period.1 Over the two time periods average growth rate of GDP has
gone down from 5.44 per cent to 4.15 per cent and the compound growth rate from 5.44 to
4.13 per cent – a decline by more than one per centage point in growth of GDP. While the
decline in growth rate may also have been the result of deflationary monetary and fiscal
policies but at least partly it is due to privatization (Figure 5.2).
1 1991-92 year has been excluded as a privatization period.
PAKISTAN: DR. A.R. KEMAL 151
Figure 5.2
Average and compound growth rates of GDP, investment and employment
The decline in the growth rate of investment has been even more dramatic. The average
growth rate of investment fell from 5.55 per cent to just 1.82 per cent and the compound
growth rate from 5.49 to 1.76 per cent. The fixed investment as a per centage of GDP has
fallen from a little more than 17 per cent in the second half of the eighties to 13.6 per cent
of GDP by 1998-99 only because public sector investment declined from about
9 per cent to 5.2 per cent over the same period. The private sector investment, in fact,
increased from less than 8 per cent to 9.4 per cent in 1997-98 (falling to 8.4 per cent in 1998-
99), but it could not compensate for the decline in public investment (Figure 5.3).
0
1
2
3
4
5
6
0
1
2
3
4
5
6
Pre-privatization Post-privatization
GDP Investment Employment GDP Investment Employment
Growth rates
Growth rates
Figure 5.3
Fixed investment ratios
Growth rates
Total Public _ Private
Years
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00
20.00
1985-86
1986-87
1987-88
1988-89
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
123
123
123

152 PRIVATIZATION IN SOUTH ASIA

The output and investment in the manufacturing sector show similar trends as observed
in the aggregate GDP and investment. The average growth rate of manufacturing output over
the two time periods fell from 3.85 to 3.45 per cent while the compound growth rate
declined from 6.03 to just 2.16 per cent.1 Similarly the average growth rate of investment
in the large scale manufacturing sector fell from 7.44 per cent to -2.45 and the compound
growth rate from 6.46 to -6.64 (Figure 5.4).
Sharp fluctuations in the investment in the post privatization period needs to be noted.
Investment rose sharply during 1991-94 period ranging between 4.4 and 4.8 per cent of GDP
and but since then has declined to 2.7 per cent of GDP by 1998-99 (Figure 5.5).
Figure 5.5
Investment in manufacturing
Investment GDP ratio
0
1
2
3
4
5
6
1985-86
1986-87
1987-88
1988-89
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
Total Large scale
Years
1The difference in compound and average growth rates is a reflection of sharp fluctuations in the growth
rates of the manufacturing sector.
Figure 5.4
Average and compound growth rates of GDP, investment and employment
1234
1234
1234

