PRIVATIZATION OF CEMENT INDUSTRY

A case study of Pakistan

DR AMANAT ALI JALBANI, SZABIST, Karachi
July 10 - July 16, 2006

Karachi Chamber of Commerce and Industry (KCCI) is the hub of activities concerning the commercial and industrial aspect of the city. Recently the KCCI has planned to hold exhibition "My Karachi, Oasis of Harmony" at the end of this month. We met President Haroon Farooki (HF) to know the role of KCCI in promoting the country's exports.

The privatization of state owned enterprises (SOEs) has been a recurrent theme on international arena since the early 1980s. In Pakistan it was in the policy agenda of governments after 1977, but it was actually initiated with effect from 1991-92. It is aimed to achieve enhanced quantity and quality of goods and services, strengthen public finances, broaden and deepen capital markets, reduce opportunities for corruption and to avoid mismanagement. This study explores the impacts of Pakistan's cement industry privatization in general.

Along with other sectors, privatization of cement industry remained one of the top agendas of the Pakistan government. It left both positive and negative affects. Positive as believed in the sense that efficiency and effectiveness of cement sector with the improved performance of privatized units. The negative affect in the sense that there is increase in the consumer prices and unemployment. Privatization of cement would have been much more beneficial to the consumers and employees as well if there would have been a control over prices and social object in the mind of private sector.

PRIVATIZATION IN PAKISTAN IN GENERAL

Over the last few decades, there has been a widespread change of opinion about the role of state and private enterprises in promoting economic growth. An opinion has emerged that the achievement of more dynamic economic growth requires a greater role for the private sector with the belief that resources will be used more productively if they are transferred to the private sector. A key element of this new market orthodoxy has been the privatization of state-owned enterprises (SOEs).

Privatization is used in a very broader sense. But most simply, it is the transfer of assets or service delivery from the government to the private sector. Privatization runs a very broad range, sometimes leaving very little government involvement, and other times creating partnerships between government and private service providers where government is still the dominant player. According to the World Bank, 'privatization is the transfer of ownership of SOEs to the private sector by sale (full or partial) of going concerns or by sale of assets following their liquidation."

The privatization of state owned enterprises has been on international agenda since the early 1980s. Common factors precipitating the need to privatize are unsustainable large budget deficits, and burdensome funding of huge SOEs deficits. The inefficiency, mismanagement, political interference, corruption etc were also referred as justification for privatization.

In Pakistan, the concept of privatization for the policy makers is not new, it may be traced as back as in 50s, when Pakistan Industrial Development Corporation (PIDC) was established in 1952 to boost up 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 public to private sector. The tide of nationalization, which swept the whole economy in the first half of 70s, was reversed in 1977. The privatization of State Owned Enterprises (SOE) 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.

As a first step towards privatization, a Committee on Dis-investment and De-regulation was formed. The Committee in its preliminary report, submitted to the government in January 1991, recommended the disinvestment of 118 industrial units, which included 45 nationalized units taken over during the period 1972-74. The government approved this disinvestment plan and announced the creation of a Privatization Commission on 22nd January 1991 to implement the disinvestment program within the shortest possible time. The birth of Privatization Commission institutionalized privatization efforts in Pakistan. At the same time, a Cabinet Committee on Privatization (CCOP), with the Minister for Finance and Economic Affairs as its Chairman, was constituted to approve the recommendations of Privatization Commission. [ Syed Anwar-ul-Hasan Bokhari (1998)]. With effect from 1991 to 2003, GOP privatized around 132 units at Rs 101031 billion [table -1]

During the period from November 26, 2002 to July 31, 2004 privatization proceeds of Rs. 49.555 billion were realized from 18 transactions. The Privatization Commission in order to ensure participation of the small investors and benefit from the privatization program also sold GOP shareholding in NBP, POL, ARL, DG Khan Cement, OGDCL, SSGC and PPL through Capital Market. Some of the major transactions completed are:

* Sale of 51% of GOP stake in HBL for Rs. 22.409 Billion.
* Sale of GOP shareholding in POL, ARL and D.G Khan Cement through
Stock Exchange for Rs. 5.861 billion.
* Divestment of 30% shares of Bank Alfalah for Rs. 620 million.
* Sale of Management Rights of ICP-SEMF for Rs. 787 million.
* Divestment of 13.2% shares of National Bank of Pakistan for Rs. 1,387 million.
* Strategic sale of Associated Cement, Rohri for Rs. 255 million.
* Sale of 15% shares of Pakistan Petroleum Limited (PPL) through Capital market for 0.655 billion.
* Strategic sale of Thatta Cement for Rs. 714 million.
* Strategic Sale of Hotel Hyatt Regency for Rs. 530 million.
* Sale of 10% shares of Sui Southern Gas Limited for Rs. 1.745 billion through Capital Market.
* Sale of the Falleti's Hotel, Lahore for Rs. 1.211 billion.
* Sale of shares of Kohinoor Oil Mills Limited for Rs. 80.7 million.

The Commission during the period July 2004 to April 25, 2005 also realized Rs. 33.797 billion from the sale of GOP shares in PIA, PPL, KAPCO, Falleti's Hotel and 10% additional shares of Kohat Cement, Dandot Cement Ltd. By 25th April 2005, the Government of Pakistan had completed or approved 147 transactions at gross proceeds of Rs 168.080 billion. [www.privatization.gov.pk].

Following are details of privatization in Pakistan after the formation of Privatization Commission in 1991.

Table- 1.
NUMBER OF PRIVATIZED TRANSACTIONS

(Rupees in million)

.

1991 TO JUN 2003

JUL 2003 TO JUN 2004

JUL 2004 TO APRIL 25, 2005

TOTAL

TOTAL

SECTOR

NO.

AMOUNT

NO.

AMOUNT

NO.

AMOUNT

NO.

AMOUNT

Banking

6

18,614

1

22,409

.

.

7

41,023

Capital Market Transaction

11

9,727

3

9,707

3

12,266

17

31,700

Energy

12

20,904

.

.

1

20,240

13

41,144

Telecom

2

30,558

.

.

.

.

2

30,558

Automobile

7

1,102

.

.

.

.

7

1,102

Cement

11

7,557

2

1,049

1

75

14

8,681

Chemical / Fertilizer

17

10,198

1

6

.

.

18

10,204

Engineering

7

183

.

.

.

.

7

183

Ghee Mills

21

756

1

81

.

.

22

837

Rice / Roti Plants

23

326

.

.

.

.

23

326

Textile

2

87

.

.

.

.

2

87

Newspapers

5

270

.

.

.

.

5

270

Tourism

3

594

.

.

1

1,211

4

1,805

Others

5

155

.

.

1

5

6

160

Total

132

101,031

8

33,252

7

33,797

147

168,080

Source: www.privatization.gov.pk

PRIVATIZATION OF CEMENT INDUSTRY IN PAKISTAN

Pakistan is fortunately rich in the deposits of limestone, clay and gypsum, which constitute basic raw materials for manufacturing of cement. In spite of having abundant raw materials and rising growth in demand of cement, only five cement factories were established during the initial thirty years of independence, with aggregate capacity of 3.2 million tonnes. At the time of independence in 1947, only one or two units were producing grey cement in the country. During the decade of 1948-58, the number of cement units increased to six. To meet the growing demand of cement, new units were set up. During the decade of 1958-68, the number of cement units increased from 6 to 9. During the period 1977-88, denationalization of industrial units boosted the investments. Housing and construction industries picked up and the demand for cement increased. Thus, the number of cement units increased from 9 to 23 and finally 24.

To follow the agenda of World Bank and the IMF, GoP included the cement industry also in its privatization agenda. Following are the cement industry units that are privatized till now.

Table - 2
PRIVATIZED CEMENT INDUSTRIES

UNIT NAME

SALE PROCEEDS

DATE OF TRANSFER/ BIDDING

BUYER NAME

Maple Leaf Cement

485.7

Jan-92

Nishat Mills Ltd.

