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A review of privatization process

"National interest is the top priority" — Altaf Saleem

From Shamim Ahmed Rizvi, Islamabad
Mar 05 - 11, 2001

The pressure from international donor agencies is mounting to accelerate the process of privatization. Now they are making the release of committed funds for some sector conditional with privatization of some specified state enterprises. The Asian Development Bank has informed the government that the second tranche of loan for the Capital Market Development will be released on privatization of Investment Corporation of Pakistan (ICP) and National Investment Trust (NIT) before June 30, 2001.

However, despite various measures taken by the present government, including conferring a ministerial status to the Privatization Commission (PC), with full powers to manage the privatization process, the privatization plan of the present government falls far behind the schedule.

Privatization Ministry's 4 billion two year privatization plan is nowhere in sight. Out of 23 units which were planned to be privatized during its short term plan ending December 2000, only two have been disposed of bringing the achievement to less than 10 per cent of the target. The short-term plan, unveiled last July by the authorities, had envisaged selling of 23 entities by December 2000. In over six months the ministry has sold 9 per cent government shares in Muslim Commercial Bank (MCB) and Liquefied Petroleum Gas (LPG) business of Sui Southern Gas Company (SSGC).

The list of 23 included key entities like nationalized banks, 49 per cent shares in Allied Bank Limited (ABL), government's working interests in 9 oil and gas fields, noncore assets of Sui Southern Gas Company (SSGC), Sui Northern Gas Pipeline Limited (SNGPL), Pakistan State Oil (PSO), minority shares in ARL, PSO shares in PRL and Pak-Saudi Fertilizer.

Besides these major entities the authorities had listed 16 industrial units to be handed over to private sector by the year-end. The privatization ministry, formerly privatization commission, had identified 49 units for privatization in the two-year short-term and medium-term plan.

The former Chairman and now a minister has been making emphatic claims to meet its short term and medium term targets. After failing to achieve the same he came out with various explanations. The latest being that the commission without being an independent ministry fell handicapped in carrying out its operation. That has also been granted now. The new minister is no other than the Chairman of the Privatization Commission himself — Mr. Altaf Saleem. And the law turns the commission into a corporate body, with full powers to manage the privatization process without interference from any ministry. The law provides the ministry a number of options for privatization namely sale of assets, sale of shares through public auction or tender, public offering through stock exchange, employee buyout and lease or management contract.

Addressing a media seminar on "Privatization in Pakistan policy, programme procedure and progress", the Minister said state-owned entities (SOEs) cannot yield better proceeds if they are privatized in their present shape. However, the exchequer can earn huge amount provided the SOEs are restructured and balance sheet improved.

Citing the example of KESC, he said that its line losses amounted to 41 per cent and "one per cent is equal to Rs. 40 million". He disclosed that KESC had to suffer a loss of Rs. 22 billion in the next six months. "Its fuel cost is more than the bills recovered".

He said that the government expected $3 billion to 4 billion of proceeds through the privatization of SOEs. "National interest is the top priority", Saleem said and added that the majority of the "to be privatized" SOEs were under heavy losses and they would be sold out after restructuring and reforms. The sell-off the SOEs would be done through well-designed transaction structures and contracts. "Speedy privatization is not difficult but we want to do the right transaction with the right people", he added.

In his long discourse Mr. Altaf Saleem covered what he called the intricacies involved in the process of privatization. According to him the management associated with the public-sector enterprises was not cooperating with the Privatization Commission. They put up hurdles by their misguided summaries about the enterprises they are running. The personnel in these units were inefficient and indulged in corruption with the result that the PC was unable to proceed with decision-making on the question of auction of state shareholding in these enterprises within stipulated periods of time.

The Privatization Ministry is however sure that it will be able to dispose of Pakistan Telecommunication Corporation (PTCL) by June this year at a good price. The PTCL is the healthiest units in public sector which showed a profit of over Rs. 13 billion last year. However, the depleting foreign exchange reserves and resultant pressure from IMF has made sale of PTCL almost imminent. Under pressure of IMF the situation was considered at a high level meeting presided over by Chief Executive, in Islamabad last week. It reviewed the whole situation and decided to set up a commiittee to formulate workable proposals to boost the reserves. Among the suggestions at the meeting, privatization of the remaining shares of the PTCL was considered as being expeditiously achievable and capable of bringing in substantial cash immediately. Earlier, the sale of eleven per cent of the PTCL shares had fetched about $900 million. The meeting was told that a Saudi party had shown interest in the purchase of the PTCL but the offer was not very attractive.

In its time, the PPP government had decided to hand over the management of the PTCL to a party which would buy 40 per cent of the shares. This limit was reduced to 30 per cent by the successor PML(N) government. Press reports suggest that the present government is considering to further lower this ceiling to 16 per cent. At the same time it is said that a deal is being negotiated in secrecy and the proposal to put up the shares on the stock exchange has been abandoned. If the two reports are correct the deal that will be struck would seem likely to give rise to all sorts of rumours and misgivings. One suggestion can be that the sale should go through the stock exchange and if that may not be found feasible, an amount equal to the 16 per cent of the shares put up for sale may easily be obtained through securitization of the PTCL earnings.

That can take care of the immediate need of boosting the reserves, if that is the reason for rushing through the sale in an otherwise currently unfavourable economic environment in which securing a fair price may be difficult.