PRIVATIZATION: A DIFFICULT TASK
The government should facilitate creation of facilities and abstain from getting involved in production or services providing business
By SHABBIR H. KAZMI
May 13 - 19, 2002
There are benefits and advantages of governments indulging in establishing and managing industrial and/or commercial activities. Over the last five decades the world has seen two extremes, leaving all types of business activities at the discretion of private sector and governments owning and operating industrial and services providing entities. However, none of the systems have emerged perfect. The sale of public sector units to private sector started in late eighties as a global phenomenon. Pakistan is not trying to re-invest the wheel. The economic managers can benefit a lot from the experience of other countries and come up with a home-grown plan. The process must be carried out expeditiously or the country will become a victim of lost opportunities.
The process of liberalization, deregulation and privatization initiated globally in eighties. Some of the countries were able to complete the transition in smooth and swift way. Others are still struggling. It is evident that those countries which followed an elaborate and realistic strategy emerged successful. Whereas, the countries lacking home-grown plan are not only still struggling without such of success but have been facing the mishaps.
The present economic managers of Pakistan have also prepared, an ambitious plan. Partly, it is home-grown plan and partly, due to mounting pressure of donors. Despite their best efforts, they have not achieved that they should be proud of. Going forward one should try to find plausible explanation for some of the questions. Can they be really blamed for lack of commitment? are they not making enough efforts? Do they wish to achieve too much in too little time? Do the prevailing global economic conditions allow the investors to make mega investment decisions regarding emerging markets?
Before making any attempt to find out replies for the above mentioned some of the questions, it is necessary to look back at the past. Privatization was part of the three-pronged strategy developed by the GoP in eighties, rather it was the third item on the agenda. The top two were liberalization and deregulation. Under the liberalization plan, some of the sectors where private sector was not allowed to invest were opened for them, i.e. cement and power generation. It was followed by deregulation policy — discontinuing the mandatory GoP permission for the selection of plant location and giving the opportunity to manufacturers to fix the prices of their finished goods.
The objective behind liberalization and deregulation, prior to commencement of process of privatization, was to create regulatory environment to avoid exploitation of the stakeholders. i.e. employees, customers, shareholders and financial institutions. However, the process was bogged down to a large extent because the bureaucracy was not ready to let its power go away so conveniently. Private sector, which has been enjoying highest protection also resisted introduction of market-based policies.
As regards privatization, the policy itself came under tremendous criticism, both the management of state-owned enterprises and the unions drawing strength from political parties opposed the plan. It is still being said, "We cannot trust the private sector because: 1) they do not have the expertise, 2) large-scale retrenchment of workers is feared, 3) tax evasion will be high and 4) they will mint the profit through price hike. Some of the apprehensions may have roots but others are the outcome of diabolic thinking of the opponents of privatization to safe-guard their strong holds.
The efforts of politicians, to malign the opponents, was so vehement that at time national objectives were put at stake. Three years long legal battle between WAPDA and HUBCO is the glaring example. The others are dispute between WAPDA and KAPCO, closure of National Fibres Limited, delay in corporatization of Power Wing of WAPDA. Most of these were avoidable controversies but propagated unnecessarily to attain political mileage.
Another, but important event which completely halted the process of privatization, was imposition of economic sanctions on Pakistan in May 1998. Then came the September 11 incident and subsequent events in the region, particularly war in Afghanistan. The world already suffering from recession, further plunged into 'synchronized global recession'. The investors are still involved in struggle for their own existence. They have deferred most of their future investment plans.
As regards efforts for privatization by the present economic managers, Altaf M. Saleem, Federal Minister for Privatization, announced the agenda in early 2001 (details available in Pakistan & Gulf Economist issue number 8 of year 2001). He explained the priorities and the strategy. This included: 1) sale of shares with transfer of management, 2) sale of remaining shares of the GoP in privatized units, 3) financial restructuring of some units prior to offer for sale and 4) even liquidation of some of the units economically unviable. The September 11 incident not only tipsy tarvey the entire plan but may take some time to remove the negative perception about Pakistan.
As the process is yet to gain momentum, it provides an opportunity to re-examine the plan, re-arrange the priorities and also arrange the road shows to show the credentials. It may be true that pressure on Pakistan is mounting to contain losses being incurred by state-owned enterprises, sale of profit making units only, should be a source of concern. Another issue, lack of interest of first tier global companies demand re-engineering of the whole process. The lack of interest of first tier companies is evident from the response received for the offer for sale of PTCL and KESC.
