2005 WAS THE YEAR OF PRIVATISATION COMMISSION

Privatisation proceeds for the year 2005 stood at Rs 217 billion

From SHAMIM AHMED RIZVI, Islamabad
Mar 13 - 19, 2006

The year 2005 was the year of Privatisation Commission despite some snags developed in two major transactions namely KESC and PTCL, which have been aptly sorted by the government.

The year 2006, however, has not started with a positive note, as Pakistan Steel Mills sell-off has been postponed twice during the last two months. The final dates is now uncertain as the workers union has challenged the privatisation of Steel Mills in Sindh High Court. The privatisation proceeds for the year 2005 stood at Rs. 217 billion.

While the authorities succeeded in convincing the second highest bidder for KESC to match the offer made by Kanooz Al-Watan of Rs. 20.2 billion (which later backed out), negotiations with Etisalat have also succeeded with some concession in the mode of payment of the bid amount. Etisalat may take the management of PTCL by the end of March on payment of about Rs. 85 billion out of Rs. 155 billion, which is equivalent to the second highest bid for 26 percent share of PTCL. The remaining amount will be paid in eight biannual installments.

An official privy to the decision told PAGE that the Economic Coordination Committee (ECC) of the cabinet, which met on March 3, discussed PSMC's privatisation in depth and reached an understanding that any hasty decision would not serve the purpose of making it a vibrant unit.

Sources said the ECC endorsed a proposal of Privatisation Commission to delay PSMC's sale for a couple of weeks. The authorities want to fix the bidding date for this key public sector entity in the last week of March. They told the ECC that they would resolve all controversial issues by the third week of the current month. The Cabinet Committee on Privatisation (CCOP) had set March 10 as deadline for the Mills' bidding.

The government on Wednesday last finally reached an agreement with Etisalat on all modalities and procedures for transferring Pakistan Telecommunication Company Limited (PTCL) management in two weeks. The official announcement said: "On the conclusion of talks, both parties, (Etisalat and GoP) committed themselves to the new partnership, which would further strengthen brotherly relationship between Pakistan and UAE."

Sources told that the agreement provides that the latter would make upfront $ 2.598 billion bid money for 26 percent PTCL shares. They said: "Etisalat will make upfront payment of $ 1.5 on the execution of agreement for transfer of PTCL management that would be signed in two weeks, and pay the remaining bid money in 8 equal half yearly installments."

A seven-member Etisalat team had arrived in Islamabad to finalize the modalities with the government to seal the deal for PTCL. The visiting team held talks with the Privatisation Commission team on daily basis for the three days and decided all issues relating the deal. The two teams kept on getting instructions from their respective top management during the last phase of talks. Pakistan's team led by Privatisation Minister Dr. Abdul Hafeez Shaikh, remained in touch with President General Pervez Musharraf and Prime Minister Shaukat Aziz. Both leaders were informed on day-to-day developments.

With the transfer of PTCL management to Etisalat the privatisation proceeds for the year 2005 will amount to Rs. 217 billion out of the total proceeds of about Rs. 377 billion since 1991 when the privatisation programme was started. During the initial years (1991 to 2000) privatisation proceeds amounted to Rs. 60 billion with another about Rs100 billion between 2001 to 2004. By any standard the performance during the last 5 years under the present government has been remarkable, specially the year 2005.

Privatisation of State Enterprises is often criticized on the ground that the government was keen in selling profitable entities rather than getting rid of loss making entities. The outgoing Privatisation Minister Dr. Abdul Hafeez Sahikh (who will be leaving next week to join World Bank) was a strong advocate of privatisation of state commercial organizations irrespective of their financial results. According to him doing business was not government's job. Even otherwise only few units were in green while 90 percent of state entities were showing losses causing heavy financial burden to the national exchequer. At every forum Dr. Hafeez urged for early disinvestment of state-owned enterprises in order to reduce this burden. He termed 1970s nationalization programme as the main factor for the subsequent economic ills of the country.

The decade of 1970s in Pakistan witnessed a massive redistribution of national assets from the private owners to the sate. The reason underlying the then government's thinking for this extremely radical action was that the national wealth was being concentrated in the hands of few families and the rich were getting richer and the poor getting poorer. It was asserted by the proponents of this strategy that the state control over allocation of the resources would promote the best interests of the poor. The intellectual support for this strategy was drawn from the success of the Soviet Union and the socialist economic model practiced in that part of the world.

Two decades later it turned out that these assertions and assumptions that drove this particular line of action i.e. nationalization was not only unrealistic and flawed but the consequences were exactly opposite to what the intentions were. The collapse of the Soviet Union and the bankruptcy of the socialist model eroded the ideological underpinning of this strategy and the actual results on the ground in Pakistan and almost all the developing courtiers shattered the ideal and utopian dreams of the proponents of this philosophy. Pakistan's public enterprises including banks became a drain on the country's finances through continuous hemorrhaging and leakages and a drag on the economic growth impulses. The poor instead of benefiting from the state's control over these assets were actually worse off as almost Rs. 100 billion a year were spent out of the budget annually on plugging the losses of these corporations, banks and other enterprises.

The economic rationale of privatisation is not fully understood by many. In particular, there is popular view that it is okay to sell the loss making enterprises but retain the profit making entities such as PTCL and PSO in the public sector. It is true that the budgetary stress and commercial bank borrowing factors are not valid in such cases but there is a larger economic case for the divestiture of even such profit making enterprises. The main logic behind this divestiture is that it will promote efficient allocation of scarce resources, optimal utilization of resources, making sound, timely and market responsive investment choices, winning and retaining customer's loyalty through better service standards and lower product prices or user charges and contributing to the expansion of the economy through taxes, dividends etc.

A lot is being made of the fact that the PTCL was making huge profits for the exchequer and these profits will now be diverted to the private owner. The facts are quite contrary to this assertion. The Government of Pakistan will still retain 62 percent of the shares while the private operator will have only 26 percent. Thus out of each billion rupees of profits earned by PTCL, the GoP will receive Rs. 620 million while the private operator only Rs. 260 million. In addition the PTCL will continue to pay the corporate tax on its income.

The fears about employment losses in the industry as a result of privatisation are also, by and large, unfounded. The example of the banking industry's privatisation contradicts those who claim that privatisation means jobs are lost. In 1997 when the restructuring, downsizing and privatisation of the nationalized commercial banks picked up speed there were 105,000 employees working in the financial sector. After privatisation was completed, the banking industry has expanded and the workforce has expanded to 114,000.