Impact Of Privatization On Pakistan Economy

INTRODUCTION

1.1

Background:

The most notorious economical measure the governments do often avail for structural economic-changes specially in developing nations across the world is "privatization". The very term is taken more to be a political than of Economics' literature, and public opinion towards it is grounded –unfortunately- more on ideology than empirical facts. Fortunately it doest reduce its importance. It's not less than a lesson that "privatization", is yet criticized as necessary evil which get ride of 21st century's economic policies round the globe. Privatization is an important instrument of economic policy. It is the transfer of property or control of assets used to deliver goods or services from the public to the private sector. That may be a narrow definition refers to privatization at the level of the firm or units within it. While, a widely accepted definition of privatization encompasses the privatization of management as well as the privatization of ownership. Broadly defined, privatization is the abolition of barriers to private sector provision of services or the infrastructure necessary for their delivery. The broad definition refers to Privatization at sector level (e.g., telecommunication, electricity, social security, etc.). There may be other types of privatization as "Contracting Out", the government makes a well defined contract with private firms to efficiently manage public programs, provide services, or conduct public projects using public resources. "Vouchers", rather than providing services, the government issues vouchers entitling eligible individuals to obtain these services from private providers. "Asset Sales", the government sells program assets to a private firm that then takes over provision of the service for a profit "Public-Private Partnerships", cooperative ventures with the private sector, usually involving infrastructure. "Grants", private firms receive public money to provide public services or programs. "Franchises", Private firms are granted monopoly to manage or provide public services. "Deregulation", Removal of regulations allows former public services to be provided privately without public supervision. "Service Shedding", The government simply ends provision of a particular service, opening the door to private companies. "Managed Competition", The government creates a contracting process which allows public employees to bid along with contractors. As we have a bird eye view of the modern concept of privatization the history leads us years past event. When Federal Republic of Germany took a decision to sale a majority of VOLKSVEGAN shares to private investors. It was followed by major breakthroughs of Margaret Thatcher’s privatization of Britain Telecom and Chirac’s privatization of large banks

in France. The concept spread all over the world just like jungle's fire emerging economies of the time like Japan, Mexico, and France followed it. But collapse of communist economical structure in eastern Europe and even in former Soviet Union tempered the momentum. Over the period of 10 years between 1984 and 1994, there has been a world-wide shift of $468 billion in assets from the public sector to the private sector (Poole, 1996). In subcontinent the concept arrived in late 80s. we will discus the local scenario in detail. After the fall of Soviet Empire economies on earth moved towards the new era the nourished practical struggle toward "market economy". Where the transaction will be finalized by market rather then state's executives. The basic concept behind that revolution was right of private ownership. Property rights aims to smoothen the various transactions in the marketplace. Competitive markets, in which transactions are effectively handled by market prices, rely heavily on formal, well-defined property rights (Mankiw, 2001). Previously researcher like De Soto explains, “To be exchanged in expanded markets, property rights must be ‘formalized’, in other words, embodied in universally obtainable, standardized instruments of exchange that are registered in a central system governed by legal rules” (1996). Major work in this regard was followed as another fundamental aspect of privatization, which plays an essential part in the efficiency improvement2 associated with privatization, is embedded in the Coase Theorem. Ronald Coase proposes that the private sector is effective in solving the problem of externalities3, through costless bargaining, driven by individual incentives. According to the Coase Theorem, individual parties will directly or indirectly take part in a cost-benefit analysis, which will eventually result in the most efficient solution (Mankiw, 2001). Thus, coase argues the role of the legal system is to establish rights that would allow the private sector to solve the problem of externalities with the most effective solution. A major implication of the Coase Theorem is the fact that the initial allocation of rights does not affect the outcome as long as the rights are well-defined. Furthermore, the solution that results from bargaining of private parties will be a Pareto optimal solution. From the perspective of privatization, the Coase Theorem Issues in Political Economy, Vol. 14, August 2005 As …….. suggested that government also privatize the "SOEs" to reduce administrative cost and reduce layers of bureaucracy. Privatization directly shifts the focus from political goals to economic goals, which leads to development of the market economy (Poole, 1996). For an efficient growth of economy it’s a primary obligation of government to reduce the competition barriers, well known as monopoly. Privatization directly shifts the focus from political goals to economic goals, which leads to development of the market economy (Poole, 1996). History proves the major privatization efforts do positive spillovers of improved technology, better management skills, and access to international production networks” (World Bank, 2002) attract the FDI. Moreover Easterly gives an incentive theory for economies that can be for of technological sort of improvement for economy. In other words, Easterly alludes to an idea that a combination of different factors (investment, education, technological innovation), along with a fundamental structural change might be the path to long term economic growth. One of the underlying themes throughout Easterly’s book is the idea that people respond to incentives. In fact, most of Easterly’s analysis of various economic models throughout the book is an analysis of the incentives created by those models (Easterly, 2001). To sum up privatization has a direct relationship with economic growth, or restructuring.