-15
-10
-5
0
5
10
-8
-6
-4
-2
0
2
4
6
8
10
 Pre-privatization Post-privatization
GDP ISM
ILM
Employment
GDP
ISM
ILM
Employment
Growth rates
Growth rates
PAKISTAN: DR. A.R. KEMAL 153
In order to assess the growth of the industry, the data made available by the Federal
Bureau of Statistics (FBS) and Provincial Bureaus of Statistics (PBS) on production,
employment and employment cost has been analysed. The FBS data indicate an increased
growth rates in case of vegetable ghee, nitrogenous fertilisers, soda ash, caustic soda, chlorine,
switch gears and tractors and a decline in the growth rates of phosphatic fertilisers, cement,
scooters, motorcycles, buses, trucks, motor cars and jeeps. Decline in output of cement and
consumer durables industries seem to have been the collusion of the duopolists.
The PBS data also show a sharp increase in the growth rate of vegetable ghee, fertiliser
and chemicals industries while cement and automobiles industries indicate a sharp fall in the
growth rates of output. However, the real wages have been stagnant thus indicating that the
workers have been untouched by any growth (Figure 5.6).
The analysis of variance and regressions reported in Kemal (1996) does not suggest
any improvement in the levels of efficiency measured by the return to equity or return to
fixed assets. With a view to isolating the impact of concentration and protection levels on
the growth of output after privatization, growth rate of post-privatization period was regressed
against the growth rates in pre-privatization period, concentration ratios and protection.
The coefficient of dummy variable is negative in eight and positive in the remaining
6 industries but in nine industries it is insignificant. The coefficient is significant and
positive in nitrogenous fertilisers and switchgears, and significant and negative in scooters/
motorcycles, LCVs, motorcars and jeeps. Fertiliser is a regulated industry and the automobile
sector is oligopolistic (Table5.1).
Data to estimate total factor productivity are sketchy. The Census of Manufacturing
Industries data show a decline in total factor productivity in the large scale manufacturing
sector by 6 per cent but an increase by 2 per cent in the privatized industries over 1991-96
Figure 5.6
Nominal and real wages
0
20
40
60
80
100
120
1980-81
1981-82
1982-83
1983-84
1984-85
1985-86
1986-87
1987-88
1988-89
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
Nominal wages Real wages
Years
Wages
154 PRIVATIZATION IN SOUTH ASIA
period. While productivity in vegetable ghee and transport equipment industries increased by
69 and 18 per cent it fell by 29 per cent in compressed gases, nine per cent in fertilizer, six
per cent in cement, one per cent in agricultural machinery and 33 per cent in textile machinery
(Table 5.2).
Table 5.1: Results of regression of post-privatization output against time, dummy and
manufacturing output
Name of industry Coefficient of time Coefficient of dummy
Vegetable Ghee & oil 1.98 0.004
Nitrogenous fertilizers 8.4* 0.18*
Phosphatic fertilizers -15.6* 0.01
Soda ash 6.1* 0.03
Caustic soda 7.5* -0.07
Chorine 18.3* -0.13
Cement 1.5 -0.07
Switch gears -15.6 1.06*
Scoters/Motor cycles 10.9 -0.33
Trucks 9.1 -0.2
Buses 5.6 -0.75
LCV 11.3 -0.65*
Motor cars/Jeeps 6.8 -0.55*
Tractors 5.2 0.08
Note: * shows significant at 5-per cent level,
Table 5.2: Total factor productivity
Industries Total factor productivity
All industries 0.94
Vegetable ghee 1.69
Compressed gases, etc 0.71
Fertilizers 0.91
Cement 0.94
Agricultural machinery 0.99
Textile machinery 0.67
Transport equipment 1.18
Total privatized industries 1.02
Public enterprises have been instrumental in diffusion of technology especially through
vigorous pursuit of an indigenisation program. Whereas public sector firms would provide
training facilities irrespective of the fact whether gains from training are internalized or not,
private sector would not make such investments unless they are sure that gains can be
internalized. This may have serious implications for productivity.
PAKISTAN: DR. A.R. KEMAL 155
The common man would see the benefit of the privatization only if the prices fall.
Besides, if the growth of production falls and prices rise, then it is clear that they are using
their monopoly power. The real prices deflated through the wholesale price index of the
products of the industries produced by the privatized industries have not fallen. As a matter
of fact, they have gone up.
5.2 Banking sector
Pakistan has already divested two relatively smaller banks and is in the process to
divest two major banks. A large number of Pakistani and foreign banks are operating
simultaneously in Pakistan, and they compete vigorously with each other. It is therefore
expected that performance of the privatized banks would be better.
Two privatized banks are Allied Bank Ltd. (ABL) and Muslim Commercial Bank (MCB).
Former was taken over by a management group and a private investor has acquired the latter.
The performance of the Muslim Commercial bank in the post privatization period has been
somewhat better then that of the Allied Bank. However, any improvement in performance
is overshadowed by the ballooning employment cost (Figure 5.7). Paid-up capital of ABL
increased from Rs 272 million in 1991 to Rs 1063 million by 1997 and of MCB from Rs 576
million in 1991 to Rs 1820 million in 1997. Similarly deposits of ABL increased from Rs
25 billion to Rs 63 billion and of MCB from Rs 350 billion to Rs 1024 billion over the same
period. The profits of both the banks have increased. In case of ABL, profit increased from
Rs 100 million in 1991 to Rs. 531 million in 1995 but since then it has fallen. The profit of
MCB increased from Rs 212 million in 1991 to Rs 1235 million in 1997.
Figure 5.7
Performance of the banking sector
Allied Bank of Pakistan Muslim Commercial Bank of Pakistan
Source: Banking Statistics of Pakistan, various issues.
Employment cost Profits
Rs. (in
millions)
Years Years
0
500
1000
1500
2000
2500
1989
1990
1991
1992
1993
1994
1995
1996
1997
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
1989
1990
1991
1992
1993
1994
1995
1996
1997
156 PRIVATIZATION IN SOUTH ASIA
5.3 Power and telecommunications sector
Only 26 per cent shares of one thermal unit have been divested and the management
has been transferred to the private sector. There may have been an improvement in productivity
but the increase in profits has been due to higher prices, which were also guaranteed. The
increase in power prices and losses of the power utility have placed a question mark over
the concept of welfare. On the other hand sale of shares of telecommunications and PIA
without any change in management could not have any impact on the levels of efficiency.
6. The Impact of privatization on employment
While improvements in productivity would eventually result in higher levels of well
being, the impact of privatization on prices, employment and wages and other employment
benefits determine the resultant impact on social fabric of the country. As mentioned earlier,
privatization neither resulted in lower rate of inflation nor in the lower real prices of the
products of the privatized industries.
The decision to divest manufacturing and financial enterprises, Water and Power
Development Authority (WAPDA) and Pakistan Telecommunications put the job of more
than 500 thousand workers at stake. There are five possible ways in which privatization may
affect the labour. First, since public sector enterprises traditionally employ labour in excess
of their requirements, the private sector would like to get rid of the excess labour. Second,
in an oligopolistic market structure the possibility of collusion is quite distinct and as such
they may restrict the output, and consequently the demand for labour would be reduced.
Third, the private sector may like to opt for capital intensive methods of production, thus
further reducing demand for labour. Fourth, even when more workers are required in the
private sector, they may be hired on contract with a view to avoiding benefits to be provided
to full time employees.
Obviously, divestiture through stock exchange without change in management would
hardly affect the level of employment. However, complete or partial divestiture with change
in management and enterprise restructuring prior to its sale would definitely affect the
employment levels because the public enterprises are generally overmanned. (See Kemal,
1993 and Lawai, 1993). The recent restructuring of Habib Bank and United Bank resulted
in loss of job for ten thousand workers. Similarly 2,225 out of 3495 employees of the heavy
engineering industry have taken golden handshake/voluntary retirement and 2195 employees
in vegetable ghee mills not yet privatized have taken voluntary retirement.
6.1 Trends in employment
Compared to an annual compound growth rate of 2.0 per cent growth in the overall
employment in the pre-privatization period, the growth rate fell to 1.39 per cent in the
postprivatization
period. Increase in capital intensity over time has constrained the employment
growth in addition to decline in the growth rate of output. Employment situation in the
manufacturing sector, where most of the privatization has taken place, is quite worse. Whereas
in the pre-privatization period, employment in the manufacturing grew at a rate of 6.5 per
PAKISTAN: DR. A.R. KEMAL 157
Figure 5.8
Growth rate of employment
cent, employment in the manufacturing sector declined at a rate of 13.5 per cent. Even more
disturbing is the decline in employment in the small-scale industries in recent years. The
