Let the private sector run the show – Opinion

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It is not a myth that in Pakistan the government is poor while the people are rich in money. Public debt is five times greater than formal private sector credit. There is little need to prove that the private sector is efficient and that the public is inefficient. The government should involve the private sector in the management of companies currently operating in the public domain.

There is a perception in Islamabad – especially among senior government officials – that private actors are rent seekers and abuse the market. Yes they do. But this is in fact a regulatory failure. Around the world, the private sector is exploiting regulatory loopholes; it’s the regulator’s job to make sure that doesn’t happen. Regulatory failure cannot be blamed as market failure. The private sector should be given space. It is efficient in the allocation of resources. And in a dynamic regulatory regime, rent-seeking transforms the market into a search for efficiency.

The other argument against the management of companies by the private sector is that they accumulate wealth, but the benefits are not passed on to the rest of the population. Consolidation of wealth is a problem, and it is a global problem. But the benefit is passed on to the economy as a whole in the form of efficiencies provided by the private sector. And losses in the public domain result in the payment of the wealth created to lenders as debt service.

Some have anti-business sentiments based on the perception that there will be job losses once a public entity is handed over to private hands. This is not true. There is sufficient evidence that privatization in the 1990s and 2000s paid off and created many new jobs. Yes, dead wood in the public sector will lose but these would be replaced by a greater number of efficient and capable employees. The argument of saving jobs by not privatizing is like not using machinery or mechanization in any industry to save jobs.

Pick any industry and see the benefits of privatization since the 1990s. The banking industry was plagued by willful defaults and jobs were offered on political whims. In the 1990s, the process of privatization and deregulation began and there has been no turning back since. These banks are now profitable and have created tens of thousands of jobs. They are the biggest taxpayers in the country. There is no correspondence in the services.

Another example is the cement sector. In the 1990s, when the deregulation and privatization of the cement sector began, the sector had a capacity of 9-10 million tonnes. Today, it is running at 70 million and in two years it will pass 90 million tonnes. The sector is internationally competitive and exports 8 to 10 million tonnes per year. The industry has moved from the wet process to the dry process and from fuel oil to coal. Then they started using waste heat recovery and other effective ways to cut costs.

Yes, the cement factories have made profits and their motivation is profit maximization. But in the process, billions of dollars have been invested by the private sector. Many jobs have been created. Consumers have benefited from better pricing – cement price inflation is minimal compared to many other commodities. Prices in the northern region were between Rs 500-600 per bag in 2015 and they are today. Just compare it with the price of wheat, sugar, or whatever. Competition and process improvement have yielded these results. However, today, the sector is in the news because of its cartelization. Yes, the cartel can exist. But this cartel in the private sector is certainly better than functioning inefficiently in the public sector.

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

Fertilizers, edible oil and many other industries boomed after privatization. Now let’s look at the sectors operating in the public domain. The country’s biggest economic headache is circular debt in the electricity sector. Here, deregulation and privatization of the electricity and gas markets have been resisted for three decades. Wapda was unbundled in the 1990s, but control is still in the hands of Islamabad’s electrical division. Discotheques exude inefficiency. Nepra’s regulatory structure is questionable.

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

Bureaucracy likes control. It’s human nature. Bureaucrats like to be in business. They give job favors to friends and family. Political actors do it in an ugly form. This control, public possession and weak regulation has cost billions of dollars in circular debt and costly energy for all. This is the cost of regulatory capture.

Just compare SBP with Nepra. When SBP was under bureaucratic control, willful defaults were a norm. If PPIs are milking, you have to ask Nepra why he allowed absurd return structures to occur and how the costs have been artificially inflated. Nepra has four members representing each province. What do the provinces have to do with regulation? Think what a mess it would be if monetary policy were also handled the same way.

Ultimately, the government should step back from running businesses and strive to form strong regulatory frameworks and have the best people implement them. Let the private sector take risks and earn returns. Let the private sector innovate and make it beneficial for all.

Copyright Business Recorder, 2021



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