Privatisation & Its Objectives
English Essay on "Privatisation & Its Objectives" - Compositions on "Privatisation & Its Objectives"
Privatisation refers to the sale of all or part of a government’s equity in state-owned enterprise (SOEs) to the private sector or to the placing of SOEs under private management through leases and management contracts. In a reversal of the nationalization trend of 1973, privatisation was increasingly adopted on a worldwide scale in the 1980’s, covering both rich and poor countries. But as its process unfolds, public opposition gets stronger. Government has to straighten its priorities and ponder the objectives or privatisation. Privatisation, it should always be kept in mind, is a means to an end and not an end in itself.1
Need for Privatization:
There are proximate or enduring reasons for privatisation. In the proximate reasons the first is fiscal pressure on the government. It stems the flow of public funds in the form of subsidies and grants to SOEs. Government with massive, budget deficits and external debts usually resort to privatisation. International pressure on government is another reason for privatisation. The pressure usually comes from international donor agencies such as the World Bank, IMF, USAID. No longer content with eliminating government subsidies to private sector. WB which only evaluated projects for soundness is now concerned with broad economic policies. educationsight.blogspot.com The government dependent on the agencies are thus forced to follow their advice. Privatisation in such countries cannot be a huge success since it is originated from outside and not from within. In contrast to the proximate causes just discussed there are some long term reasons for privatisation too, factors such as capital intensity, high market power, natural monopoly conditions, high economic rents and externalities.
But in many countries SOEs were created due to political revolutions. Many firms which wouldn’t have been nationalized under calmer circumstances were converted into SOEs. Such enterprised are usually inefficient and overused. Sooner or later the government finds out that are a burden on the economy and aren’t as successful as similar firms in the private sector. And so privatised them. ft is also said that as the private sector has now matured SOEs are no linger necessary.
PRIVATISATION IN PAKISTAN: All the reasons stated above are pertinent in Pakistan’s case. Selling off the SOEs may appear to be the easiest opinion but it has its flaws. Bhutto nationalised the privates sector in 1971, when the time wasn’t ripe for such a change. Capitalism hadn’t quite developed, there were numerous monopolies and nearly 80% of the country’s wealth was controlled by the notorious 22 families. Nationalization seemed the fastest way to change the situation. Though the motive was good, the solution didn’t come upto expectations. US also faced this problem in early 1900s hut its overcame these problems scientifically. Although the robber barons were not made to give up everything their. Monopolies were successfully broken. Slowly anti -trust institutions were developed and market power distributed. In Pakistan the political uncertainty and disregard for the constitution make such a gradual change difficult to implement. Bhutto’s nationalization imply swapped one ‘set of problems for another.’ The all powerful robber barons were replaced with unaccountable bureaucrats. Most of the industries taken ever either stagnated or decayed.
Today the public sector consists of some 170 public enterprises, owned by 69 government sponsored corporations (GSCs). Their combined annual sales turn over is about Rs. 160 billion and they employ 270,000 people. Assets under the corporation’s control represent 40% of the fixed investments in Pakistan. The corporation’s equality capital is almost double the $3 billion market capitalization of the 700. Despite these resources the public sector has failed to achieve anything except giving a lot of people jobs which wouldn’t have been there under private sector. Government records show that state companies eat up over Rs. 1 billion every year in subsidies and grants. Of all the GSCs only seven or eight earn more than the opportunity cost of capital If the capital invested in all the GSCs ws to yield a rate of return equal to the opportunity cost of capital, the government would have an annual income of Rs. 88 billion, enough to wipe out the present level of public debt for two years.
Nawaz Sharif took power in December 1990, and put privatisation as one of the key measures to help shrink budget deficit. The government also hoped that it would attract more foreign investment and stem flight capital. But things did not quite go that way. The sale of Muslim Commercial Bank was a dirty affair. The Bank wasn’t handed over to the highest bidder or to the previous owner, but to the National group headed by the prime minister’s friend Mian Mohammad Mansha. Although one of the other bidders took the matter to the High Court they too it back almost immediately when the government threatened them with tax evasion charges. The National group owns 15 billion of annual exports.
The sale of Allied Bank is also surrounded by such controversies. First of all the government has highly over-valued the bank, asking for a piece of Rs. 70 per share. Apart from all these ill-organised attempts at privatisation, there have been other incidences which have really, weakened investor’s confidence in the government. One of them is Gadoon Fiasco. It illustrates the slipshod manner in which the government is carrying out its reforms. Under pressure from the US to clean up its poppy-growing areas, successive governments in Pakistan have been trying to persuade the growers to find more acceptable.
Regarding foreign investors, the situation is worse. Pakistan’s infrastructure is extremely weak and cannot support multi-national companies. Pakistan’s political scene is another hindrance to foreign investment. Recently another government was ousted out of office and things became to a standstill again. In 1991 the import licenses of a US $ 43 million joint venture between Toyoa and Habib Group was cancelled mainly on political grounds, and now Honda is reconsidering setting up an assembly plant in Punjab.