Census of manufacturing industries data indicate 9.7 per cent decline in employment in the
large scale manufacturing sector over 1990-91 to 1995-96 period (Figure 5.8).
The Provincial Bureaus data available only for two provinces viz. Punjab and Sindh
indicate that except for fertilizer where employment increased at a rate of 1.37 per cent in
the post-privatization period compared to a decline in the pre-privatization period, the trend
is exactly the reverse in all the other industries. Employment in vegetable ghee grew at a
rate of 1.66 per cent in the pre-privatization period, but declined at an annual compound rate
of 4.78 per cent in the post-privatization period. Employment in the cement industry increased
at a rate of 0.85 per cent in the pre-privatization period and declined at a rate of 3.84 per
cent in the post-privatization period. Employment declined at a rate of 2.95 per cent in
chemicals and at a rate of 2.16 per cent in automobile industries during the post privatization
period (Figure 5.9).
The Census of Manufacturing Industries data also shows a decline in employment in
the large scale-manufacturing sector. Except for fertilizer, where employment increased
by 12.4 per cent, all the other privatized industries have witnessed very sharp decline in
-80
-60
-40
-20
0
20
Growth rates
All industries
Vegetable ghee
Compressed gases, etc
Fertilizers
Cement
Agricultural machinery
Textile machinery
Transport equipment
Figure 5.9
Growth rate of employment in large scale
-4
-2
0
2
4
6
8
1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95
Years
Growth rates
Grow th rate of Employment
158 PRIVATIZATION IN SOUTH ASIA
employment. Vegetable ghee lost 45 per cent of the work force and textile machinery about
three-fourth.
With a view to protecting the workers against the loss of job, the government and the
representatives of the workers had reached an agreement in 1991. The agreement states:
(a) That there shall be no lay-off during the first year of privatization;
(b) That workers opting for the golden handshake will be given four months of the last
salary drawn plus gratuity equaling to one month salary for each year of service;
(c) That worker’s rehabilitation programme through overseas employment and training
will be continued and adopted;
(d) That 10 per cent of the shares should be offered to the employees; and
(e) That the workers should be allowed to bid for purchase of the unit and they shall
be given preference.
The agreement guarantees the job for one year. Though workers were not laid off in
the first year, producers encouraged their workers to take the golden handshake and as many
as 63.3 per cent of the employees in the manufacturing sector opted for golden handshake.
Whereas the incidence was only 10.5 per cent in the fertilizer industries but almost everyone
opted for voluntary retirement scheme in newspaper industries. In rice and roti plants it
exceeded 90 per cent, in engineering, ghee and chemicals it exceeded 70 per cent and in
automobiles and cement it exceeded 30 per cent. The high incidence of golden handshake
may have been the result of two main factors. Firstly the workers knew that the job security
was offered only for just one year and as such they did not want to take any chances. Second,
since the responsibility of paying golden handshake was with the government, the new
owners encouraged the workers to take golden handshake and later employ them on contract
(Table 5.3).
Table 5.3: The incidence of golden handshake
Industries Total Per centage opting
employment for golden handshake
Automobiles 4604 38.0
Cement 8289 36.1
Chemicals 6342 70.8
Fertilizer 688 10.5
Engineering 2661 77.5
Ghee Mills 5057 74.3
Rice 810 93.3
Roti Plant 676 99.1
Newspapers 1142 100.0
Miscellaneous 5056 97.3
Total 34649 63.3
Source: Privatization Commission.
PAKISTAN: DR. A.R. KEMAL 159
As much as one quarter of the bid value has been used in the golden handshake and
in some industries they have even exceeded the bid value (Table 5.4). This was necessitated
by the fact that such industries were making losses and there was no way that the industry
could be divested unless they were provided the golden handshake.
Table 5.4: Bid value and golden handshake payments
Particulars Bid value Per centage of bid
(in million Rs.) value used in
golden handshake
Automobiles 1032.77 12.89
Cement 6352.27 11.05
Chemicals 5320.53 15.06
Fertilizers 435.39 0.70
Engineering 193.35 51.05
Ghee Mills 620.05 56.13
Rice 237.35 39.02
Roti Plant 18.90 25.88
Newspapers 231.10 191.00
Miscellaneous 175.15 533.70
Total 14616.86 24.35
Source: Privatization commission.
A large number of units have been virtually closed and some of them have changed
the manufacturing activity. Essentially in such cases all the workers have been rendered
unemployed. More than half the industrial enterprises either are closed down or almost all
the employees have been rendered surplus.
The worker-management groups have acquired 9 units. They are operating efficiently
without any retrenchment of the workers. As regards retraining of the workers there has been
virtually no progress. The workers are invariably offered ten per cent shares but they have
rarely shown interest in purchasing shares in these units.
6.2 Banking Sector
ABL was transferred to the management group of the workers employed in the bank
and as such there has been no reduction in the employment. Similarly, MCB did not lay off
any workers. The wage bill of ABL has increased from Rs 677 million in 1991 to Rs. 2017
million in 1997 and of MCB from Rs 1048 million to Rs 4361 million over the same period.
The increase at current prices over the six years period is 197.9 and 316 per cent respectively
in ABL and MCB. The consumer prices over the same period increased by 104.0 per cent.
Increase in employment cost in real terms may be reflecting to some extent increase in
employment but mainly it is due to an increase in wages and salaries.
160 PRIVATIZATION IN SOUTH ASIA
7. Wage rates and social protection of the workers
The interviews carried out with the manufacturers and the labour leaders show interesting
views. The producers in general appreciate the privatization policy but they have divergent
0
20
40
60
80
100
120
140
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
Year
Index
Real wages
Labor productivity
Figure 5.10
Labour productivity and real wages
views on privatization of the infrastructures. While those engaged in the manufacturing
activity feel that the government has no business to carry out the commercial activities like
manufacturing, and they are against privatization of utilities. This is because induction of
private sector in power has raised the cost of electricity to a level that they have lost
comparative advantage. They are of the view that if infrastructure units have to be privatized
it should be through stock exchange, and the pricing policy should be under the control of
the government. They also indicate that more transparency would help the privatization
process in a significant way (Figure 5.8).
Whereas the private sector maintains that they are providing even better facilities to the
workers than they were enjoying in the public sector, the workers do not agree. The workers
suggest that while employees’ old age benefit is intact, the pension scheme for the managers
and professionals has been abandoned, the number of bonuses has been slashed and increments
to the salaries have been stopped. Workers also complain about the insecurity of job and
pension and believe that the low paid employees are being thrown out.
The trends in nominal and real wages show interesting pattern. Whereas upto 1990-91
there was an increasing trend, the same is not observed in the post privatization period. The
Provincial Bureau data indicate a very sharp decline in the real wages of the workers. The
aggregate real wages have declined by 7.6 per cent in the 1990-91 to 1997-98 period
compared to 37 per cent increase in the 1983-84 to 1889-91 period. The decline over the
same period has been 29.1 per cent in vegetable ghee industry and 17 per cent in cement
industry. However the wages increased in the fertiliser sector by 7.7 per cent over the same
period.
The Census of Manufacturing Industries Data indicates a marginal increase of 2.5
per cent in the real wage rate over the 1990-91 to 1995-96 period. The increase in the
Years
PAKISTAN: DR. A.R. KEMAL 161
industries that have been privatized is 5.1 per cent. Nevertheless in the vegetable ghee,
compressed gases, and textile machinery real wages declined by 12.3, 22.3 and 30 per cent
respectively.
The survey carried out by Worker’s Federation of Pakistan (1993) spells out the benefits
to the workers of both the private as well as public enterprises. The survey shows that the
fringe benefits in the private sector are lower and workload is higher compared to the public
sector. Whereas 47.1 per cent public firms in the manufacturing sector operated for five days
a week and another 23.5 per cent for five and a half days per week, the proportion in the
private sector was only 23.5 and 15.7 per cent respectively. In the services sector 31.4 and
21.0 per cent of public firms operated for five, and five and half days, the proportion in the
private sector was 10.1 and 5.8 respectively including a high probability that workers may
be asked to put in more days of work after privatization. Leave entitlements including
annual, causal and sick leaves are higher in the public sector than the private sector.
The employers are obliged to provide various facilities to the workers under law and
they do provide most of the services including social security, old-age benefits, workers’