Some analysts term sale of PTCL, an effort to encash the lost opportunity, at the best. Pakistan could not do this when the market was ripe and investors were keen. At present most of the leading global telecommunication companies are under excessive pressure, fund managers are not ready to invest in the sector and particularly in companies in the developing countries. Despite the fact that PTCL offers incredibly attractive dividend yield, its share have lost attraction for investors, at the best speculators are trying to keep the interest live.
According to some analysts, "The present story of privatization starts with PSO and also ends at PSO." Others say, "Privatization Commission has done a marvelous job by achieving:- 1) sale of 10 per cent shares of National Bank of Pakistan against an offer of 5 per cent only, 2) sale of Pak Saudi Fertilizer shares along with transfer of management control, 3) soliciting an attractive bid for Badin-I oilfield." They also say, "Currently foreign investors have special interest in energy related projects. Therefore, probability of soliciting attractive bids for PSO, SSGC, SNGPL and OGDC is relatively high. The GoP must set the ground ready for the bidding of these entities. These should not be allowed to become the lost opportunity.
One of the factors which dampened prospects for sale of companies belonging to power generation and oil and gas sector was the delay in establishing sector related regulatory authorities. Though, national Electric Power Regulatory Authority (NEPRA) was formed years ago, there was a lot of criticism on its autonomy. The GoP has established Gas Regulatory Authority (GRA), it has yet to play its due role. Although, the GoP has been trying to deregulate POL trade, the importance of an effective and autonomous concerned authority cannot be undermined.
As regards privatization of power generation, transmission and distribution companies, analysts have an advice for the GoP. They say, "The GoP should not sell power generation companies prior to the sale and transfer of management control of transmission and distribution companies." Referring to the experience of WAPDA and KESC they say, "These entities have suffered the worst due to exceptionally high transmission and distribution (T&D) losses, bulk of which comprise of outright theft. It is also true that acute shortage of power generation gave birth to IPPs and thermal power plants of WAPDA and KESC are less efficient.
However, higher than desired T&D losses are due to overhead lines which proliferate electricity theft. Therefore, the areas demanding immediate and large scale investment is distribution, for upgradation of the network. The private sector can minimize the theft by laying underground cable, additional investment would start paying off immediately. The public sector electric power generation efficiency could be improved by regular and timely maintenance and repair.
In the past they had complaints like, 1) listed companies not making sufficient disclosure, 2) poor level of corporate governance, 3) insufficient laws and regulations to protect the interest of small/minority shareholders, 4) delays in transfer of shares and 5) poor overall regulatory mechanism. Most of these complaints and irritants have been removed to a large extent. There are ample evidence that foreign fund managers have re-entered into Pakistan's equities market with a greater confidence level. The successful sale of shares of NBP paves way for divestment of remaining shares of privatized banks through stock exchanges as well as sales of, at least 10 per cent shares of Habib Bank Limited and United Bank Limited.
The conditions may not be conducive for the privatization, at least for the time being, but the nation cannot sit with fingers crossed. All eyes are set at Privatization Commission. The recent achievement have broken the ice. The negative perception about Pakistan is also on the decline. Still a lot has to be done for the removal of doubts and revival of the investors' confidence.
PRIVATIZATION TRANSACTIONS ENVISAGED TO BE UNDERTAKEN
Pakistan Telecommunication Company Limited
FINANCIAL & BANKING
Habib Bank Ltd. (HBL)
United Bank Ltd. (UBL)
Public offer of various entities including: NBP, HBL, MCB
Monitory share-holding: POL, ARL
Divestment of 49% shares in ABL
OIL AND GAS
Working interest in oil/ gas fields (namely Badin-I, Minwal, Turkwal and Mazarani)
(Bidding already held. Results under process).
Working interest in nine oil/ gas fields (namely Sawan, Zamzama, Bhit, Chacher, Kandra, Tando Allah Yar, Zarghun South Jhakra and Bhadra).
Oil & Gas Development Co. Ltd.
Pakistan Petroleum Ltd.
Pakistan State Oil
Sui Southern Gas Pipelines Ltd. (SNGPL)
Sui Southern Gas Company (SSGC)
Karachi Electric Supply Co.
National Power Construction Co.
State Life Insurance Corporation (SLIC)
Pakistan Insurance Corporation (PIC)
A.C. Rohri Cement
Sind Engineering Limited
PECO (Badami Bagh)
Pak-American Fertilizer Ltd.
Pak-Arab Fertilizer Ltd.
Republic Motors Ltd.
PECO (Kot Lakhpat)
Bolan and Lasbella Textile Mills
Faletti's Hotel, Lahore
Malam Jabba Resort Limited
National Construction Company.