A constant struggle for control of economic resources between the private and public sectors

Nov 04 - 10, 2002

Nobel Laureate Joseph Stiglitz's new book 'Globalization and its Discontents' has recently created quite a furore and elicited a surprisingly aggressive reaction from the IMF. One opinion that Stiglitz made in the preface of the book, though struck a chord with this economist, and is something that perhaps is ignored in general by public. In this context perhaps equities analysts, such as myself, are the most guilty of pushing for something that we have not thought through clearly. Stiglitz states that he is a proponent for privatization if a necessary condition is met that the privatized entity is then more efficient and the process leads to lower prices for the consumers. It may be pertinent to add, in the context of listed public entities and their valuation, does the privatization lead to greater generation of wealth for the minority shareholder?

Privatization has, over the last two decades, been the "buzz word" for economic reforms and progress. These two decades have been, as Bill Gross of PIMCO names them "unfettered capitalism". In the constant struggle for control of economic resources between the private and public sectors, the private sector had gained ascendancy which led to an era of deregulation globally. Paul McCulley of PIMCO in the June 2002 edition of 'Fed Focus' noted, "This year's Forum was a "biggie," in that PIMCO declared a major secular turning point: America's twenty-year journey towards more unfettered capitalism, fuelled by a shifting of power over resources from the public to the private sector, is over. The years ahead will involve a remixing of America's mixed economy indeed the global mixed economy towards greater public sector power over resources."

Pakistan climbed on to the unfettered capitalism bandwagon late and then lost its way as successive governments lacked the political will, or due to conflict with self-interest, to follow through with this programme, that was until the coup in October 1999. The change in government weakened Pakistan's ability to counter the demands of the key proponents of unfettered capitalism, the international financial institutions, for deregulation and privatization. The period of 1999 to present has been one of acceleration in the rate of deregulation and more effective implementation of the privatization process.

Stiglitz's argument and PIMCO's identification of a new secular trend raise interesting questions about privatization process. Can the government justify the privatization of any or all of its assets under Stiglitz's criterion? Will the privatization of companies such as PTCL, PSO and SSGC foster greater competition, improved efficiency and lower prices for the consumer? Can deregulation, without privatization, achieve similar results. New technology is already forcing PTCL to become more competitive, and ending its monopoly at the end of 2002 will further this trend. From the equities market's perspective, will the privatization of PTCL add value for the minority shareholder? Why is the equities market and analysts in general so bullish about privatization? This may be a symptom of the impact that foreign investors had on our market, where fund managers were looking for privatization stories and rewarded (through greater investment) progress on privatization. But would a run up in the price of a scrip make sense in an environment where foreign investors remain even risk shy? This question may be even more pertinent now, given the extraordinary price performance of Pakistan State Oil shares over the last few weeks fuelled by the comments of the Chairman, Privatization Commission. And as PIMCO depicts, where foreign fund managers are looking to benefit from a secular shift to greater public sector power.

My colleague, Nayantara Noorani, in the context of PTCL's privatization notes, "Though PTCL's current management have made strides towards raising efficiency as well as revenue generation capacity in order to achieve sustainable growth in the bottom line they still have a long way to go. In this context as the sector becomes increasingly deregulated, in post 2002 era, the current pace of improvement though notable is not sufficient to operate in a more competitive environment, since the market is unlikely to tolerate any slip going forward. In this context with deregulation continuing to accelerate in Pakistan's telecommunication sector, consumers should benefit from rising competition and greater choice of service providers based on service quality, product range and delivery cost. The ultimate question is, whether the proceeds from privatization in terms of the present value of future cash flows of PTCL are sufficiently large to offset the loss of revenue to the government?

The objective is not to question the privatization process itself its too late for that but to call for a greater effort from agencies related to the privatization and to identify whether Stiglitz's conditions are met. The matter may not, and probably is not, about whether or not privatization should occur, but of how the privatization is conducted. The question to be asked is, whether the sequencing in the privatization process will lead to maximum value for the country over the longer run, instead of the present condition for sale gaining maximum value now. What should be considered is whether say doing the "baby bells" treatment to PTCL before sale could enhance competition and value for the consumer. Would it lead to greater job creation? If the privatization occurs and there is job destruction, then are there other sectors which are creating enough jobs to take up the slack. If there is job destruction and no creation will the consequent social costs outweigh the benefits? What steps can be taken prior to the sale in order to prevent such ills as job destruction, private monopolies, etc.

The present government has shown that it is well aware of the need for adequate sequencing, but the question remains, will the next democratically elected government show the same ability? That ladies and gents will be the million dollar question for investors who have taken positions in stocks such as PSO and PTCL with a view to gaining from their privatization.