profit participation, children’s education and accommodation. Proportion of firms providing
transport facilities is lower in the private sector. Similarly, the private sector does provide
medical facility, but the quality and coverage is inadequate.
Whereas in the public sector both provident and gratuity is provided or pension is
provided in most of the cases, in two-third of the cases in the private sector, workers have
a right of either provident fund or gratuity.
8. The environment for private sector and medium term projections of
investment and employment
Whereas level of employment declines in the short run following privatization, over
longer run it may result in higher levels of employment through higher levels of investment
and production. As a result of privatization, the public investment starts falling but the
private sector may more than compensate and as such total investment may rise. This is
because more avenues are opened up for the private sector and it builds up the confidence
of the private sector especially of the foreign private investors.
Fiscal incentives, de-regulation, privatization, tariff rationalization, removal of nontariff
barriers, no restriction on investment activity, allowing private sector in all types of
economic activities etc. creates a conducive atmosphere for investment. The after-effects of
sanctions, inconsistent policies and lack of continuity have been some of the problems in
attracting both the indigenous and foreign investors. With announcement of a very clearcut
investment policy and the resolve of the government to stick to the policies is expected to
result in higher level of investment.
Special efforts have been made to attract foreign private investment. There are no
longer any restrictions on entry in any economic activity or on the proportion of the equity
held by the foreign firms. The liberalization of the foreign exchange market has removed
restrictions on the payment of royalties and technical fees, on raising funds from the local
capital markets and the banks and on repatriation of principal, capital gains and profits. The
162 PRIVATIZATION IN SOUTH ASIA
foreign investors have been guaranteed the safety of their capital. The privatization policy,
in addition to the measures enumerated above, has also encouraged the foreign investors.
While during 1991-97 period foreign private investment did increase and most of these have
been in the energy and other infrastructure projects, after the sanctions and row between
WAPDA and the IPPs, the investment has fallen. Moreover, foreign investment is not expected
to generate significant levels of employment because of their high capital intensity.
8.1 Medium term projections of investment and employment
Soon after initial privatization total investment had started rising with major share
accounted for by the private sector. However, since 1992-93 the investment has started
declining and after the sanctions it has gone down very sharply and fixed investment has
fallen to just 14.5 per cent of GDP. No doubt these rates are rather low, and the privatization
and deregulation policies would result in higher level of investments. However, what would
be the response of private sector is too early to say. Therefore, three alternative scenarios
are presented below (Figure 5.11).
The first scenario essentially assumes that investment would rise slowly to 18.2 per
cent of GDP by 2010. Scenarios 2 and 3 are more ambitious where fixed investment would
rise to 21.4 and 23.5 per cent respectively by 2010.
A high rate of investment, via a higher growth of the GDP, is expected to stimulate the
demand for labour to absorb the increments in the labour force. The increase in the demand for
labour is projected on the assumption that employment elasticity would be 0.36. In the modest
growth of investment, labour demand does not increase sufficiently and even by the year 2010
the unemployment remains around 6 per cent. Even in other two scenarios where there is a rapid
growth of investment, unemployment remains above 6 per cent level. Thus, there is a need to use
more labour intensive technologies if unemployment problem is to be resolved.
Figure 5.11
Projected level of investment GDP ratio
0
5
10
15
20
25
1997-98
1998-99
1999-2000
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
Scenario 1F. Investment GDP Scenario
 2 F. Investment GDP _ Scenario 3 F. Investment GDP
Years
Investment GDP ratio
PAKISTAN: DR. A.R. KEMAL 163
9. Regulatory reform
Only an efficient regulatory framework can ensure higher level of productivity in
monopolistic framework. Baumol (1996) points out that the six mechanisms of regulation
usually employed to regulate firms must be avoided. First strategy could be to break the
monopoly injecting more competition by introduction of additional firms into market especially
when the scale of economies are significant. Second strategy could be maintaining cross
subsidies and thus driving out of line the prices required for economic efficiency. Third
strategy could be imposing exclusive territories for different competitors and thus increasing
the cost. Fourth, there are inconsistencies in the regulators’ policy. Fifth, there could be
delays in decisions in accordance with the market conditions by the producers just because
the regulators have not been able to make the decision in time. Sixth could be regulation
through accounting conventions such as fully distributed cost boils down generally to cost
plus formula for prices, eliminates any incentives for reducing the cost.
Let us examine the extent to which Pakistan has been able to follow the suggestions
of Professor Baumol. Demand for a large number of industries in Pakistan is not even
sufficient for even a single plant of optimum size. But the competition has been encouraged
in these industries, thus reducing the levels of efficiency even further. Cross subsidies can
play an important role but the international organisations do not allow that. Case in point
is the inefficient use of phosphatic and nitrogenous fertilisers. A few years back, sugar mills
were not allowed to buy the sugarcane from other than their own zones, thus increasing the
cost of production. As regards inconsistencies and delays by the regulatory authorities, the
two agencies so far established for power and telecommunications do not hold much of
promise. It seems that the regulatory authorities are following a full cost pricing rules and
the guaranteed return on equity, which can hardly result in higher levels of efficiency.
Regulation of the industry is to facilitate and encourage effective competition. In the
presence of scale of economies, marginal costs pricing are incompatible with solvency of the
firms. Baumol outlines the following seven rules of economic regulation.
1. Where there is evidence of competition, regulators should refrain from intervention.
2. Where competition can be stimulated, it must be done.
3. The regulators should make sure that prices in the long run do not exceed the
levels, which in a perfectly competitive market would make entry profitable.
4. Prices should not be permitted to go below those that would be viable for any
substantial period in a competitive or contestable market1 , i.e. prices should not fall
short of the marginal cost of any product or the per unit incremental cost of the
entire output of any homogenous product.
1Contestable markets are defined as the state of a market in which there is totally costless and an unimpeded
freedom of entry and exit.
164 PRIVATIZATION IN SOUTH ASIA
5. Because in a contestable market, one may encounter prices close to the stand-alone
cost ceiling or the marginal-average cost floor, the firm should be left free to adopt
any price within these limits.
6. Price caps may substitute the ceilings on total earnings or rate of return on investment.
7. When inputs are supplied by a regulated firm, both to itself as a component of one
of its final product, and to a competitor producer, the regulated firms should charge
the rival the same price for that input that the former implicitly charges to itself.
10. Summary and conclusions
Privatization Policy is the cornerstone of economic policy of Pakistan and the paper
examines impediments to realising the objectives of privatization, which include higher
levels of efficiency, investment, production, employment, and physical and social
infrastructures and retirement of the public debt. So far 106 units have been divested and
government has received Rs 59.6 billion through the sale of these enterprises. The principal
method of divestiture has been through sealed bidding. The floatation of shares on the stock
exchange has so far been used to divest ten per cent of the shares of the Pakistan International
Airlines (PIA) and 12 per cent shares of Pakistan Telecommunications. Twenty six per cent
shares of Kot Addu thermal power station has been divested with handing over of the
management to the private sector firm.
Privatization has not been able to reduce the fiscal deficit, which has continued to be
in the range of six per cent. The deficit might have fallen further had the interest rates not
risen following the financial sector reform. Over the period of privitization in the nineties
development expenditure has declined from 8 to 3 per cent of GDP, thus suggesting that
privatization probably had no impact on fiscal deficit. Since cumulative receipt from
privatization does not exceed Rs 59.6 billion, which compared to a debt of Rs 2,500 billion
is rather small and could have only a limited impact on debt servicing. Nevertheless,
privatization of large banks and telecommunication can have significant influence on the
