PRIVATIZATION WITH A DIFFERENCE

SHAMSUL GHANI (shams_ghani@hotmail.com)
Feb 23 - Mar 01, 2009

The previous government's policy of sale of strategic assets came under heavy fire so much so that the proposed sale of Pakistan Steel Mills with a question mark on its transparency triggered the infamous judiciary and executive tug of war that culminated in the ouster of the government, though via election process.

The Privation Commission of Pakistan, under a new minister has now embarked on a policy that aims at improving the efficiency of the sold state organizations rather than simply raising of revenue. Moreover, the policy provides for the use of privatization proceeds for the retirement of debt rather than the appropriation towards external account payments. In his speech on February 09, the federal minister for privatization Syed Naveed Qamar stated that setting privatization proceeds target by selling national assets was not the priority of present government, which was practiced during Shaukat Aziz era and the proceeds were used for budget deficit contrary to the PC law for utilizing the proceeds that is 90 per cent for debt retirement and 10 per cent for Poverty Alleviation Program. Unfortunately, the law was not implemented Leaving aside the proceeds' use issue, the organizational efficiency improvement objective underpins the idealistic policy stance, especially in view of the experiment of KESC privatization.

The table below compares foreign investment inflow/outflow position for the last three financial years.

MILLION US$
  FY-06 FY-07 FY-08 FY-08
(JUL-JAN)
FY-09
(JUL-JAN)
Foreign Private Investment 3,873 6,960 5,429 2,534 2,266
Foreign Direct Investment 3,521 5,140 5,410 2,555 2,588
of which privatization proceeds 1,640 266 133 133 .
Portfolio Investment 352 1820 19 (21) (321)
Equity Securities 352 1,570 19 (21) (321)
of which GDRs . 710 197 91 .
Debt Securities . 250 . . .
of which PMCL int. bonds . 250 . . .
Foreign Public Investment 613 1,468 21 22 (34)
Portfolio Investment 613 1,468 21 22 (34)
Equity Securities . 738 . . .
of which GDRs of OGDC . 738 . . .
Debt Securities 613 730 21 22 (34)
Total 4,486 8,428 5,450 2,556 2,232

Destabilized under the influence of global crises and domestic political turbulence, Pakistan's economy had been on vent for quite some time before the emergency IMF assistance resuscitated it. The shocks to which the economy was subjected have however, left their scars. The flight of capital jolted the investment market and halted business and industrial activities. The policy rate hike was the straw that broke the camel's back. In the face of dwindling investment inflow, the economy is now in the recessionary mode. Foreign investment, which was highest during the FY-07, decreased by 35.3 per cent in FY-08. The first-seven-month position in the FY-09 is also disappointing as it projects a further 30 per cent fall (on an annualized basis) as compared to the preceding financial year. On privatization front, we generated $ 1,640 million during the FY-06 as against $266 million and $133 million raised in the following financial years respectively. For the current financial year, we are yet to raise any amount from privatization source. We are in a liquidity crisis position and additional revenue is need of the moment. We should admit it straight away instead of trying to hide behind the curtain of policy objectivity. Be it the amortization of dollar loans and bonds, the settlement of external account payment or the bridging-up of the budgetary resource gap, the utilization of privatization proceeds has gone anyway into the economy. What is actually required is the minimization of external account deficit by restricting our imports to essentials only and increasing the exports in dollar terms.

The government has recently announced new privatization policy with the label of "PPP model", according to which 26 per cent shareholding of 21 state owned enterprises (SOEs) would be sold on the basis of private-public partnership. The cabinet committee on privatization (CCOP) has, however neither given any timeline nor indicated any estimate of sale proceeds. The market conditions and availability of financially sound and technically competent buyers will determine the timing of sale. Besides four power supplying companies operating in Quetta, Peshawar, Faisalabad and Hyderabad, the CCOP has approved privatization of SME Bank, National Power Construction Company, Heavy Electrical Complex, Pakistan Machine Tool Factory, PTDC Motels and Restaurants, the USC, Pakistan Post, Kot Addu Power Company, National Insurance Company, Pakistan Re-insurance Company, and State Life Corporation of Pakistan. The CCOP further approved land issues for privatization considerations concerning Printing Corporation of Pakistan, Sindh Engineering Limited, Services International Hotel, and Republic Motors Limited. The privatization of Pakistan Railways will be undertaken in phases after upgrading the services of different departments. Under the new policy, the percentage of share-offering to the employees of the respective entities has been increased from 10 to 12. As expected, the privatization of Pakistan Steel Mills and Qadirpur Gas Field has been put off, due obviously to the employees' pressure.

As is the norm, the policy announcement was not without criticism of the previous government's privatization policy. Nevertheless, the following words of the minister concerned raise hope that now it will be "privatization with a difference":

"People have lost confidence in the privatization process due to certain past deals such as KESC, which produced worst results and no development or expansion could be made by the buyer but the difference in new policy would be felt loudly. We should never be in a hurry to get rid of SOEs and should wait for the appropriate time and better price to make them efficient through bringing in the private sector management in a transparent way as the private sector management was always efficient and effective."