Efforts to create enabling framework rather than issuing sovereign guarantees

Feb 19 - 25, 2001

The discussion whether Pakistan should undertake privatization or not is simple waste of time and energy. The Government of Pakistan (GoP) had expressed its commitment for greater role of private sector in mid eighties when it started the process of liberalization, deregulation and privatization. Now the issues are: accelerating the process, making it transparent, attracting both local and foreign investors and creating regulatory framework to avoid exploitation by private sector entities replacing state-owned monopolies, etc. Pakistan is not trying to re-invent the wheel. Many countries have successfully achieved the objective and customers/consumers have emerged to be the beneficiaries at large.

According to Altaf M. Saleem, Minister for Privatization, "Pakistan is not selling its 'family silver'. The GoP aims at confining its role as facilitator and regulator and wishes that private sector should play its role as producer and services provider. The fiscal hemorrhages caused by state owned enterprises (SOEs) in the past and coerced lending to these entities has been responsible for Pakistan's weak financial position. Even to that extent that proceeds from privatization could not be used for debt retirement. The result is that this debt has gone too high and not sustainable. A very large percentage of our total expenditure is eaten up by debt servicing."

The transition from the highest state controls to market-based economy is not an easy task. Private sector demands clear-cut and long-term policies before investors could make any decision. Liberalization and deregulation was the first step for the entry of private sector in various industries. The objective was to create healthy competition among various players. This policy led to establishment of Hub Power Company, cement units and automotive assembly plants. At the same time a need was felt for the establishment of autonomous regulatory authorities in telecommunication, power and gas sectors. The objective behind creation of these authorities was to define rules of the game and identify umpires to ensure fair play. International lenders provided funds and expertise for the establishment of these regulatory authorities. Though, one cannot say that these authorities are fully autonomous, they (authorities) are also going through learning process.

One may wonder why any government should worry so much about putting necessary policies in place before entering into market-based era. It is also a fact that investment is driven by returns. When the policies are unambiguous and for longer terms, investors are able to forecast and make decisions. According to the minister, "Our best efforts are to create enabling macroeconomic environment. In the absence of such an environment, investors seeks and often demand sovereign guarantees. Pakistan has done this in past and also had its fall back. Therefore, now the efforts are to enable the investors to estimate the risks, find ways to minimize them and make efforts to achieve the desired rate of return. The rules of the game are the same for every one and it would be up to the investors to try to achieve the best."

While talking about the GoP policy, Altaf said, "Apart from ensuring transparent deals our efforts are to design the transactions in such a way that it is a win win situation for the GoP as well as the investors. We would not like to sell the assets at through away prices. But at the same time we want to ensure a decent return for the strategic buyers. We want these investors to inject more funds for BMR and expansion. The same has been a practice globally."

Dilating his point about future prospects, the Minister said, "Look at power sector, the country needs millions of dollars to enhance power generation and to revamp T&D network. One of the reasons for higher T&D losses is depleted T&D network. Look at KESC, one per cent of T&D loss costs Rs 40 million to the Corporation. Therefore, when the strategic buyer makes fresh investments in KESC he also enjoys higher probability of cutting losses.

"We are selecting financial advisors for various entities very carefully. The fees payable to a financial advisor may seem a little high. However, a financial advisor who has the required experience contributes a lot in concluding a good deal. Therefore, this time we are picking up only reputed names," Altaf concluded.