fiscal deficit.
Privatization can result in higher growth, increased productivity and lower prices but
only in a competitive framework. In a monopolistic framework, however, producers restrict
the output to maximise their profits. By regulating the monopolies a producer may be forced
to reduce price and increase the level of output. While such regulation is relatively easier
in tradable goods industries by reducing the imported duties on competitive imports, in case
of the non-traded goods it may not even be feasible.
The average growth rate of GDP has gone down from 5.44 per cent to 4.15 per cent
and the compound growth rate has fallen from 5.44 to 4.13 per cent during pre and post
privatization period. Similarly average growth rate of investment fell from 5.55 per cent to
just 1.82 per cent and the compound growth rate from 5.49 to 1.76 per cent. The decline may
have been due to the deflationary monetary and fiscal policies pursued under the stabilisation
programs but privatization has also been responsible for that.
The analysis of variance does not show any difference in the growth rate of output in
the pre-and post-privatization period. Similarly, there is no difference in the return to equity
PAKISTAN: DR. A.R. KEMAL 165
or return to fixed assets in the pre-and post-privatization period. The analysis also shows that
the growth rate of privatized industries fell subsequent to their privatization. However, this
could be attributed to a general decline in the manufacturing output during 90s. Controlling
for the general decline in output, privatization had no impact in 9 out of 14 industries, in
two industries growth rate increased and in 3 industries growth rate fell.
Total factor productivity of the manufacturing sector fell by 6 per cent over the 1990-
91 to 1995-96 period. However, it increased, on average, by two per cent in the privatized
industries over the same period. Nevertheless, improvement in productivity is observed only
in vegetable ghee and transport equipment and has fallen in the remaining sector.
The real prices deflated through the wholesale price index of the products of the
industries produced by the privatized industries have not fallen. As a matter of fact they have
increased.
Restructuring of public enterprises, prior to privatization has also resulted in loss of
employment. Almost ten thousand workers lost jobs as Habib Bank and United Bank were
restructured. Similarly 2,225 out of 3495 employees of the heavy engineering industries have
taken golden handshake or voluntary retirement and 2195 employees in vegetable ghee mills
not yet privatized have taken voluntary retirement.
Compared to an annual compound growth rate of 2.0 per cent growth in the overall
employment in the pre-privatization period, the growth rate fell to 1.39 per cent in the
postprivatization
period. Similarly, in the pre-privatization period employment in the manufacturing
grew at a rate of 6.5 per cent, but has declined at a rate of 13.5 per cent in the postprivatization
period.
The Census of Manufacturing Industries indicates 9.7 per cent decline in employment
in the large-scale manufacturing sector over the 1990-91 to 1995-96 period. It shows 12.4
per cent increase in employment in fertilizer industry but a decline of 45 and 75 per cent
in vegetable ghee and textile machinery industries. In other sectors the decline in employment
has been in the range of 20 to 40 per cent.
With a view to protecting the workers against the loss of job, the government and the
representatives of the workers had reached an agreement in 1991. Notwithstanding the
agreement, a very large number of persons have opted for the golden handshake scheme;
as many as 63.3 per cent of the employees opted for golden handshake. The incidence across
the industries however has been different though except for fertilizers in almost every
industry at least one-third employees have opted for golden handshake. In privatized units
of fertilizer only 10.5 per cent of the employees opted for the scheme. Whereas in the
Newspaper industry, almost everyone opted for voluntary retirement scheme, in rice and roti
plants it exceeded 90 per cent, in engineering, ghee and chemicals it exceeded 70 percent
and in automobiles and cement it exceeded 30 per cent. Event though Habib Bank and
United Bank have not yet been privatized they have made payment amounting to Rs 13
billion as golden handshake.
There has been no labour shedding in the two privatized banks. The employment cost
has gone up from Rs 677 million in 1990-91 to Rs 2017 million in ABL and from Rs 1048
166 PRIVATIZATION IN SOUTH ASIA
million to Rs. 4361 million in MCB. The increase comes out to be 197.9 and 316 per cent
respectively significantly higher than 104.0 per cent increase in consumer price index. It
indicates a sharp increase in wage rates in the banking sector.
Interviews with employers indicate not surprisingly that they welcome privatization.
Nevertheless, the manufacturers while welcoming privatization of manufacturing enterprises
did not appreciate the privatization of infrastructure enterprises unless prices of utilities are
controlled. They are of the view that more transparent privatization is necessary. They also
believe that the workers have gained by way of increase in the wage rates. On the other hand
the workers do not share this view. They complain of job insecurity, reduction in bonuses
and less fringe benefits.
Real wage rates in Pakistan have increased in the pre-privatization period but have
fallen since then. The CMI data show that wage rates in the large-scale manufacturing sector
have increased by only 2.5 per cent during the five year period. Though the average increase
in the privatized industries is 5.1 per cent, in vegetable ghee, compressed gases, and textile
machinery the wages declined by 12.3, 22.3 and 30 per cent respectively.
Privatization and other incentives offered are expected to increase the investment levels.
As a matter of fact the investment had started rising but political instability, sanctions and
the problems with IPPs have resulted in lower levels of investment. What will be the
response of the private sector is difficult to predict. Therefore three investment scenarios
have been developed. First scenario projects an increase in fixed investment to 18.2 per cent
of GDP by 2010. In scenarios 2 and 3, investment is projected to rise to 21.4 and 23.5 per
cent by the year 2010. Assuming a relatively high employment elasticity of 0.36,
unemployment rate would still exceed six per cent by 2010. The unemployment would still
be around six per cent in 2005 even if we assume high investment rates but then start falling
at a rapid rate. This shows clearly the need to adopt labour intensive technology and to make
sure that monopoly is regulated.
Since monopolist can restrict output and keep capital stock idle, regulatory framework
is essential. The regulatory authorities have to make sure that their decisions promote higher
level of efficiency.
10.1 Policy suggestions
Privatization policy needs to be pursued with the main objective of improvement in the
efficiency in economy. Since competitive framework is absolutely necessary for improvement
in welfare, tariff rationalisation, anti-trust laws and control of monopoly, authority coupled
with regulatory frameworks must precede privatization. Automatic systems to check the
monopoly powers needs to be built into the system
The sale of public assets should bring maximum prices to the government so that the
budgetary deficit is reduced and resultant inflationary tendencies may subside. This is possible
only if the privatization process is transparent. Transparency requires that reserve price is
appropriately estimated, they are made public before the opening of the bids and no sale
must be allowed below the reserve price. Since investors bid in view of the value of assets
PAKISTAN: DR. A.R. KEMAL 167
and liabilities, they should be allowed to make the bid on the basis of the information
provided by the commission and to slash the bid accordingly in case of deviation.
The public enterprises may be restructured before they are offered for sale to the
private sector. This is absolutely essential because of two reasons. Firstly, a losing concern
will fetch lower prices. Second, if the government has to bear the cost of golden handshake
then the government should restructure prior to privatization. The private sector should not
be provided a chance to convert the regular workers into contract workers. At present, the
producers encourage workers to get golden handshake and then employ them on contract.
The timing of the privatization should be such that it has minimal impact on the
workers. Probably the worst time for privatization is when a country is implementing IMF
stabilization programmes. The declining growth rates of investment and output result in very
slow employment growth, and privatization would result in an alarming unemployment
situation. It would result in falling real wages.The agreements reached with the workers
should be fully implemented. Retraining of workers should be given the priority.
The utilities, such as, power, railways and telecommunication should not be privatized
unless it is ensured that they can be effectively regulated. Instead of divesting such enterprises,
the government may consider leasing and franchising. The rules for regulatory agencies
should be so formulated that they can function independently without any coercion. There
should be proper checks and balances on these authorities without compromising their
autonomy.
168 PRIVATIZATION IN SOUTH ASIA
