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The whole process still appears bogged down in legal, procedural and administrative snags

Feb 19 - 25, 2001

Privatization has been integral part of the Government of Pakistan (GoP) macroeconomic policy since 1985. While one may say that the whole process has been moving at snail's pace, Pakistan's track record has been much better than its neighbour India, where not a single unit has been privatized in last three years. During last ten years the GoP has realized nearly Rs 60 billion equivalent to US$ 1.7 billion from sale of shares of Pakistan Telecommunication Company, Kot Addu Power plant, five financial institutions and 97 other units.

The theory of privatization (globally) is based on a conviction that governments should not indulge in production activities. At the same time efforts are to minimize government's control through liberalization, deregulation and privatization. A review of the performance of state-owned enterprises (SOEs) in Pakistan shows: mismanagement and high costs, misguided and costly investments, increased corruption, poor quality and quantity of goods and services and high debt and fiscal losses. SOEs' losses lead to fiscal hemorrhaging in various ways. This include: equity injections, loans, bonds and guarantees, other implicit and explicit guarantees and fiscal subsidies. The prevailing situation is the result of political appointments and directives and efforts to keep prices low artificially. Since a large number of these entities are virtually bankrupt, the state-owned financial institutions face coerced lending which deprives private sector from its due share in credit. Yet another issue is that these SOE's are outside the premise of regulatory bodies and the ultimate sufferer are consumers/customers.

Privatization Commission has been given the mandate to sell state-owned assets through an open an transparent process. While the efforts have been to avoid any subsequent litigation, the experience has been contradictory. Many of the transactions opened Pandora's box, there were suits and counter suits and at times the GoP was forced to take up the control of some of the units for their survival. Therefore, the current economic managers have taken slightly longer time to redefine policies and procedures which, in a way, slowed down the whole process. Apparently, the GoP has now formulated relatively better policies and procedures. This was all the more necessary because now the bigger units are being offered for sale.

The newly defined objectives are, encourage higher production, improve service coverage and quality, promote market-based prices, attract capital and better management, reduce fiscal hemorrhaging, use proceeds to retire national debt, strengthen domestic capital markets, broaden ownership base and reduce opportunities for corruption. In other words the GoP aims at fostering competition to allow the customers/consumers to enjoy the benefit of privatization.

The GoP aims at achieving faster pace by creating conducive macroeconomic environment, market-based pricing policies, supporting laws and regulations, independent regulatory authorities. There are also efforts to minimize issuing sovereign guarantees, lavishly issued in the past. The objective is to attract investment on the economic viability of the projects by creating enabling environment and not simply on the basis of government guarantees.

The units being offered can be classified into various categories: banking and finance including insurance, oil and gas, power, telecommunication and manufacturing units. Various types of sale envisaged are: strategic sale, auction and public offer for specified percentage of GoP shareholding. Privatization Commission intends to offer various percentages of its stake, though stock exchanges, depending on the appetite of equities market. On one hand it will enable the Commission to gauge the level of interest of investors and on the other hand evaluating the type of investors who could possibly take part at the time of sale of strategic share.

It would be interesting to note that while the GoP was able to raise around Rs 60 billion from privatization, it also forced to inject over Rs 40 billion as additional equity in two nationalized commercial banks. Such fiscal hemorrhages were also common in WAPDA and KESC. Therefore, the one single largest reason for privatization of SOEs is the impact of their losses on budget deficit. The more the process is delayed the more scars it will have on national economy.

While it is true that the task is very difficult, the GoP must have the will to achieve the target. Investors often get the feeling that the GoP is not serious in implementing its programme. One such evidence is the delay in creating various regulatory authorities. Even if a authority like NEPRA is created, its autonomy remains questionable. Only the acts of the GoP can prove that it means business and not yet another round of noises to make the IMF/World Bank happy