1.2

Overview of Various Efforts for Privatization in Pakistan.

If we thorough fully analyze the economic structure of Pakistani economic structure right from separation to today, we can see obvious shuffling efforts. It also expands from extreme of nationalization to massive efforts of privatization. Privatization as a part of economic policy is not infinite in Pakistan the history prolongs more that 60 years ago. In 1952 Pakistan Industrial development Corporation (PDIC) was established to boost up their managerial and production efforts of more than 50 industrial undertakings. When it did nourish government decided to sale theses industries to private sector. While 70s were an extreme level, when governmental decided to nationalize the major industries in the country. The concept behind the nationalism was to uproot the concentration of wealth from a few hands to general public. The philosophy of the government was seemed to be influenced by the communist economic structure. Later on with change of regime in the country turned the table of economic policies. Now government introduced Transfer Managed Establishment Order (TMEO) in (1978) to improve the operational efficiency of former nationalized industrial units. The Order promulgated with explicit right of exowners to regain their assets. However, in case there was no positive response from former owners, the government was free to transfer the management and control to any other party on whatever terms it considered fit. The Order also envisaged the transfer of management of profit making units. Due to limited scope of disinvestment policy of the government and lack of any legal and institutional framework not much headway was made and only two industrial units were returned to their former owners, during this period. Later on there was an aggressive movement from higher governmental level. A cabinet committee was established under the chairmanship of finance Minster the other members were Minister for production and Mister of industry. The committee was named as Cabinet Disinvestment Committee (CDC) in (1985). The highest level of governmental involvement resulted to limited fruitfulness. The major disinvestments of the era were Tarbela Cotton and Spinning Mills, Domestic Appliances Ltd and Pak Iran Textile Mills at Uthal, Quality Steel, Karachi Pipe Mills, Pioneer Steel Mills, Special Steel Mills and Trailer Development Corporation etc… the overall development remained not noteworthy. The few of many reasons were insufficient legal framework and institutional hold up as well as lack of political willpower mainly hampered the course of transferring the SOEs to the classified sector. Later on in 1988 the newly elected government of PPPP reminding that it was follow up of Mr. Bhutto's regime, Government realized the situation. Government acquired the services of a famous British research firm named as M/s N.M. Rothschild for consultancy over privatization efforts. The fim drafted a report named as “Privatisation and Public Participation in Pakistan.”. the report emphasized on "Wide Spread Ownership" program. It means the development of Pakistan's capital market. The report put a special consideration upon , adequate structural changes, removal of communicational barriers, effective marketing campaigns, and sound policies regarding workers. Company took a sample of 50 firms and then short