Table A-1: Average and compound growth rates of GDP, Investment and Employment
GDP Investment Employment
Average growth rate
Pre-privatization (1986-87 to 1990-91) 5.44 5.55 2.05
Post-privatization (1992-93 to 1996-97) 4.15 1.82 2.35
Compound growth rate
Pre-privatization (1985-86 to 1990-91) 5.44 5.49 2.00
Post-privatization (1991-92 to 1996-97) 4.13 1.76 1.39
Source: Based on data obtained from Economic Survey, various issues.
Table A-2: Growth rates of GDP, investment and employment in manufacturing (Post and
Pre-Privatization)
GDP Investment in Investment in Employment
manufacturing Large Scale
Average growth rate
Pre-privatization (1986-87 to 1990-91) 3.86 6.06 7.44 6.46
Post-privatization (1992-93 to 1996-97) 3.45 2.19 -2.45 -13.48
Compound growth rate
Pre-privatization (1985-86 to 1990-91) 6.03 7.44 6.46 0.44
Post-privatization(1991-92 to 1996-97) 2.16 -3.84 -6.64 -3.47
Source: Based on data obtained from Economic Survey, various issues.
Annex 1
PAKISTAN: DR. A.R. KEMAL 169
Table A-3 Bid values and payments on golden handshake of selected industries
S.No. Particulars Bid value Payment on Per centage Total No. of Per centage
golden payment employment officers
handshake
1 Automobiles 1032.77 133.085 12.88622 4604 1749 37.98871
2 Cement 6352.27 701.722 11.04679 8289 2992 36.09603
3 Chemicals 5320.53 801.2 15.05865 6342 4493 70.84516
4 Fertilizers 435.39 3.047 0.699832 688 72 10.46512
5 Engineering 193.35 98.696 51.04525 2661 2061 77.45209
6 Ghee Mills 620.05 348.054 56.13322 5057 3759 74.33261
7 Rice 237.35 92.603 39.01538 810 756 93.33333
8 Roti Plant 18.9 4.892 25.8836 676 670 99.11243
9 Newspapers 231.1 441.402 191.0004 1142 1142 100
10 Miscelleneous 175.15 934.774 533.6991 5056 4921 97.32991
Grand Total 14616.86 3559.48 24.35184 #REF! #REF! 63.33516
170 PRIVATIZATION IN SOUTH ASIA
Annex II
Protection of the interest of workers
Government signed an agreement with the All Pakistan State Enterprise Workers Action Committee
on 15th October, 1991 prior to launching the privatization program. The package had three components,
viz. protection of workers, a scheme of golden handshake and the buy-out by the workers. These
packages are give below:
Package A
(i) Workers are accorded all protection available to them under the Labour Laws. As a special
measure no retrenchment of the workers is allowed during the first twelve months.
(ii) 10 per cent of the shares of the privatized units is offered to the workers at a mutually agreed
rate.
(iii) Workers rendered surplus after the initial period of 12 Months, are entitled to the following
benefits:
(a) Priority in matters relating to the employment abroad.
(b) Availability of easy credit for facilitating their self-employment.
(c) A surplus pool of laid off workers was to be maintained by an agency appointed for the
purpose and the Privatization Commission is endeavor to find jobs for such workers. Till
such time, these workers are placed in employment, they are entitled to unemployment
benefit at the rate of Rs. 1000 per month for a maximum period of two years. This benefit
would be available to only those workers who have been rendered and remain unemployed
involuntarily.
(d) Suitable arrangements are to be made to provide training to surplus workers in new trades
and occupations.
(e) Grants are to be given for the marriage of their daughters.
(f) Scholarships are to be provided for education of their children.
Package B
(a) One month’s gratuity for each complete year of service is payable to the workers. Wherever this
gratuity is non-existent or less than one month, the gratuity is assumed to be of one month.
(b) Four month’s last drawn basic salary for each year of service will be paid in addition under the
arrangements of the Privatization Commission.
(c) All dues are paid only after the sale of units. However, all possible measures are adopted to settle
the dues before handing-over of the units.
(d) List of workers opting for golden hand shake is to be provided by the respective CBAs.
(e) All those including seasonal regular workers, who wish to avail the facility have their option
before the sale agreement is signed.
Package C
(1) In case of employee buyout, negotiations is facilitated in consultation with the Supreme Council
of All Pakistan State Enterprises Workers’ Action Committee.
(2) Workers are provided all opportunities to purchase a unit if they make a bid. They also have a
right of negotiations on the highest bid.
PAKISTAN: DR. A.R. KEMAL 171
(3) All bids made by the workers have to be competitive and in accordance with the bid documents.
(4) Workers are given concessions through negotiations if they are declared successful bidders.
(5) Wherever gratuity fund is maintained as a trust, the funds can be used for investments as per
rules.
(6) The savings in the Provident funds can also be utilized for bidding purposes subject to Government
rules and Regulations.
(7) A management plan (which should include a financial plan) is submitted by the workers for any
bid they make for a unit.
(8) Any unit owned by the Federal Government in FATA will avail the same facilities as available
to remaining units of state owned enterprises.
(9) The facility of group insurance for workers who opt for golden hand shake is available for
continuation provided he subscribes from his own resources.
172 PRIVATIZATION IN SOUTH ASIA
Bibliography
Alam, Quamrul, A. M. (1989): “Privatization Policy and the Problem of Industrial Development in
Bangladesh”, Journal of South Asian Studies, December.
Baumol, William J. (1996): “Rules for Beneficial Privatization: Practical Implications of Economics
Analysis”, Islamic Economic Studies, June.
Beesley, M. E. (1997): “Privatization, Regulation and De-regulation”. Rouledge. London.
Canadian International Development Agency (CIDA) (1987), “A Study of Divestment of Industries in
Bangladesh”, Vol. 1, Dhaka.
Candoy-Sekse Rebecca (1989): Techniques of Privatization of State owned Enterprises, Inventory of
Country Experience and Reference, World Bank Technical Paper 90
Caves, D.W. and Christensen (1980): “The Relative Efficiency of Public and Private Firms in a
Competitive Environment: The Case of Canadian Railroads”, Journal of Political Economy,
October.
De Walle, Nicolas van (1989): “Privatization in developing countries: A review of the issues. World
Bank.
Dotgson, John (1987): “Privatization”, in (eds) Howard Vane & Terry Caslin, Current Controversies
in Economics, Basil Blackwell, Oxford.
Employer’s Federation of Pakistan (1996): “Study on terms and conditions of employment in the
manufacturing and services sector of Pakistan”, FES, Islamabad.
Foreman-Peck, James (1989): Ownership, Competition and Productivity Growth: The Impact of
Liberalization and Privatization on British Telecom, Warwick Economic Research paper No. 338.
Kemal, A. R. (1993): Retrenchment Policies and Labour Shedding in Pakistan, Occasional Paper 17,
ILO, Geneva.
Kemal, A. R. (1996): “Why Regulate a Privatized Firm? The Pakistan Development Review. Winter.
Kikeri, Sunita, John Nellis and Mary Shirley, Privatization: The Lessons of Experience. The World
Bank, 1992.
Lawai, Hussain (1991): “Post Privatization Experience: Case Study of M.C.B.”, A paper read at
Seminar on Privatization organized by Management Services Division.
Nankani, Helen (1989): Techniques of Privatization of State-owned Enterprises - Selected Country
Studies, World Bank Technical Paper 89.
Naqvi, Syed Nawab Haider and A. R. Kemal (1991): The Privatization Experience of Public Industrial
Enterprises in Pakistan”, The Pakistan Development Review, Summer.
Naqvi, Syed Nawab Haider and A. R. Kemal (1994): Structural Adjustment, Privatization and
Employment in Pakistan” in Rizwanul Islam Social Dimensions of Economic Reforms in Asia,
ILO, SAAT, New Delhi, India.
Naqvi, Syed Nawab Haider and A. R. Kemal, (1998): “Privatization, Efficiency, and Employment in
Pakistan” in Tony Bennet (Ed). Privatization - How it works. Routldge, London.
Pakistan Federal Bureau of Statistics, Census of Manufacturing Industries, Islamabad.
Pakistan Federal Bureau of Statistics, Labor Force survey, Various Issues. Islamabad.
Pakistan, Finance Division, Economic Survey, Islamabad, various issues.
Pakistan, Finance Division, Government Sponsored Corporations, Islamabad, various issues.
PAKISTAN: DR. A.R. KEMAL 173
Pakistan, Privatization commission, Privatization in Pakistan, Islamabad.
Pakistan, State Bank of Pakistan, Banking Statistics of Pakistan, Karachi.
Punjab, Provincial Bureau of Statistics, monthly Industrial statistics, Lahore.
Rothscheld, N.M. et al (1989): “Privatization and public participation in Pakistan, Islamabad,
International Finance Corporation.
Selim, R. (1988): “Public and Private Enterprises in Bangladesh: A Case Study of the Jute
Manufacturing and Textile Mills” (Unpublished M.S. Thesis Submitted to the Postgraduate School
of Studies in Planning, University of Bradford), England.
Sen, Binayak (1992): “Privatization in Bangladesh: Process, Dynamics and Implications”, in
Privatization: Trends and Experiences in South Asia, Paper presented at an International Seminar
organized by CSCD, Colombo, and Sri Lanka.
Sind, Provincial Bureau of Statistics, monthly Industrial statistics, Karachi.
Stigler, George (1975): “The citizen and the state, Chicago, University of Chicago Press.
Vuylsteke, Charles (1989), Technique of Privatization of State owned Enterprises - Methods and
Implementation, World Bank Technical Paper No. 88.
Wolf, C (1979): “A theory of non-market failure. The public interest”.
Yotopolous, Pan A. (1989): “The (Rip) Tide of Privatization: Lessons from Chile”, World Development.
 Non-STOP
www.fact.co
m.pk Advertise
Here