Pak Cement

188.9

Jan-92

Mian Jehingir Ellahi & Ass

White Cement

137.5

Jan-92

Mian Jehingir Ellahi & Associates

D.G Khan Cement

1,972.8

May-92

Tariq Sehgal & Associates

Dandot Cement

636.7

May-92

EMG

Garibwal Cement

836.3

Sep-92

Haji Saifullah & Group

Zeal Pak Cement

239.9

Oct-92

Sardar M. Ashraf D. Baluch

Kohat Cement

527.9

Oct-92

Palace Enterprises

Dandot Works - National Cement

110.0

Jan-95

EMG

General Refractories Limited

18.9

Feb-96

Shah Rukh Engineering

Wah Cement

2,635.5

Feb-96

EMG

Associated Cement Rohri

2,55.0

Nov-03

National Transport Khi.

Thatta Cement

7,93.0

Jan-04

EMG

10% additional shares of Kohat Cement, Dandot Cement

75.0

Oct-04

EMG

Total

8,681.4

. .

[Source www.privatization.gov.pk ]

DEMAND & SUPPLY OF CEMENT.

During the early years, Pakistan did not produce that much quantity of cement so as to meet its domestic requirements. Therefore, Pakistan had to import cement for a long period. Import of cement continued from 1971 to 1985. It reached to a level of 1.3 million tonnes in the year 1981-82 Its scarcity also hampered the development process in the country.

New cement plants and expansion projects were started in 1994/95 when the historical annual growth in cement demand was 7 per cent with per capita consumption of only 71 kgs. It was expected that the growth rate of cement consumption would accelerate due to the urbanization and revival of the economy.

The country, at present, has an installed capacity of producing 17.55 million tonnes of cement per annum, mainly Portland cement. It is envisaged to increase installed capacity (also by expansion) to 28.21 million tonnes per annum by 2008.

There has been strong rise in demand of cement during recent years. The reasons for this are 1) increasing construction activity in Afghanistan and 2) lower competition from Iran. In addition to Afghanistan, Sri Lanka, Bangladesh and Vietnam are being explored as new destinations for cement exports. Industry sources indicate that there is a potential to export 2-3 million tones/annum of cement to these countries.

On the other hand, the demand of cement for infrastructure units is expected to grow with the commencement of work on Gawadar Port, power plants, Islamabad New City, Karachi Package Ghazi Brotha Dam and the construction of huge network of irrigation canals in the country

PRICE TRENDS

Before the privatization of cement industry, per bag price of cement was around Rs.95 per bag. After privatization the cement was being sold in the market at around Rs165 per bag until February 1998 but prices escalated to Rs245 per bag in July, 1998. In justifying the increase in price cartel, the All Pakistan cement Manufacturing Association (APCMA), in a report submitted to the Ministry of Commerce in May, 1998, mentioned the total cost of production was Rs184.32 when adjusted with profit and transportation the price rose to Rs228.50 per bag. On the other hand in an earlier report in June 1997, the APCMA had estimated the cost of production at Rs136 per bag and adjusted it with profit and transportation at Rs170 per bag.

The cement industry attributes the high prices of cement to the government's imprudent policy regarding taxation and upward adjustment of furnace oil prices and electricity tariff. The combined impact of electricity and furnace oil on the cost of production is 47 per cent.

Despite the fact that cement constitutes as one of the basic necessities for shelter, the policy makers have subjected the cement sector to the highest taxation in the region. The levy of General Sales Tax (GST) on cement is Rs660 per ton in Pakistan as compared to Rs320 in India. The excise duty is Rs1000 per ton, which is 186 per cent higher than India where it is Rs350 per ton. In the light of this tax regime, it is said that Pakistan has one of the highest tax rates on cement in the Asian region. The impact of such tax and duty structure has resulted in almost 40 per cent increase in the cement price per 50 kg bag when compared to India suppressing demand for Pakistan cement. A comparative study regarding taxes on cement indicates that as against Pakistan where the taxes on cement are 40 per cent, it is nil in Iran, 7 per cent in Thailand, 10 per cent in Egypt, 10 per cent in Philippines, 10 per cent in Indonesia and 18 per cent in India.