listed only seven were suggested potential candidates for initial widespread ownerships. these were Habib Bank, Muslim Commercial Bank Pakistan National Shipping Corporation (PNSC), Pakistan International Airlines Corporation (PIAO). Pakistan State Oil (PSO), Sui Southern Gas Company (SSGC) and Sui Northern Gas Pipelines Ltd (SNGPL). 1991 the Government of Mr. Nawaz Sharif took aggressive policies in this regard. in January 1991, recommended the disinvestment of 118 industrial units, which included 45 nationalized units taken over during the period 1972-74. The government approved this disinvestment plan and announced the creation of a Privatization Commission on 22nd January 1991 to implement the disinvestment program within the shortest possible time. Once again a cabinet committee was established to approve the privatization commission's plans, named as Cabinet Committee on Privatisation (CCOP). The Committee in its preliminary report, submitted to the government in January 1991, recommended the disinvestment of 118 industrial units, which included 45 nationalized units taken over during the period 1972-74. Later on privatization was a consistent instrument of governments. In 1999 once again a change in regime but Mr. Parvez Musharaf lead government took the most bold steps in this regard. Now a days current government have a massive plans on their table with a different "PPP" model of privatization. If we do summarize the major successful efforts we have list of such transactions. Habib Bank Limited Bidding for sale of 51% shares was held on 29th December, 2003 with highest bid of Rs.22.409 billion. LOA issued on 1st January, 2004. United Bank Limited 51% shares sold in October, 2002. Payment of US$ 176,907,858 and Rs.1, 852,500,000 received. Muslim Commercial Bank 75% shares were sold in April, 1991 for Rs.2,420.0 million. Remaining shares have been divested in January, 2001, November, 2001 and October, 2002 for proceeds of Rs.1, 287.2 million. National Bank of Pakistan 23.2% shares have been divested through IPO/POs in November, 2001, February, 2002 (Rs.373.0 million) November, 2002 (Rs.782.0 million), November, 2003 (Rs.604.0 million). Bank Al-Falah 70% shares of Habib Credit & Exchange Bank were sold in July, 1997 for Rs.1, 6333.9 million. 2% shares were meant for the employees 28% shares sold in block for Rs.1, 226.0 million. The shares not taken up by the employees were also sol. Sale Purchase Agreement was signed on 13th December, 2002. Transaction has been completed. Banker’s Equity Limited It was privatized in June, 1996 with 26% shares for proceeds of Rs.618.7 million. National Development Finance Corporation It has been merged in National Bank of Pakistan. Investment Corporation of Pakistan (ICP) ICP Mutual Funds were divided into 3 lots to encourage competition. Bidding for Management Rights of ICP Lot ‘A’ Mutual Funds consisting of 12 funds was held on September 21, 2002. Highest bid of Rs. 175 million made by M/s ABAMCO Limited. Agreement for transfer of management rights signed on 11th October, 2002. The transaction stands completed. Bidding for ICP Lot ‘B’ Mutual Funds was held on 24th October, 2002. Highest bid of Rs.302.5 million made by PICIC. Agreement for transfer of Management Rights was signed on 13th December, 2002. The transaction stands completed. Bidding for ICP SEMF was held on 22nd March, 2003. Highest bid of Rs.786.786 million made by PICIC. Transfer of Management Rights Agreement signed on 3rd May, 2003. The transaction stands completed. Allied Bank Limited ABL was

privatized in 1991 with 51% shares being sold to the Employees. There are few other companies which are under consideration like OGDCL and Pakistan Railway etc… There have been different models and scenarios of privatization yet motives were always almost same. Steps are being taken to expedite the privatization process as well as to rationalize the macro economic environment for speedy economic development of the country.

