Is Privatization The Only Option For State-Owned Enterprises?

Is Privatization The Only Option For State-Owned Enterprises?
Privatization and nationalization are presented as the sole economic alternatives. An out-of-the-box solution like cooperatization, which has successful precedents in other countries, would be a well suited normative economic framework for Pakistan. It could not only prevent laying off workers, fear of which has already led to protests on streets, but could also turn around the engine of growth in loss making public entities. 

In a recent NayaDaur article, economists Shahram Azhar and Danish Khan offered a new theoretical explanation of Pakistan’s underdevelopment, i.e., divergence in the de facto and de jure power. I build on their argument to provide further evidence that below par performance of Pakistan’s economy is directly connected to differences in de jure and de facto power. Moreover, in the context of crisis in State-Owned Enterprises (SOE) such as Pakistan Steel Mill, this article shows that the policy of cooperatization (workers owned-managed cooperatives) is a much better alternative to nationalization or privatization, and if adopted earnestly, then it can prove to be an engine of growth and employment generation in Pakistan.

The aura of uncertainty that consistently looms around Pakistan’s political & democratic institutions has repercussions for a wide range of factors, including the flow of investment, business growth, macroeconomic stability, and the performance of SOEs. In fact, available research suggests that it takes some time for an economic policy to take its effect—a phenomenon known as lag—and any inconsistency in policy has a more profound impact on economic growth than any comparable variable. Little wonder then that Pakistan is trapped in a vicious cycle of low growth, bad governance and public maladministration. The perpetual political instability due to differences in de jure and de facto power precludes socio-economic welfare policies to mushroom.

In this context, it comes as no surprise that Pakistan’s government departments, ministries, and public sector enterprises are marred with inefficiencies and mismanagement, with the World Bank ranking the country’s public-sector effectiveness in the low 29th percentile. In addition, many of the country’s public sector entities are incurring huge losses due to their inability to cover operational expenses, thus deepening their dependency on the government for fiscal buoyancy. The infamous Pakistan Steel Mill (PSM) is one such example. Because Pakistan is a highly indebted country with approximately $113 billion in external and PKR 35 trillion in internal debt, the aforementioned white elephants are a favorite target for restructuring & reform—a euphemism for privatization & austerity—of the creditors like the International Monetary Fund (IMF) and the World Bank.

Founded in 1973, the PSM symbolizes everything that is wrong with Pakistan’s public sector enterprises viz corruption, neglect, and overstaffing. Hence, the PSM serves as a litmus test for a ruling party’s industrial policy as well as ideology. Historically, the center-left Pakistan People’s Party (PPP) has been the biggest advocate for the PSM and its estranged workers, while the center-right Pakistan Muslim League-Nawaz (PML-N) has trodden a cautious path vis-à-vis PSM’s privatization, fearing a public backlash (Tribune, 2016). The hybrid regime of Pakistan Tehreek-e-Insaf (PTI), however, is much more decisive & unfaltering in its decision to privatize the PSM and lay-off all its workers. This is partly attributable to economic factors but mostly to PTI’s neoliberal ideological inclinations, as it is the party most favored by the economic elite than the working-class.

Being the leading bourgeoisie party coupled with the IMF’s pressure for structural reforms, it comes as no surprise that PTI is aiming for a major overhaul of the loss-making public-sector enterprises. Historically, these reforms have inevitably resulted in the privatization of such entities, with thousands of workers losing their jobs. This alternative is touted as being more efficient & propitious to the enterprises' growth than their continued administration under the public sector. However, this claim doesn’t hold in the face of reality. Consider the case of Pakistan Telecommunication Company Limited (PTCL), which is arguably the most high-profile case of privatization in Pakistan and which simultaneously exposes the superficiality of the neoliberal agenda.

Founded at the time of Pakistan’s independence, the PTCL consistently outperformed all public sector enterprises by making impressive profits, delivering value, and providing world-class services. In fact, just before its privatization in 2006, the company was a leading player in the telecom sector in Asia and reported impressive profits to the tune of PKR 30 billion. Since privatization, its performance and service-delivery have both dwindled with profits declining by as much as 60% in the ten-year-period as indicated by its 2016 financial statements which reported a profit-after-tax of PKR 12 billion.

The case-study of PTCL teaches us that privatization as a structural reform rarely—if ever—works. In reality, it is a neoliberal project of transferring value from the peripheries to the global core. This takes place through the so-called ‘structural adjustments’ of the multilateral like the IMF in connivance with the corrupt local elite. This also raises an important policy dilemma that if the public sector enterprises are generally inefficient, and privatization isn’t a panacea of all ills, then what other alternative governments have; getting rid of the loss-making public sector enterprises while mitigating any loss to the social welfare caused by laying-off workers. Indeed, it seems a mutually exclusive choice where the trade-off is between fiscal buoyancy and retention of workers. However, it need not be a mutually exclusive trade-off, and a third way is possible, which ensures both public sector vibrancy and retention of employment simultaneously. This is the policy of cooperatization, which calls for the conversion of a loss-making public-sector enterprise into a worker cooperative, i.e., hand over the firm to its workers.

While cooperatization is a radical policy in essence, we must assert that it is anything but utopian and has its precedent in the structural changes that took place in the Cuban economy following the disintegration of the Soviet Union. In 1997, after failing at numerous attempts to salvage the Soviet-style communist model, the Cuban government finally decided to devise a new strategy by privatizing different sectors of its economy in particular farming & agriculture. However, this model of privatization sharply differed from international practice as the enterprises were handed over to the local communities and workers instead of the private capital. Organopónico Vivero Alamar was one such example.

Located in Havana—the nation’s capital—Organopónico Vivero Alamar (henceforth ‘the Farm’) is an urban farming enterprise that exclusively grows organic products such as fresh vegetables, fruits, seeds, spiritual & herbal plants, to name a few. Since the workers took charge of its operations in 1997, the Farm has maintained a democratic economic model with workers collectively deciding what to produce, how to produce, where to produce, and what to do with the profits. Moreover, the workers have complete control over the fundamental and the subsumed class processes by fully controlling the production, appropriation, and distribution of the surplus that they produce. In other words, the Farm is a true example of a Workers Self-Directed Enterprise (WSDE) where exploitation—in the Marxian sense—has been eliminated.

The success of the Farm doesn’t stop at simply being a WSDE. It boasts an impressive record of productivity growth, profitability, and financial performance as well. For instance, the workers at the Farm earn almost twice while working considerably less than their peers in the state-owned farms. Similarly, the Farm is successfully able to sell its output at 25% less than the market prices even though it exclusively produces pure, organic fruits & vegetables. This shows the superior productivity of the Farm vis-à-vis both the state and privately-owned farms.

The impressive performance of the Farm is explicable empirically as well. In her seminal work titled 'What do we really know about worker co-operatives?', Pérotin (2015) asserts that worker cooperatives generally perform better than the public or private sector enterprises owing to their egalitarian organizational structure, which empowers workers by giving them complete autonomy over their work and the way it is managed. Indeed, the arrangement of work is a key determinant of workplace exploitation.

The write is a research economist based in Islamabad