Although Pakistan is now offering what is perhaps the most lucrative deal in this part of the world it does not seem to lure many people. For foreign companies, population sizes, living standards, infrastructure and political stability are often more pertinent. Pakistan need not worry about population but its per capita income severely limits the types of goods that can be sold in the domestic market.
When a country like Pakistan starts a privatization process with a shabby infrastructure and an inefficient stock market the process takes on a new meaning. Instead of being a means to attain government objectives, it becomes a huge challenge by itself. Many forces begin to act against it, including the bureaucracy, the employees of the SOEs, the consumers and many politicians. In Pakistan all these forces are compounded by political chaos.
Privatisation of national banks has raised fears of the return of a small dominant elite. Although these banks are inefficient, and ill-managed, they are perhaps willing to lend money to small businesses. When they fall into private hands the loans will once again start going to friends without any concern for small businesses. The system already encourages monopolies; the state of anti-trust laws, or for that matter any business law in Pakistan provides the ideal background for the return of the 22 families.
In Pakistan privatisation has become a necessity, but what is even more necessary are the conditions which have to be there in order to make the process a success. In its eagerness to privatise, the government may neglect the dangers that accompany privatisation: macroeconomic dangers, which affect the country’s economic viability or security; micro economic dangers, which affect the health of the company being privatised; and he dangers to the government’s privatisation plan if mismanaged.
In almost all circumstances privatisation creates unemployment. The prob1 of unemployment is aggravated when service oriented business, like banks, are privatised. If utilities are included, the situation becomes worse. It also causes loss of a vital industry. The government should retain control over the payments and credit allocation system of the country until the economy has reached a level of free-market economics at which the financial infrastructure can be expected to operate efficiently. It can also cause disruption to the business being privatised. The results of massive lay-offs, requirement to re-tool entire plants, setting up new distribution systems might affect productivity in the long run Also, when a labour force which is unacquainted with the capitalist management objectives is required to work under free-market competitive pressures and an absence of job security, challenges emerge which even the most gifted of western management is might not be able to meet.
Whoever may come to power, Pakistan will almost certainly want to pursue privatisation but to succeed, it must be clear about its objectives. Is it pressure from foreign donors to is it a need for short term liquidity which necessitates it. Are the reasons ideological or is the process designed to attract foreign capital. A cost-benefit analysis must also be done to decide whether the benefit to society is worth the effort, keeping in view the level of unemployment. Privatisation should be considered as an option and not the only solution. It would be wise to pursue privatisation in provincial autonomy framework. To stem monopoly build-up SOEs should be distributed among provinces. The distribution should be broad and big firms be broken, even if it disturbs economies of scale.
To attract foreign investment stock exchanges need to be improved. But first political instability needs to be resolved. It becomes a chicken and egg situation. If there is enough investment and enough jobs are created the political situation would improve. On the other hand if the political situation does not improve there is little chance of economy rebounding back.
Need for Privatization:
There are proximate or enduring reasons for privatisation. In the proximate reasons the first is fiscal pressure on the government. It stems the flow of public funds in the form of subsidies and grants to SOEs. Government with massive, budget deficits and external debts usually resort to privatisation. International pressure on government is another reason for privatisation. The pressure usually comes from international donor agencies such as the World Bank, IMF, USAID. No longer content with eliminating government subsidies to private sector. WB which only evaluated projects for soundness is now concerned with broad economic policies. educationsight.blogspot.com The government dependent on the agencies are thus forced to follow their advice. Privatisation in such countries cannot be a huge success since it is originated from outside and not from within. In contrast to the proximate causes just discussed there are some long term reasons for privatisation too, factors such as capital intensity, high market power, natural monopoly conditions, high economic rents and externalities.
But in many countries SOEs were created due to political revolutions. Many firms which wouldn’t have been nationalized under calmer circumstances were converted into SOEs. Such enterprised are usually inefficient and overused. Sooner or later the government finds out that are a burden on the economy and aren’t as successful as similar firms in the private sector. And so privatised them. ft is also said that as the private sector has now matured SOEs are no linger necessary.
PRIVATISATION IN PAKISTAN: All the reasons stated above are pertinent in Pakistan’s case. Selling off the SOEs may appear to be the easiest opinion but it has its flaws. Bhutto nationalised the privates sector in 1971, when the time wasn’t ripe for such a change. Capitalism hadn’t quite developed, there were numerous monopolies and nearly 80% of the country’s wealth was controlled by the notorious 22 families. Nationalization seemed the fastest way to change the situation. Though the motive was good, the solution didn’t come upto expectations. US also faced this problem in early 1900s hut its overcame these problems scientifically. Although the robber barons were not made to give up everything their. Monopolies were successfully broken. Slowly anti -trust institutions were developed and market power distributed. In Pakistan the political uncertainty and disregard for the constitution make such a gradual change difficult to implement. Bhutto’s nationalization imply swapped one ‘set of problems for another.’ The all powerful robber barons were replaced with unaccountable bureaucrats. Most of the industries taken ever either stagnated or decayed.