The dangers of privatizing

education
By Kamal A. Munir

In the past two decades, there has been an almost ten-fold

increase in the number of private schools in Pakistan (from
about 3,300 in 1983 to approximately 32,000 by the year
2000). Fifty percent of these schools were established after
1996, reflecting a relatively recent explosion in growth. Recent
research shows a strong positive correlation between the
quality of education and fees.

It is clear that education in Pakistan is fast becoming a market

commodity, which will be bought and sold in the private sector,
rather than being provided by the state. As Pakistan, and other
developing countries, storm ahead on the course presently set,
it is important to assess the long-term implications of this
phenomenon for the development of these countries.

The importance of education cannot be exaggerated. It was

recognized as a basic human right 50 years ago in the UN
Declaration of Human Rights. However, that is not the reason
why developed countries like Britain decided, almost 100 years
ago, to provide free education to all their citizens. They took
this decision after realizing, long after the US and many
European countries did, the tremendous positive externalities of
primary education, i.e., it benefits not only the person who
receives education but also society as a whole.

These externalities have only grown since then. Strong links

have been found between, for example, education and better
health along with lower mortality and fertility rates. Due to its
much higher literacy levels, Vietnam, despite being a poorer
country, has child mortality rates that are one-third those of
Pakistan. Similarly, education is seen to reduce poverty and
raises productivity in all spheres of the economy.

Western governments spend public funds on education because

they believe that a better-educated population will contribute to
faster development. This is the lesson that Britain learned in
early twentieth century, replacing its class-ridden, highly
selective education system with universal, compulsory
education, and it is based on the same logic, which motivates
private employers to pay for employee training.

Equally, education is essential because, as Amartya Sen likes to

emphasize, it is needed to realize human potential in a broader
sense. It empowers people, making them confident enough to
influence institutions, processes and policies that affect their
lives. Education, thus, does not have to be justified in terms of
its instrumental value.

However, if education is to contribute to national

competitiveness and societal development, much depends upon
how it is delivered. The approach that the Pakistan government
seems to have taken is one advocated by the World Bank, the
World Trade Organization and the International Finance
Corporation (IFC). This entails viewing education as a market
like any other.

Pakistan seems to have wholeheartedly embraced this

philosophy and this is evident from the fact that private schools
are flourishing all over the country. Naturally, as a developing
country, Pakistan will also have to face the consequences of
this policy. And the consequences of leaving education to the
market are decidedly not that pretty.

First of all, it needs to be understood that markets develop

through segmentation. In accordance with different levels of
purchasing power, various levels of 'education', or products
being sold in the name of education, are made available in the
market for different segments of the population. This trend
typically continues, increasing the discrepancy between the top
and bottom tiers.

As most resources become concentrated to serve the upper

classes, the poor are deprived of basic education, or anything
that could be termed education. There is plenty of evidence
that charges for education serve to exclude the poorest children
from access to those basic services, or drive families into
poverty through having to meet the extra costs.

Accordingly, as private schools become more pervasive, it is

difficult to guarantee not only the quality of education delivered
by private providers to the majority of Pakistani children but
even its very existence. This is because under the market
mechanism, faced with insufficient demand, schools are free to
close down. In the absence of a publicly funded school in the
area - something that might become the norm in Pakistan -
many are thus denied access to any education, however
inferior.

The consideration of education in terms of its instrumental

value only is usually a self-fulfilling prophecy. Private provision
of education to the poor is 'streamlined', so to speak, to cut
costs. In other words, it is not 'education' at all, but more of a
ritual enacted by teachers and pupils. The implications of
imparting below par education, devoid of lofty ideals or
stimulating ideas, to the majority in a developing country are
staggering.

If you believe that education makes any positive difference to

your quality of life at all, you must concede that the children of
the poor will not only receive the worst jobs in the economy,
but will be destined to live the worst lives as well.

Empirical studies have consistently shown that as costs to

students and families increase, fewer children attend school.
These user fees are especially disadvantageous for girls who
historically have not been sent to school as often as boys.
Those who are thus denied education have their human
potential destroyed. They are extremely poor, usually
unhealthy, and typically die decades earlier than the rest of us.
They and their children are also open to the grossest forms of
exploitation.

We have already seen the consequences of privatizing other

basic services like water on the behest of the World Bank and
the IMF. Typically, this has led to an increase in rates. In some
towns in South Africa, water is delivered through pre-paid
meters, much like cellular phones. When the money runs out,
the water supply stops. This forces many people to collect
water from untreated sources, exposing their children to water-
borne diseases, which already kill more than two million
children a year.

The argument for private provision of education is that it frees

up resources that can be ploughed into making public services
better. However, the IFC reports which point this out, do not
provide any evidence to show that this migration actually
results in the 'freeing up' of resources and capacity that could
be put back into the public system. Instead, the money thus
freed up is either used to pay back debt, or used to subsidize
private concerns, when they claim to be providing a public
service from private funds.

For those peddling it, the private provision of education is an

extremely attractive proposition, with a global annual turnover
of $3 trillion. It is no wonder that Western companies
specializing in education want to pry open the markets of
developing countries through the WTO, the World Bank and the
IFC. The WTO wants to introduce education in the long list of
services to which the organization's free trade policy applies. So
far, some developing countries, notably India, have been
resisting this move.

However, if education does one day become a service under the

WTO rules, its subsidization by any government will be
considered a barrier to trade, and thus demolished. Thus,
countries like the US and Britain have been relentless
supporters of putting education on the WTO list of services - no
subsidies allowed by national governments - this would allow
their universities to set up bases in countries such as Pakistan,
without having to compete with institutions which may be
providing better education for free.

The success of Western countries' own experiments with

education of course flies in the face of all this. Recognizing the
value of education to social and economic development, the US
was one of the first countries to develop a publicly financed
education system (with the development of private education in
America, discrepancy between classes and social problems in
the bottom half increased). Similarly, in Japan, the
Fundamental Code of Education, issued in 1872 expressed the
public commitment to make sure that there must be "no
community with an illiterate family, nor a family with an
illiterate person".

Thus - with the closing of educational gaps - began Japan's

remarkable history of rapid economic development. Later on,
particularly in the second half of the 20th century, South Korea,
China, Taiwan, Hong Kong, Singapore, and other economies in
East Asia followed similar routes and firmly focused on general
expansion of education.

The 2003 OECD Report on Education has found Finland's school

system to be the best in the world in terms of the quality of
education. Pre-schooling for Finnish children begins at six years
old - usually in a kindergarten - and a year later they begin
their formal education. Teams from Britain and other developed
countries have been going to Finland to study their educational
system. All this attention has taken the Finns quite by surprise.
To them, there is no magic formula. They are running things in
a way that seems obvious to them.

The guiding principle of Finnish education is democracy and

equal opportunity. There is no selection involved at any stage.
All students are taught in the same class, and there is no
streaming whatsoever. Moreover, all education along with the
necessary schoolbooks, other learning materials, and meals are
entirely free. Finally, if the journey to school of a pupil in basic
education exceeds five kilometres or if it is difficult, taxing or
dangerous for the pupil in other ways, then the pupil has the
right to free transportation or suitable assistance.

In other words, the secret of Finnish success is generous

government funding and no segmentation. Both these
conditions are increasingly absent in Pakistan, where the entire
system is based on streaming and segmentation. This is
something that even neo-liberal economists such as Amartya
Sen understand.

Sen recently suggested that the obstacle of unaffordability

must be firmly removed across the world. To quote him: "I am,
of course, aware that some champions of the market system
want to leave school fees to the market forces. But this cannot
but be a mistake given the social obligation to give the
essential opportunity of schooling to all children."