Another very disappointing aspect of exorbitant profiteering in the industry is that the cement industry is unevenly distributed in various regions of the country, different units use different technologies and different units have different plants of different ages with different efficiencies. But irony is that all units charge almost similar prices across the country, which implies misuse of cartel power. Another valid principle of the market economy based on competition is when market is depressed, prices move downward but in the case of cement the reverse has happened. The cement industry is working under capacity and there is scope for full capacity utilization at affordable prices. But the thrust for extraction of exorbitant profits dominates the principle of fair play.

The forces of exploitation and greed determine prices in Pakistani markets rather than market forces. The government must check the inordinate price-hike. The shelter is a basic need of the common man and to ease the provision of shelter cement prices have to be brought down. [Zafar-ul-Hassan Almas, daily Dawn, 21 February 2000]. Cement prices in the country have crossed Rs350 per 50 Kg bag level during the year 2006, following an alleged maneuvering in supply as reported by the dealers.

EFFECTS OF CEMENT PRIVATIZATION ON CONSUMERS AND EMPLOYEES

Pakistan being a rich country in terms of the basic ingredients (limestone, clay and gypsum) required for producing cement, it is unlucky that the benefit of availability of all these natural resources is not passed on to the consumers. It is the industry which is earning the highest profits and also the government which is getting lots of revenues in the form of taxes which are said to be the highest in this region and the end users are the real sufferers. This statement can be substantiated with the fact that a cement bag of 50 kg is being sold at Rs160 in India as compared to Rs 300 or more in Pakistan. Conversion from furnace oil plants to coal system has already taken place in majority of the cement producing units which have started getting high benefits but cement companies are reluctant to pass the benefit to the consumer on the excuse that the industry has suffered great losses in the past due to high price of furnace oil hence unless the losses of the past are recovered they are not in a position to pass on the benefit to the end users. And in this condition government is not effective to intervene in price mechanism because it is already charging highest tax from these industries.

It seems that privatization has brought more of the adverse affects towards the larger population of Pakistan that is poor people. Where as the government says that it has well controlled the prices of cement industry, but there exists a large gap between cost and price of cement.

On the other hand, privatization of any industry brings the concerns of layoffs for its employees. There was great deal of layoffs in the newly privatized companies in the form of Golden handshake and the stake in the shares of cement companies.

Privatization has created a great deal of unemployment for the people in the areas where these cement manufacturers exist. There were almost 300 to 400 layoffs in the every cement factory that was privatized and many of them closed down, resulting in full unemployment of these closed down units. These privatized units do offer some extra facilities to these employees, which government was failed to provide before, but also take great deal of work. Also the opening up of new plants in the country has opened the ways to new employments. After privatization, the number of cement manufacturers has increased from 16 to 24 in the country, but it still does not employs that much of workers as were employed by the nationalized cement industry, keeping in view the social objects in their mind. It has also decreased the job safety of employees of privatized units. Moreover, the income of these employees is not appropriate as much as they work and in accordance with increasing inflation in the country. Finally, the transparency of privatization has always remained doubtful and questionable. This has been termed as sweetened privatization deals

CONCLUSION & RECOMMENDATIONS

We can conclude that private sector enjoys monopoly in cement sector. After privatization, the government has no control over setting prices, prices are set by Association of Cement Units i.e. cartel. After privatization, in terms of technology cement sector has transformed from furnace oil production to coal firing system, which results in saving the cost of production. In terms of demand and supply, there is lot of demand of cement in and outside the country. After privatization and change of technology, despite saving in cost of production, the consumer is not getting any benefit in terms of reduced prices. The ultimate beneficiaries are manufacturers/owners and the government itself, and the end users are the real sufferers. On the other hand the lay off of employees and increased risk of losing the job has been the other result of privatization of this industry. Overall the increase in cement prices has badly affected the common man of Pakistan.

After privatization, there still remains a role of government to play. In this scenario, the government has to play very significant role to control the prices and to protect the end users/consumers.