Dr Vaclav Klaus, once a finance minister, prime of minister and president of the Republic, quite innocently made a statement, which became well known. He said, “No, I am not ready to pay hard money for soft advice.”

And Milton Friedman called it the ‘Klaus Law,’ which Dr Klaus liked very much!

On such an unexpected response form Dr Klaus, the likes of International Monetary Fund (IMF) were absolutely shocked because that was exactly what they wanted to organise – soft advice for hard cash - technical assistance, sending experts, entertained in the best hotels in Prague and spending most of their time in the lobby bars of those hotels discussing transformation.

As to the objections on the mechanism of privatisation from its own protagonists, Dr Klaus speaks from the point of view of a government (but sure a limited government): We were confronted with an enormous naivety with regard to the formation of legislation, its enforcement and the relationship between formal legislation and informal rules, etc.

And we have been especially criticised for our inability to create perfect legislation. I have to argue that there is no perfect legislation. You have parliaments just for the fact that you need to make changes to and add new legislation to improve it – to fill some of the gaps and holes in the legislation – it’s a permanent evolutionary process in any country in the world.

He further states that the formation of legislation is and must be slow. It can’t be just a quick process. I must say that what I consider to be very important is that legislation is the outcome of the process of evolution; it is not of anyone’s dictate (and if it is a dictate, it plays havoc as has been the case in Pakistan. KA).

As you know very well, legislation is not the outcome of abstract rationalism. Legislation is the result of a very complicated political process, a very very human political process. You don’t create legislation by picking the five best lawyers from the best universities and asking them to “Please be so kind as to give us legislation.” It is discussed. Every sentence is discussed, in your and our parliament.

And, Dr Klaus admits: I’m sure you know very well that legislation is influenced not only by political or ideological arguments, but by vested interests, by lobbying, by what we economists call ‘rent-seeking’ activities. So there is nothing quite like a body of legislation, which you can simply transfer from one country to another and decide that this is true. There is just one example of such a transfer of legislation in modern history, and you probably know what I have in mind – the reunification of Germany.

It was even the identical language. Even to translate the legislation, Dr Klaus tells, is difficult. And it was the same language, so it was easy just to announce that the next morning the old legislation is no longer valid and the new legislation is valid.

And Dr Klaus hastily adds: I always say that our critics probably assume that we are still a totalitarian state, where the appropriate legislation can be simply introduced. But we know it is a very complicated political process.

This is how Dr Klaus sees the whole process of transition including privatisation. But, sure, if we need free markets and do not need over-regulation or a paternalistic welfare state, we will have to go for the three liberalizations, that is, price liberalization, business liberalization, trade liberalization, knowing well that no single liberalisation can bear fruit.

In the context of privatisation in Pakistan, following points are of utmost importance:

1. Changing the economic system (in Pakistan also) is not an easy task as it involves conflicts of interests, that is, it threatens vested interests. Hence, it needs a principled stand and a will to bring it about. It must be taken as a matter of policy.

2. Privatization is part of an overall economic change, a first step and a very important one. But it will be of no use in the absence of price, trade and business liberalizations.

3. As in other cases, in doing privatisation also, a government may makeor makes mistakes unintentional as well as deliberate.

4. If privatisation is to be done, do privatise all of the business enterprises, and let there be a competition. Keeping some selected enterprises with the state with a privileged status will hurt the competition.

5. The cost of transition, or say privatisation, must be kept in mind.

6. The privatised units may or may not succeed; as un-protected private sector, in sharp contrast to the protected public sector, faces competition, and, as happens with such businesses, may meet failures.

7. Like all other legislations, privatisation legislation may be wrong, manipulated, manoeuvred, vested, rent-seeking, etc, and its implementation and execution partial or flawed or skewed, but what is needed: it must be discussed, exposed, criticized and improved.

Finally, (and so far no one has been making this point) it must be demanded that as privatisation is lessening the size and burden of the government; in turn, burden of taxes on people must also be lightened. This will spur both growth and development.

 [Note: This article is based on a lengthy interview of Dr. Vaclav Klaus]

The caretakers have been busy dealing with economic crises following constitutional amendments that empower them to implement long-term measures.