Pakistan cannot afford to treat education like bananas. If it

goes down that route, very soon the multinationals will take
over the provision of education to its elite and upper middle
class, alienating them even more from their own country. The
middle classes will be left to local educational chains, and the
vast majority languishing at the bottom will be denied a half-
decent education, while delivering their families into poverty.

The privatization of education in Pakistan is likely to have dire

consequences for the national competitiveness and social
development of the country twenty years from now. By
relinquishing the provision of education to market forces, the
government of Pakistan may be digging graves for a vast
majority of its citizens. The sooner the policy makers realize
this the better.

| Home | Top |

Copyright © 2004 Fact Group Of Publications, All rights reserved

 Search Us
Sustainable Development
Policy Institute
Home SDPI in the Press Site Map
List of
Mission Publications
Statement Disclaimer: The views expressed in these articles are of the authors and Search
not necessarily of SDPI Resource
About SDPI
Centre
Research Annual Reports
Programme Education:Tipping the balance in whose SDC
Policy Advice
favour? Membership
Advocacy Vacancies
Training By Mohsin Babbar Internship
Programme
Partners SDPI in the
Sunday August 18, 2003, The News. Press

Education is important, above all, because it

empowers people to take more control of their lives.
At a personal level, it provides people with self-
confidence needed to make their opinions heard

ISLAMABAD: There are views that Pakistan should allocate

at least 4% (Rs170bn) of GDP to education, which is more
than our total defence budget (160bn for the year 2003-4).
Is it time to redefine our 'national interest'?

Article 37-B of the Constitution of Pakistan states that it is

government's responsibility to, "remove illiteracy and
provide free and compulsory secondary education within
minimum possible period." Since the formation of this
constitution, successive governments have consistently
failed to fulfil this responsibility.

Dr Mahbubul Haq once said, "Political commitment for

aspirated campaign to universalise primary education in the
shortest possible time is still lacking in the country."
Policymakers seem to have interpreted the above-
mentioned clause to suit their own agenda and have not
defined the timeframe of the "minimum possible period" for
the removal of illiteracy.
Unfortunately, Pakistan has experienced countless
unsuccessful educational reform programmes costing billions
of rupees, aimed to increase the overall literacy rate; yet,
they remain deeply entrenched in the quagmire of ignorance
and illiteracy.
Pakistan has one of the highest numbers of illiterates in the
world, and the current standard of education in Pakistan is
really shocking. According to a study by Oxfam
International, while the proportion of children are not
attending school in South Asia will fall by half by the year
2005, Pakistan will account for an increasingly larger share
of children not attending school. In fact, the study warns
that by 2005, Pakistan will account for 40% of the region's
children who are out of school, compared to 27% in the year
1995.
In 1990, Pakistan signed the Education for All (EFA)
declaration. It took four years to sign it formally by the then
Prime Minister of Pakistan, and a further six years for the
ratification of the commitment to EFA at the World
Education Forum, Dakar, Senegal. This reflects how our
governments rush to sign international conventions and
declarations, yet do absolutely nothing to ensure their
implementation.

According to UNESCO's publication titled, 'Literacy Trends

and Statistics in Pakistan', the enrolment rate in Pakistan
did not exceed 60%, set against the target of 100%
participation rate by the year 2000. This implies that 8m
children between the 5-9 age group never enrolled in
school, and half of the 12m that have enrolled may drop out
before completing primary education.

Of all the E-9 countries, Pakistan has the lowest survival

rate at the fifth grade, which will translate to 14m children
out of school by the year 2003. GoP has admitted in a very
valuable data source for education, entitled 'Pakistan
Education and School Atlas', published by newly established
Centre for Research on Poverty Reduction and Income
Distribution (CRPRID), a research centre under the
supervision of Planning Division, that Pakistan has dropped
far behind several other developing countries in terms of
education, and immediate attention is required to catch up
in this fast growing sector.UNESCO-CRPRID joint venture
'Atlas' has linked poverty and democracy with education and
literacy. The report argues that the link between education
and poverty is much debated. However, what is not disputed
is the fact that the undereducated are disproportionately
represented in the ranks of poor. Education gives people
new skills and empowers them to take advantage of new
opportunities. For countries, education raises productivity,
innovation and output.

Education is important, above all, because it empowers

people to take more control of their lives. At a personal
level, it provides people with self-confidence needed to
make their opinions heard. At a community level, it provides
the skills through which people can protect their rights--to
land, to schools, or to participation in public life. At a
national level, it creates a demand to be heard. Without
education, democracy is an empty shell.

There are some other commitments reconfirmed by the

government at EFA-SAARC meeting, which requires
revolutionary changes in policymaking to implement and
achieve them. Elimination of gender disparity is one of the
big challenges in this regard, which may never be achieved
without introducing a co-education system from primary to
tertiary levels. This task is politically difficult, as there is a
chance of resistance from politico-religious circles of the
country, who, at the moment, are very much engaged in
decision-making.

Ministers for education of Saarc countries, through a

ministerial meeting held last month in Islamabad, have
advised the governments to allocate progressively a
minimum of 4% of GDP to education. This, too, seems very
difficult and an almost impossible task in near future
because 4% of the GDP means that education needs
approximately Rs170bn annually, and that ample amount,
which is more than our total defence budget (160bn for the
year 2003-4), would never be earmarked.Under the
camouflage of 'national interest', invisible economic
managers are not going to cut down defence allocations to
meet this demand.

A meagre amount of Rs3.1bn has been allocated for the

development of education sector in this year's budget,
compared to previous year's allocations of Rs2.7bn.
According to the latest economic survey, in the year 1995-
96 the total allocations for education sector were equivalent
to 2% of the GDP. In the year 1996-97, they were raised to
2.62 %, but when the military government took over in
1999, these allocations were reduced to 1.6% for the year
2000-01, and were slightly increased to 1.7% of the GDP for
the fiscal year 2003-04.
The education sector is facing a huge gap between rural and
urban areas as well, similar to the rest of the social sector
components. In every programme, which aims to bring
reforms and to increase overall literacy rates, policymakers
give priority to urban development in terms of allocations
and projects. As a result, in the year 2003, the estimated
rural literacy (40.91%) is less than that of urban literacy
(68.74%). Although the UNESCO Pakistan report reveals
that growth rate for female literacy has nearly doubled, still
the gap between the two genders is very huge. Estimated
figures for 2003 show that female literacy rate is 38.57%,
while male literacy rate is 61.93%.

If we compare female literacy rates of urban and rural

areas, the gap is still larger--61.89% urban literate women
and only 27.06% rural literate women. Another evidence of
the increasing divide between rural and urban development
is that of 21 districts where literacy is very low. Only two of
these districts are urban-based. Gujarat and Jhelum had
their status changed due to very high literacy. There is a
need to further explore such success stories and what
factors lie behind such rapid achievements through research
and analysis, and replicated in areas where there is low or
very low levels of literacy.

Policymakers and planners have been emphasising on

investments in higher literacy education, instead of primary
education, to achieve set target. Low levels of investment in
basic and primary education, successive failures of promises
made in every plan, and the practice of missing well-marked
deadlines, have created a credibility gap. Information
technology education--which is more or less a completely
urban-based education--is enjoying a larger chunk of the
budgetary allocations as compared to formal education
sector.

Planners are unable to understand the reality that increasing

SDPI homepage | Top of this page

Copyright © 2003 SDPI - All Rights Reserved