TIDE OF PRIVATIZATION

FOZIA.ISHAQUE (fozia.ishaque@hotmail.com)
Feb 23 - Mar 01, 2009

Privatization of State Owned Entities (SOEs) is a wide-range, intricate as well as politically and socially sensitive process. If devised prudently it aims at facilitating and promoting capital, goods and labour markets in the country, An ideal and meticulously devised privatization plan of SOEs essentially takes care of all the stakeholders, which include labor, consumers, investors, government and the economy.

The privatization process in Pakistan has passed through different phases and it has been very instrumental to blend the private businesses with the government institutions.

HISTORY

The concept of privatization is not new to the policy makers of this country. A flashback down the lane shows its footprints as back as in 50s, when Pakistan Industrial Development Corporation (PIDC) was established in 1952 to enhance the industrial development in the country. This premier corporation established over 50 industrial undertakings in the length and breadth of the country and after their successful operation and management, these units were transferred from the public to the private sector.

The tide of nationalization, which swept the whole economy in the first half of 70s, was reversed in 1977. The privatization of SOEs became an important instrument of economic policy of the government in late 80s. However, it was in 1991 that privatization process in Pakistan became effective.

REASONS

Privatization process is adopted in the wake of various underlying facts and potential benefits. The primary rationale behind privatization is the stance of the international financial institutions and free market economists which opine that the state should confine itself to regulation only and the operation and ownership of industrial enterprises and utilities should be left to the private sector. Private sector units are generally more efficient than public sector units.

Besides, a favorable fiscal impact of privatization is expected from the sale proceeds being used to retire national debt as well as elimination of losses of the public sector units. Another argument for privatization is to foster competition and to strengthen capital markets. An objective of the privatization is to encourage foreign direct investment. It must be recognized that privatization is a dynamic way of promoting participation of private investments in developing country's economic activities.

The presence of state management and ownership in a wide range of industrial, trading and financial enterprises has beyond all doubt proved to be a chronic source of budget deficits, ineptitudes, inefficiencies, and nepotisms.

PAST EXPERIENCE

The entire process of privatization in Pakistan had dismal results in 1998. Only 22% of the privatized units gave better performance than before, while 44% reflected deterioration in their workings and 34% units stood closed. This event has been interpreted as a devastation which played havoc with the nation's economy. The faulty process of privatization has also been attributed to a sharp drop in the economic growth rate from 6% in the 1980s to 4% in the first half of 1990s when the privatization was begun.

The litany of chaos flooded in the earlier phase of the privatization where in authorities did not pay much attention to necessary precautionary measures with a view to achieving best results for the benefit of economic activities. For instance no aspect of credibility or credit worthiness of the parties showing up as bidders and buyers of state enterprises was investigated.

The whole basis of the sell-off was the highest bid by a successful buyer which turned out to be a faulty approach. These bidders subsequently failed to display entrepreneurship as they sold the installed machinery and other assets including land belonging to the company.

There have been two tides of privatization in Pakistan. The first tide is from 1992 to 1994 and the second tide from July 2001 to October 15, 2002. In the first period, assets worth Rs.120 billion were divested and in the second period assets worth Rs.65 billion were divested. Moreover, the most tragic consequence of privatization was the closure of many units which are listed below; - 1) Naya Daur Motors 2) Dandot Cement 3) Zeal Pak Cement 4) National Cement 5) General Refractories 6) Pak PVC 7) Swat Elutriation 8) Nowshera PVC 9) Nowshera Chemicals 10) Pak China Fertilizer 11) Karachi Pipe Mills 12) Metropolitan Steel 13) Pak Switchgear 14) Quality Steel 15) Indus Steel Pipe 16) Fazal Veg. Ghee 17) Haripur Veg. Oil 18) Khyber Veg. 19) Suraj Ghee Indus. 20) Hydari Veg. Ghee

The reasons for closure are numerous. One was that the units were sold out without checking the creditworthiness of the party. Schon Group whose horrible reputation is household knowledge in Pakistan was given three units, National Fibre, Pak China and Quaidabad Woolen Mills. All these were closed after privatization. Among the other major units which closed after privatization was Zeal Pak Cement. The buyer was not interested in running the factory but in selling the assets. In many instances the privatized units also formed cartels to exploit the consumers. A cartel was formed between D.G. Khan Cement and Maple Leaf Cement to exploit the consumers in that region.

The second tide of privatization was from July 2001 to October 15, 2002. The major privatization which took place during this period included; (1) sale of GOP "Working Interest" in six oil concessions, (2) sale of 51% GOP stake in UBL, (3) sale of Pak Saudi Fertilizer Ltd., and (4) two capital market transactions amounting to Rs13.6 billion.

The sale of shares of MCB & NBP and other capital market transactions were the correct decision as the privatization through gradual sale of shares to the public is the most preferred form of privatization. The sale of UBL to Abu Dhabi and Best Way Group is altogether inexplicable. First GOP poured Rs30 billion into UBL to cover its non performing loans to make it privatizable. GOP has not explained as to why Rs30 billion of tax payers' money was poured in UBL for privatization and what was the hurry that relinquished this unit a week before the national election.

As a matter of fact, privatization gives tremendous patronage to the government in power which may be exercised to favor vested political interests rather than to serve long run national objective, negating the basic objective of improving efficiency in the economy.

TODAY'S INVESTMENT CLIMATE

The environment in Pakistan is not investment prone owing to the deteriorated law and order situation as well as militancy in Swat and tribal belts. Economic conditions are also not supportive enough to alluring investors from abroad. Instead local investors prefer to transfer assets away from Pakistan. Pakistan has a defaced image world wide. The 2008 Corruption Perceptions Index (CPI) by the Berlin-based Transparency International ranked Pakistan as the 46th most corrupt country in the world.

However the privatization efforts are still under way. The Cabinet Committee on Privatization has recently approved the new Privatization Policy besides approving privatization of 21 SOEs including a power company, SME Bank, National Power Construction Company, Pakistan Railways, Pakistan Post, Heavy Electrical Complex (HEC), Pakistan Machine Tool Factory, PTDC Motels & Restaurants, Utility Stores Corporation, Kot Addu Power Company, Pakistan Mineral Development Corporation, Marafco Industries (Machinery as is where is basis), National Insurance Company, Pakistan Reinsurance Company and State Life Insurance Corporation. New privatization policy has been modeled on the concept of public-private partnership and divestment of 26% shares of these public entities.

CONCLUSION

The era of privatization has shifted to a complicated phase in Pakistan as more complicated sectors are being contemplated for divestment. It is vital to avert repetition of previous mistakes so that national exchequer and macro economic variables are not exploited and deteriorated any further. There must be a rational approach regarding rules and procedures for transparent and competitive privatization process.

Large industrial units, public utilities, financial institutions, and infrastructure and transportation facilities are to be vigilantly modeled. Diligent financial and technical processes are to be made even more secured and lucrative for the country.