1.3

Problem Identification

Pakistani economy has been through various phases over the time. The have been a long periods of recessions and even booms. The economy have grown up to a level it is notable that Pakistani economy is one of the major economies of the world as for as volume is concerned. The economy in the recent decade has worked dramatically. Various sector contributed to wards it. Primarily it is divided into two obvious factors as external and internal. The external factors may be considered as of high impotence as a nation as Pakistan is paying a heavy cost of war against terrorism after attacks on world trade centre and pentagon. But at the same time major powers of the world have deep interest in a stable and vulnerable Pakistan. Because internal stability of a nation cant be achieved without economic stability so Pakistani economy is aided at many times during last decade by big guns. Not only in terms of structural revolution but also in the terms of financial aids. The internal factors include the liberalization of of economy, incentives in investments, and up large extent frameworks amendments. The foreign investment in the form of FDI and FPI has contributed the economy in many terms. It resulted in structural changers, technological improvements, human resource developments, well being indicators of economy and international integration as new markets were accessed. As three major sectors like production, services and financial sector reached to developmental boom. Talking about product ional and industrial sector many entities like Communication, Food & Beverage, Oil & Gas and Financial were driven by huge foreign investment. Talking about raw manufacturing or low value addition sectors like Pharmaceutical, Engineering Products, Sugar, Cement, Automobiles and Fertilizers industries have seen many technological improvement that did not only returned in the form of return but technological improvements. Talking about the whole scenario we cant ignore the impact of privatization as it opened new horizons not only in product but also in services sectors. Privatization is directly involved with FDI as it provides room to foreign investors to operate in open market and competition based market structure. We have seen despite of political instability, law and order issues, and many non ignorable factor the investor took a great interest in investment in Pakistan as compared to any other state in the world. A lot of investment made in the sectors which were privatized by the government. There are number of examples there like PTCL, UFONE etc… As a

researcher having a deep interest in national economy I think there is a lot of room for such a study where we can check the impact of privatization on Pakistani economy during last decade are so. Not a massive work has been done in this regard. That study will help not only in creating public awareness but also to policy makers to see the over all impact of privatization on economic performance of the country.

1.4

Problem Statement

A deep study of foreign literature especially in Eastern Europe, India, Latin America, and Russia suggest that there is an obvious relationship between performance of economy and privatization. How various parameters of macro economy respond in the existence of privatization? We will try to study the impact of privatization on economy. There are many theoretical economic benefits that are connected to the process of privatization. Along with creating strong incentives that induce productivity, privatization may improve efficiency, provide fiscal relief, encourage wider ownership, and increase the availability of credit for the private sector. This study will try to check the effects and the manipulation of privatization on the rate of economic growth, stimulated by the idea of people responding to incentives. Ultimately, the goal of this study is to evaluate and analyze the idea of privatization as a possible factor of economic growth. We will try to find out any linkage between these two variables in Pakistan's environment.

1.5

Objective of the Study

Primarily study will examine the relationship between privatization and macroeconomic growth of the country. The relationship has been found in various countries but it is still to put on test in local scenario yet. To abridge the gap which have been found in the literature we will conduct an empirical relationship. the result of the study ignoring any way it does lead will help our national policy makers to overview the past outcomes in the terms of economical performance. As it has been suggested by famous economists of Pakistan like Dr. Ishrat Hussain former governor of the state bank of Pakistan. We we will try to check the validity of the numerous arguments given by the economists. Study may help the general public and students to make their mind set not upon the hypothetical basis. Statement of the political gain holders, or general perception prevailing among the peoples of the nation no a days. It would help students to broad their vision about this prevailing phenomenon, at the same time it would lay down a path for further to local researchers to proceed further.

1.6

Rationale of the study

Unfortunately not a considerable work have been done in this regard have been done in local arena. As a result not a considerable published literature is available on this relationship. Though it is a burning issue but it is fact that privatization will set the new spectrum for economy. Privatization has been studied in various dimensions by local researcher, but as a relationship with macroeconomics is still untouched. In future government is going to take some bold initiatives in state owned enterprise's privatization. Privatization contributes to economic growth through productivity gains, efficient utilization of resources, better governance and expansion in output and employment. Profit making enterprises under the public sector may be making profits 10 due to the unique market structure such as monopoly or other privileges or concessions conferred upon them by the government but it does so at the expense of the consumer who has to pay higher than market price for the product or the services. But public pressure groups do often create hurdles in this process. It shows a gap of mutual consent among nation. We will try to see a healthy or non healthy relationship among our primary variables to abridge this gap. A sufficient amount of literature is available especially in developing countries like us which have gone through this process. If the relationship is rationale that we should avoid the cost of gradualism in this transactions. As studies in India provoked this cost "The Imperatives and Consequences of Gradualism" by Devesh Kapur and Ravi Ramamurti (July 2002).