Along with the support provided through the Special Investment Facilitation Council (SIFC), the government seems to have done well in reducing the level of uncertainty in economic outlook through various administrative measures.

Some of the praiseworthy steps include reforms in the privatisation process, power sector governance, exchange rate management, facilitation of business visas, and forex liberalisation for IT companies.

The government secured an ordinance setting up a special tribunal to hear petitions against privatisation transactions. The stock exchange has been a source of good news for many weeks, though it remains inconsequential.

Ultimately, this setup needs replacement with an elected government, putting politicians back in the driving seat.

A common theme emerging from pronouncements by senior political figures across the spectrum as an electoral promise is restraint on public spending. Nawaz Sharif has already included this in his nine-point agenda, and more recently, Bilawal Bhutto-Zardari has also promised to close 17 federal departments and included this point in his 10-point agenda.

Bilawal stated that this would help the government save Rs300 billion every year, indicating an emerging consensus.

The root cause of our economic woes lies in fiscal matters, especially on the spending side. However, the closure of 17 federal government departments, while a positive step, will only translate into saving approximately 0.35% of gross domestic product (GDP).

The bigger problem lies elsewhere. In its Fiscal Risk assessment for FY 2023-24, the government acknowledged that the federal government’s exposure to state-owned enterprises (SOEs) in the form of outstanding loans and guarantees stood at 9.7% of GDP in 2021, having increased since.

The circular debt in the electricity and gas sectors at the current value adds another 7% of GDP in the exposure, increasing daily. The gas sector is losing Rs1 billion every day.

As net federal revenue squeezes in the coming years, despite nominal increases in tax collection, the risk of corporate default will rise despite International Monetary Fund (IMF) assurances.

A political consensus must evolve on public spending restraint. This consensus should have two components: privatisation of 85 commercial SOEs and radical restructuring of the power sector, whereby the government must stop financing theft, default, and inefficiencies.

The old trick of political economy should be put to rest. This trick, whereby losers are juxtaposed against beneficiaries of reform, has done us no good. If our politicians can agree on this argument, it will be a big win for democracy.

Significant cuts in public spending will reduce the pressure on federal government revenue substantially. The savings, or parts thereof, can be redirected to more investment in human capital, which is crucial.

The pressure to collect more taxes will also subside, and the government will not have to increase the electricity tariff each month.

Importantly, the government will be able to increase its spending on strengthening institutions responsible for the protection of life and property. The political consensus should evolve on managing our federal government better.

It may be worth noting that while we have recently seen a new SOE policy, our privatisation policy is a one-page shallow document dating back to 1994. Recently, PRIME has conducted a consultative workshop under the chairmanship of the federal minister for privatisation, leading to an unofficial framework for a new privatisation policy that Pakistan needs to debate.

Pakistan also needs a new policy to restructure the power sector; increasing the tariff rate is no reform. The current cost-based model of electricity distribution companies guarantees the longevity of a failing system.

While the SIFC is primarily working to attract FDI, it should also investigate why our domestic investors are shying away. In this context, privatisation of 85 commercial SOEs, distributed across 10 key economic sectors, can unleash a new wave of productivity, wealth, and job creation.

These include power, oil and gas, infrastructure, transport and communication, manufacturing, mining, engineering, finance, industrial estate development and management, and wholesale, retail, and marketing.

The continued government presence in these sectors as a business player constitutes a major roadblock to economic prosperity, which needs complete removal.

Contrary to common perceptions, four governments of PML-N and PPP during the 1990s had a complete consensus on privatisation. In fact, under Benazir, the government sold more assets under state control. This continued under General Musharraf, only to be halted by the Supreme Court.

It’s time for leading parties across the spectrum to develop a consensus on public spending restraint. They have done it in the past. They should do a better job now.

THE WRITER IS THE FOUNDER AND EXECUTIVE DIRECTOR OF PRIME, AN INDEPENDENT ECONOMIC POLICY THINK TANK

The Article was originally Published on The Express Tribune, on January 8th, 2024.