Privatization has long been touted as a solution to economic challenges in Pakistan, with promises of reducing debt and fiscal deficits. However, the recent recommendations from the World Bank raise concerns about the potential pitfalls in this approach. There are overlooked factors which hamper the privatization process. Using the power sector as a case study, complexities can be assessed that arise when privatization meets the reality of subsidies and uniform tariffs. As the country navigates its economic future, it must heed the lessons learned from these experiences.
The World Bank has warned the Pakistani government about the potential legal challenges that may arise when privatizing state-owned assets through sales to foreign governments. They have recommended an alternative approach of gradually offering shares of state-owned enterprises to the public through stock exchanges. This would be overseen by a special parliamentary committee, which would necessitate the establishment of a regulatory framework to enhance efficiency, attract investment, and improve service delivery. However, this standard multilateral recommendation overlooks two critical aspects of the current situation in Pakistan. Firstly, the National Assembly has been dissolved since August 9, 2023, and until general elections are held, there is no functioning National Assembly or parliamentary committee.
Although the Senate is still operational, it is representative of the political balance in the National Assembly and provincial legislatures, and this balance is likely to change after the upcoming general elections. This creates the possibility of opposition parties challenging the privatization process. Secondly, negotiations for government-to-government contracts, whether for foreign direct investments or portfolio investments, will be primarily conducted by the Special Investment Facilitation Council (SIFC) and sector committees comprising sector experts and senior members of federal and provincial civilian administrations. Their goal is to expedite approval processes efficiently, in contrast to the gradual sale of state-owned shares proposed by the World Bank. The SIFC is expected to attract significant investments, approximately $25 billion in the short term (with the duration of “short term” unspecified) and $100 billion in the long term. It is perceived as a crucial driver of economic growth to address the deepening economic crisis in Pakistan and free the country from its debt burden.
While this approach is favorable, given that bureaucratic hurdles and security concerns have deterred foreign investment in Pakistan, it is important to consider domestic economic and political factors as key determinants of foreign investments from other governments and investors. In cases where these factors are not favorable, as is the current situation in Pakistan, foreign investors may look for more attractive investment destinations. However, in instances where an investment in a specific entity promises a steady and substantial future income, such as a copper or gold mine, the foreign government or company involved may demand fiscal and monetary concessions that may not be in the long-term interest of the general public. An example of this is the power generation contracts signed during the Pakistan Muslim League-Nawaz government from 2013 to 2018, which are responsible for today’s high electricity tariffs and the low foreign exchange reserves. This situation can be attributed to former Finance Minister Ishaq Dar’s decision to artificially control the rupee-dollar exchange rate, leading to a $4 billion decrease in remittances in 2022-23.
The World Bank failed to address a critical factor contributing to the unsuccessful privatizations in Pakistan: the absence of comprehensive empirical studies. These studies should not only provide recommendations on how to deal with various mitigating factors but also account for the potential loss of future government revenue. Furthermore, they should focus on measures to prevent the creation of monopolies by purchasers, which could result in excessively high prices or tariffs beyond the means of the average domestic consumer. Take the power sector, for example. The government’s decision to implement a uniform administered tariff across the country has led to subsidies not only for state-run companies but also for the privatized K-Electric. This undermines the very purpose of the privatization process.
Privatization has consistently been promoted by successive administrations, as it was expected to eliminate the need for nearly one trillion rupees in annual budget support and contribute to reducing the country’s debt, in line with stated policy objectives. This was also anticipated to have a positive impact on lowering the unsustainable fiscal deficit, which has persisted for over five years. However, without the right economic environment and without scrutinizing the details of all contracts before agreeing to terms, which might have adverse consequences for the average consumer in the future, it becomes a recipe for disaster. This could potentially lead to increased socio-economic unrest in the times ahead.
The World Bank’s advice, while highlighting important considerations, doesn’t capture the full spectrum of challenges in Pakistan’s privatization efforts. A critical element missing is the requirement for comprehensive empirical studies that factor in potential revenue losses and prevent monopolistic outcomes. Take, for instance, the power sector, where a uniform tariff approach has led to counterproductive subsidies. Privatization may hold promise, but without the right economic environment and diligent contract scrutiny, it can lead to unforeseen problems that burden the average consumer and exacerbate socio-economic tensions. In conclusion, a cautious and well-informed approach is essential as Pakistan navigates the path of privatization.