When the state owns, nobody owns, and when nobody owns, nobody cares. The debate to privatize the power sector in Pakistan has now been going on for a long time. Before discussing the privatization of the power sector, the readers would have to stroll down history lane.
Privatization, previously dubbed de-nationalization, has been a favorite of many politicians and policymakers. The roots of privatization could be traced back to the 50s. The establishment of the Pakistan Industrial Developmental Cooperation (PIDC) in 1952 ensured that the industrial undertakings were “well-fed” and ready to transfer from the public to the private sector. The 70s saw what many called “nationalization,” all of which was countered during 1977. The first true efforts, true in the way that they could be called a significant milestone, were in 1988 when the government of Pakistan hired “a British firm, M/s N.M. Rothschild,” to make a list of State Owned Enterprises (SOEs) that should be privatized. The companies that came under the radar were to be transferred to the public sector through a proper model. Quite frankly, it would have been the only radar one would wish to come under.
In November 1990, things got pretty serious because the then-government made privatization an important aspect of their economic policy. This led to the formation of a Privatization Commission, followed by a Cabinet Commission on Privatization (CCOP) chaired by the Minister for Finance. Dis-investment has been happening and we keep hearing about it, but suddenly, it has become the talk of the town. With the government now relying majorly on privatization and research papers being published both proposing and opposing it, some questions peek from underneath the shell.
Privatization should occur if the concerned sector is not performing well or, let’s say, halting economic growth. Now, the peeking question. What if privatizing that concerned sector proves to be a short-term solution? Another question, if I may. What if the privatization isn’t the right move?
It’s tough to argue really. With the sword of word limit lingering above the deluxe-furnished table (deluxe furnishing wasn’t nationalized) I am writing on, I must take shelter behind concisity. We can’t evaluate all the sectors in one go, so let’s take the power sector for the sake of this article or because a think-tank recently published a report that the country’s power utility sector should be privatized. Who knows?
Before discussing whether the power utility sector should really be privatized, one needs to mention first the issues the power sector faces. According to the report issued by the Pakistan Institute of Development Economics (PIDE), the issues that the power sector faces mainly revolve around three spheres: financial, technical, and performance.
The country’s pricing policy to achieve equity and welfare objectives leads to organizational constraints, a lack of autonomy being one of them. The technical sphere is not well due to the disorientation of operational and system performance sub-spheres. The organizational constraints are “lack of anti-theft law, inadequate replacement of old plants, and poor design and inappropriate location due to lack of technical expertise.” Wish the list would end here, but it is as long as the genie’s wish constraint. The performance sphere is dotted with both internal and external constraints. From lack of resources to foreign debts, the constraints are way too many.
Now, let’s hear the two sides out. First, those in favor of privatization.
I’ll begin my case by simply stating that privatization has always improved operational efficiency. Who doesn’t like a market-driven system? Also, privatization fosters competition within the market, leading to far better services that the other side has to propose. To back my first claim, here’s a little evidence. The recent research report published by the Sustainable Development Policy Institute (SDPI) proposes privatization on account of K-electric’s performance post-privatization. The report examines K-electric’s performance in terms of “technical parameters, quality of service parameters; innovation, digitalization, decarbonization, and health and safety performance.” I am only stating a few (the sword, remember?) A comparative analysis was drawn between K-electric and other state-owned electricity distribution companies (DISCOs). Crux of the report—K-electric performed well.
The other side now. Those who oppose the privatization of the country’s power sector present their case.
From the removal of subsidies to the increase in electricity prices, we have a lot to speak on. But let’s tackle their most-used argument first. The competition argument often presented by the admirers of privatization might be true to some extent, or rather, might be true for some sectors, apart from the power sector. Firstly, “introducing some generators” won’t increase the competition miraculously. According to the PIDC report, their possibility to “collude, rather than compete” increases many folds. Another rebuttal thrown at the preachers of competition argument is the plain fact that no private plant can operate or even compete against the gigantic public power plants because the power generation is based solely on fossil fuels. A small private setup simply means decreasing economies of scale.
Now that we have heard from both sides let’s look at the privatization of Nigeria’s power sector. Privatization of the Nigerian power sector failed and didn’t meet expectations. Their problems were very similar to our own. The AKSU Journal of Administration and Corporate Governance listed these as the problems: “A combination of factors such as institutional corruption, excessive government control, and poor maintenance of electricity infrastructure, operational inefficiency, poor funding, and faulty town planning.”
My case solely relies on the fact that Pakistan has similar problems. Poor infrastructure coupled with economic and political turmoil is not going to take us anywhere. Plus, taking the opposition’s arguments into regard; the growth of the sector seems unlikely. We already produce more energy than needed; a set of sector reforms would make our problems go away.
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The views and opinions expressed in this article/paper are the author’s own and do not necessarily reflect the editorial position of Paradigm Shift.
He is a second-year year student at Lahore University of Management Sciences (LUMS) pursuing a bachelor's in economics.