Today the public sector consists of some 170 public enterprises, owned by 69 government sponsored corporations (GSCs). Their combined annual sales turn over is about Rs. 160 billion and they employ 270,000 people. Assets under the corporation’s control represent 40% of the fixed investments in Pakistan. The corporation’s equality capital is almost double the $3 billion market capitalization of the 700. Despite these resources the public sector has failed to achieve anything except giving a lot of people jobs which wouldn’t have been there under private sector. Government records show that state companies eat up over Rs. 1 billion every year in subsidies and grants. Of all the GSCs only seven or eight earn more than the opportunity cost of capital If the capital invested in all the GSCs ws to yield a rate of return equal to the opportunity cost of capital, the government would have an annual income of Rs. 88 billion, enough to wipe out the present level of public debt for two years.
Nawaz Sharif took power in December 1990, and put privatisation as one of the key measures to help shrink budget deficit. The government also hoped that it would attract more foreign investment and stem flight capital. But things did not quite go that way. The sale of Muslim Commercial Bank was a dirty affair. The Bank wasn’t handed over to the highest bidder or to the previous owner, but to the National group headed by the prime minister’s friend Mian Mohammad Mansha. Although one of the other bidders took the matter to the High Court they too it back almost immediately when the government threatened them with tax evasion charges. The National group owns 15 billion of annual exports.
The sale of Allied Bank is also surrounded by such controversies. First of all the government has highly over-valued the bank, asking for a piece of Rs. 70 per share. Apart from all these ill-organised attempts at privatisation, there have been other incidences which have really, weakened investor’s confidence in the government. One of them is Gadoon Fiasco. It illustrates the slipshod manner in which the government is carrying out its reforms. Under pressure from the US to clean up its poppy-growing areas, successive governments in Pakistan have been trying to persuade the growers to find more acceptable.
Regarding foreign investors, the situation is worse. Pakistan’s infrastructure is extremely weak and cannot support multi-national companies. Pakistan’s political scene is another hindrance to foreign investment. Recently another government was ousted out of office and things became to a standstill again. In 1991 the import licenses of a US $ 43 million joint venture between Toyoa and Habib Group was cancelled mainly on political grounds, and now Honda is reconsidering setting up an assembly plant in Punjab.
Although Pakistan is now offering what is perhaps the most lucrative deal in this part of the world it does not seem to lure many people. For foreign companies, population sizes, living standards, infrastructure and political stability are often more pertinent. Pakistan need not worry about population but its per capita income severely limits the types of goods that can be sold in the domestic market.
When a country like Pakistan starts a privatization process with a shabby infrastructure and an inefficient stock market the process takes on a new meaning. Instead of being a means to attain government objectives, it becomes a huge challenge by itself. Many forces begin to act against it, including the bureaucracy, the employees of the SOEs, the consumers and many politicians. In Pakistan all these forces are compounded by political chaos.
Privatisation of national banks has raised fears of the return of a small dominant elite. Although these banks are inefficient, and ill-managed, they are perhaps willing to lend money to small businesses. When they fall into private hands the loans will once again start going to friends without any concern for small businesses. The system already encourages monopolies; the state of anti-trust laws, or for that matter any business law in Pakistan provides the ideal background for the return of the 22 families.
In Pakistan privatisation has become a necessity, but what is even more necessary are the conditions which have to be there in order to make the process a success. In its eagerness to privatise, the government may neglect the dangers that accompany privatisation: macroeconomic dangers, which affect the country’s economic viability or security; micro economic dangers, which affect the health of the company being privatised; and he dangers to the government’s privatisation plan if mismanaged.
In almost all circumstances privatisation creates unemployment. The prob1 of unemployment is aggravated when service oriented business, like banks, are privatised. If utilities are included, the situation becomes worse. It also causes loss of a vital industry. The government should retain control over the payments and credit allocation system of the country until the economy has reached a level of free-market economics at which the financial infrastructure can be expected to operate efficiently. It can also cause disruption to the business being privatised. The results of massive lay-offs, requirement to re-tool entire plants, setting up new distribution systems might affect productivity in the long run Also, when a labour force which is unacquainted with the capitalist management objectives is required to work under free-market competitive pressures and an absence of job security, challenges emerge which even the most gifted of western management is might not be able to meet.
Whoever may come to power, Pakistan will almost certainly want to pursue privatisation but to succeed, it must be clear about its objectives. Is it pressure from foreign donors to is it a need for short term liquidity which necessitates it. Are the reasons ideological or is the process designed to attract foreign capital. A cost-benefit analysis must also be done to decide whether the benefit to society is worth the effort, keeping in view the level of unemployment. Privatisation should be considered as an option and not the only solution. It would be wise to pursue privatisation in provincial autonomy framework. To stem monopoly build-up SOEs should be distributed among provinces. The distribution should be broad and big firms be broken, even if it disturbs economies of scale.
To attract foreign investment stock exchanges need to be improved. But first political instability needs to be resolved. It becomes a chicken and egg situation. If there is enough investment and enough jobs are created the political situation would improve. On the other hand if the political situation does not improve there is little chance of economy rebounding back.
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