The document discusses the debate around privatization of state-owned enterprises in Pakistan. It notes that while privatization could increase efficiency and reduce financial burden, it may fail if it results in fragmented shareholding without strong, experienced investors. The article examines examples from Poland where privatization succeeded with involvement from large companies but failed in cases of dispersed ownership lacking oversight. It argues that Pakistan must ensure privatization transfers major stakes to capable local or foreign firms that can improve management and governance, rather than scattering shares widely. Privatization alone is not a solution; it requires the right process and outcome of attracting dominant, skilled shareholders.

1. Privatization; Salvation or an Incomplete Truth
By
Kashif Mateen Ansari
These days with the news of the government’s agenda of privatization many questions
are making the rounds; why privatize? Why might privatization fail? What is needed to
make privatization work? To answer these questions, it is usually argued that
government’s intervention causes economic inefficiencies. There are many who support
privatization and there is no dearth of those who are protesting and arguing against it.
The debate on the issue is raging and both the camps are putting forwardtheir
arguments.According to PIDE Vice-Chancellor Dr Rashid Amjad, “Policy stances which
reflect our best economic interests and take into account the political economic
dimensions should be adopted.” In his views there is a need for a refurbishment of the
system for increasing efficiency and productivity of loss making public enterprises
There are many pro-privatization experts like, NUST Dean Ashfaq Hassan Khan,
“Benefits of privatization help reduce the country’s debt burden and also help improves
the allocation of resources.”
State owned enterprises (SOEs) are generally considered unproductive all around the
world, primarily because they serve the political masters and the bureaucracy more than
the business and the owner (state) they represent.
The privatization of these SOEs is considered to be the solution on the premise that the
private sector is more efficient and cost effective than the government. The role of
government should be narrowed down to policymaking and ensuring that the right
business environment exists. Efficiency of a government in running any business can be
captured in these words of Milton Friedman, “If you put the federal government in
charge of the Sahara Desert, in 5 years there'd be a shortage of sand.”
Present government has embarked on a strategy for privatizing a number of SOEs. Why
should these organizations, like Pakistan Steel or Pakistan International Airlines (PIA)
be privatized? They are inefficient and poorly managed and on top of that they are a
heavy burden on the national kitty. They are costing Rs400-Rs500 billion annually.
They wear the crown of destabilizing the budget and adding burden to the national debt.
How can a financially poor country like Pakistan continue to foot the bill of the
inefficiencies of these institutions? In the words of Margaret Thatcher “The problem

2. with socialism is that you eventually run out of other peoples' money.” Same is the case
here that we are running out of other people’s money to fund these giant government
owned businesses.
The debate on the point of “to be or not to be”; “To privatize or not to privatize” is
relatively simple. For this part of the debate it is easy to see the writing on the wall.
These SOEs cannot survive without budgetary support from the government. They are
the mega employment exchanges for the kith and kin of the high and mighty. Do we
really want to add thousands of workers to already bankrupt institutions? For how long
we can rely on our friends and masters to help us with funding support, debt and grants
to keep these giants afloat? Privatization is the answer to many of these woes. But
privatization as an ideology is not the solution to all the ills that befall the public sector.
Privatization for the sake of privatization is not the answer. Privatization has worked in
many cases and it has failed in many other instances. According to Kevin R. McDonald
who published his article “Why Privatization Is Not Enough” in Harvard Business
Review; that most newly privatized companies need dominant, experienced
shareholders to compensate for the weaknesses of managers. Without the backing and
nudging of such shareholders, companies tend to operate in the same inefficient ways
they have learnt over the years.
Kevin further noted based on his research that the positive effects of privatization are
not spontaneous. Investors earn outstanding returns only when they themselves add
value in the form of leadership, systems, experience and direction.
Privatization taken as the salvation of all the woes of state-owned enterprises, seen as a
panacea for improving corporate governance, management, and performance may be an
incomplete truth and therefore, in Kevin’s words “it’s like a runway that is just a bit too
short, extremely dangerous.”
Developing on the stories that Kevin R. McDonald put forward through his research in
Poland, there were many success stories like Thomson Polkolor which was a joint
venture post privatization between Thomson, the French electronics giant that acquired
RCA in 1987, and Polkolor, a Warsaw-based producer of picture tubes for color
television sets. Problems were the same as we see in our SOEs, very big payroll but
there was no cash to pay the employees. There was urgent requirement of capital, better
management, better work attitudes, and an injection of basic business skills and
procedures. The main sources of operational difficulties were the lack of sense of
responsibility in the employees and lack of motivation to improve productivity.

3. Nevertheless, the Thomson Polkolor joint venture achieved impressive financial results
in first 16 months of operation. Its sales doubled, the joint venture generated an
operating profit in the same period. It started paying taxes, whereas the former stateowned enterprise paid no taxes at all.
An example of privatization gone wrong is Krosno Glass Works (Krosnienskie Huta
Szkla). Krosno was privatized in November of 1991. Important aspect of this
privatization was the way the ownership was distributed between the government,
employees, development bank and general public. After the government which held 35%
of the shares; 28% of the shares were widely dispersed among the public. The
remainingshares were held by the employees, bank and another company purchasing
the products from Krosno.
Krosno’s revenues fell dramatically after privatization. One of the reasons was the
worldwide recession but that was not the only reason.The management of the company
failed to respond to the falling sales and was unable to exploit the only profitable
business of hand-blown glass.
Management’s failure to exploit their profitable line of business hurt the company.
Unfortunately, there was no dominant investor with sufficient experience to turn this
around. Replacing the company president twice in two years was the board’s response to
this problem. The inadequacy of the corporate governance revealed itself and the
dispersed share ownership was seen as the reason behind this lackluster performance.
Contributing reasons were no market-oriented governance; board members
lethargicparticipation, government nominated members failing to attend the key board
meetings. This pointed to one big flaw that there was no strong third voice in the shape
of strong sponsor guiding the management.
In various other studies it has been pointed out that certain positive effects are evident
from all privatizationsmany of these related to sales effort. But the overall performance
is more linked to a dominant shareholder whose intervention is the key to improving
corporate performance and governance.
Privatization as an ideology that has to be followed for the sake of it would not work.
Also the experience of privatization has given out mixed results all across the globe.
Evidence suggests that privatization which results into distributed and fragmented
shareholding has less chances of success as compared to the instances where we have a
strong, capable shareholder in the form of a local or foreign business house with sound
expertise andexposure in the same sector.

4. So the debate is not about privatization itself, rather it is about how we do it.
Privatization is more akin to selling the family silver. We can do it once. It will surely
give us the muchneeded funds but we must do it right the first time. Otherwise the
future generations will find neither the silver nor the benefit of the funds. Privatization
can energize the economy and put right many institutions that were once great. We may
find PIA again training the leading twenty plus airlines in the world or we may find
Pakistan Steel turning the wheel of our infrastructure and economy.
In the words of top manager of one of the privatized entities in east Europe,
“Privatization alone is like throwing a person into the water and calling it a swimming
lesson.”
Privatization alone is not the answer. We have to be very careful about the process and
the results both. Just throwing the shareholding away to scattered shareholders may
result into a change in the ownership but it will not result into the change in the
performance of these institutions. Privatization must be done in a manner that large
institutions, both local and foreign are attracted and they take up sizeable stakes in the
privatized entities. This will ensure new management thinking and active board
governance by the new shareholders. Otherwise in the case of scattered holding our
institutions will remain rudderless and drift away on the currents of economic
distraction one after the other.
(The writer is the CEO of a power project and can be reached at
kashifmateenansari@post.harvard.edu)