Privatisation of public sector industries to foreign buyers adds to yearly investment related payment outflows

Nov 10 - 16, 2003

The government has since tackled major macroeconomic issues confronting the country. However, there appears no improvement in the outflow on account of annual investment related payments. As per Economic Survey 2002-03, the country paid $ 20.871 billion during ten year period 1992-93 to 2001-2. On average, payment outflow has been $ 2.087 billion every year. Payment for 2001-02 was $ 2.43 billion, whereas for first nine months of 2002-03, the country paid $1.652 billion. Payment for full year 2002-03 may possibly exceed the amount paid in 2001-02. It may be noted that if outflow of the investment related payments were not tackled now through policy measures, soon it might equal our oil import bill and easily eat up the fiscal space achieved through re-profiling of Pakistan's external debt. Therefore, the government is urged to reconsider its privatisation and investment policies, particularly the policy regarding sale of strategic energy units to multinational companies.

Foreign direct investment might be encouraged in selected high-tech areas considered difficult for local investors and where transfer of technology is pre-requisite. Foreign investors should not be invited to set up traditional industries, possibly entailing annual dividend outflows of 25-50 % for ever. Traditional industries might be reserved for local investors and their foreign currency needs could be met through low-interest loans for which the liability would be paid off in a few years.

Privatisation of public sector industries to foreign buyers adds to yearly investment related payment outflows. In case these industries are profitable, the outflow might start immediately as interim dividends. One might expect large outflows if companies such as PSO, OGDCL and PPL are privatised in this manner. Therefore, privatisation of these units might be so structured that there are minimal outflows on account of investment related payment.

The government has initiated process for privatisation of PSO, OGDCL and KESC. The strategic investor will be offered 51% of shareholding (73% in respect of KESC), with transfer of management control to the investor. Every company is important in its own right, but taken together these units own large oil and gas reserves, electricity generation capacity, technical capability for exploration, production and marketing of oil and gas. Moreover these companies own energy-related infrastructure and ownership interest in other energy units, as is explained below.

PSO accounts for 70 % of petroleum product sales and is 52 % owned by the government. PSO reported a net profit of Rs4.03 billion ($70 million) in FY 2002-03. It has 733,896 tons storage capacity (79% of total) and 3,800 petrol stations across the country. PSO's oil marketing business is supported by its investments in related businesses: (i) 49% ownership of Asia Petroleum Limited, which operates an 82 km pipeline with an annual capacity of 3.6 million tons, supplying furnace oil to Hubco, the country's largest private power producer; (ii) 18% ownership of Pakistan Refinery Limited, operating Pakistan's third largest refinery with refining capacity of 2.3 million tons; (iii) 22% interest in Pak Grease Manufacturing Company, a specialized grease manufacturing unit; and (iv) 12 % interest in Pak-Arab Pipeline Company, which is implementing the White Oil Pipeline Project for transporting refined petroleum products to central and northern regions of the country.

OGDCL, established in 1961 by the government, with assistance from the Russians, for exploration and development of oil and gas resources, now has the largest exploration and production (E&P) portfolio in Pakistan. It is comparable in size to large international oil companies, and its portfolio is also diversified with respect to risk. Qadirpur, Uch, Dhodak and Pirkoh fields are its prime development assets, offering attractive cash flows to sustain further E&P activities. Its remaining recoverable reserves of oil are 50% of total for the country; while for gas these are 38%. On actual production, its share of oil is 37% and gas it is 30%. It may be noted that the company has the most extensive E&P database in Pakistan, developed over four decades of successful E&P activity. In addition, the company has an in-house technical services capability for seismic data acquisition and processing, drilling and related services, wire-line logging, and construction and general support services. The company is highly profitable, for FY 2001; its profit after tax was $283 million.

The government on 7th October 2003 has invited EOIs from qualified utility operators and strategic and financial investors interested in acquiring up to 73 % of equity in KESC, with management control. Salient points: (i) Unique opportunity to acquire controlling interest in the integrated power utility for generation, transmission and distribution of electricity to Karachi, the largest industrial and commercial city in Pakistan. (ii) Commitment to continue support by GOP during turn around period. (iii) Possible co-investment by ADB which may also be willing to take an equity interest of 7.67 % from available 73 % at privatisation. (iv) In addition to Karachi, KESC supplies power to the industrial areas of Thatta (in Sindh) and Lasbella (in Balochistan). (v) In total the KESC franchise area covers approx. 6,000 sq. km with a population in excess of 12 million; and (vi) The government has undertaken to continue with the approved current investment programme (until June 2006) to upgrade transmission and distribution system and to underwrite the formula based tariff regime as determined by NEPRA, in September 2002.

The government has introduced public-private partnership in education and health services. Lately, this policy has been extended to setting up and operation of new power generation plants. To start the actual partnership, the government might associate the Pakistani investors in the operation and management of existing public sector power generation plants. The same philosophy might be extended to the management and operation of oil and gas units as well as PSO. The government might consider changing the corporate governance laws to allow private directors on the Board of Directors to the extent of share-ownership in the private hands. Offer of shares on stock exchange coupled with partnership with local private investors has the potential to bring prosperity and progress to our people, without serious outflows of investment related payments.