A test case

SHAMIM AHMED RIZVI, Bureau Chief, Islamabad
Oct 02 - Oct 08, 2006

The Privatization process seems to have virtually come to a stand still ever since the decision of the Supreme Court in June last month that invalidated the privatization deal of Pakistan Steel Mills. The Federation and the Privatisation Commission, however, have filed petitions in the Apex court to review its judgment.

The Minister for Privatization and Investment Zahid Hamid and Minister for Information and Broadcasting Mohammad Ali Durrani in a recent press briefing have said that the government has tried its utmost to implement the impugned judgment in both letter and spirit. They said that on the direction of the Supreme Court, the government has cancelled the previous self-off deal of the PSM. "It has constituted the Council of Common Interest and got the CCI's approval for its future privatisation programme" they added. They said that the government was also considering offering 10 percent shares of the PSM to the general public to ascertain its real share value.

But, the ministers said that three are numerous observations of the court, which, if left unexamined and uncorrected, are liable to fatally affect the entire process of privatisation. They said that through the review petition the government wants to get guidelines for implementation of certain observations of the court and correction of some errors.

Senior advocates Abdul Hafeez Pirzada, Syed Sharifuddin Pirzada and Waseem Sajjad have filed the petition, on behalf of the Federation of Pakistan, the Privatisation Commission, and Pakistan Steel Mills respectively.

They have contended that various errors fact and law in the impugned judgment have been elaborated at length in the petition, but more important of these are"

i) That valuation of the shares of PSM was not carried out in accordance with applicable law.

ii) That certain concessions were illegally provided by the federal government to the winning bidder after the completion of bidding, and

iii) That the Share Purchase Agreement was not valid as the assets of PSM were being purchased b y an entity other than the winning consortium.

In the petition, the government has given detailed arguments and grounds for review of the judgment with regards to these observations and took the plea that "the Honorable Court had no reasonable basis for refusing to accept the winning bid of Rs 21.68 billion as anything other than the "market price".

It has been further argued that the conclusion reached by the court that the privatisation of PSM had been conducted with "indecent haste" was not justified.

The petition says that the profiles of various bidders were examined by the CCOP and the CCOP only concluded after an examination of the respective profiles of all the bidders that each of the competing consortia was acceptable. If anything, the decision taken by the CCOP shows the complete impartiality of the federal government with respect to the competing bids. The government has further submitted that no concessions were illegally provided to the highest bidders, but all decisions of the government were in the national interest.

In the petition, it has also been argued that though the court has not act in error in exercising its original jurisdiction, but the court's very restrictive interpretation of the jurisdiction of the High Court under section 28 of the Privatisation Ordinance 2000 is an error apparent on the face of the record.

In the meanwhile Senator Professor Khurshid Ahmad has filed an adjournment motion in the Senate to discuss the PTCL privatisation, involving gross violation of procedures, loss of millions of dollars to the exchequer and surrender of through a shadowy agreement. Criticizing the manner in which the Privatisation Commission has been "playing havoc with the national assets, the MMA Senator said" "the whole deal looks like one more scam in the basket of scandals this government is carrying despite all its all claims about good governance". The adjournment motion said: "It is a matter of urgent national importance; I therefore, beg to move that normal business of the House may be suspended to discuss the issue".

Khurshid noticed that the process of PTCL privatisation "smells four from the day one". He said like other projects no proper evaluation was done in respect of the PTCL assets; particularly the current value of real estates was ignored. "All this needs thorough probe by the Parliament and its Standing Committees. In fact even the Supreme Court of Pakistan should consider suo moto notice of this issue because the Supreme Court's probe and judgment on Steel Mills has saved the country from huge financial loss and transfer of its strategic assets into foreign hands", said Professor Khurshid Ahmad, who is also a member of Senate Standing Committee on Finance.

The MMA senator and veteran economist also stated that the bid price is reported to have been revised downward involving loss to the exchequer to the tune of $ 394 million. The senator also took a strong exception to the fact that the terms and conditions have also been modified for a number of times. "Strangely enough while only 26% shares have been transferred, the government has almost abdicated to its independent position in the Board of Directors by committing its directors to the viewpoint of the 26% shareholder", he observed.

Since 1991, when the privatisation process was set in motion, the sale of Pakistan Steel Mills (PSM) is perhaps the first case of its kind to have been successfully challenged in a court of law. An array of country's leading lawyers failed to convince the Supreme Court that the transaction was transparent or in national interest. The apex court in its short judgment annulled the PSM privatisation pointing out perversion of the process by corruption and lack of national consensus. The privatization policy per se was not touched but the court asked the government to convene the Council of Common Interest (CCI) within six month to ascertain the views of the nation on the sale of a strategic national asset.

A score of controversial details about the transaction were highlighted during court proceedings. The sale price of Rs. 21.68 billion (75 percent share for an equivalent of $ 360 million) was considered as too low for an undertaking built at a cost of $ 2.5 billion. The non-transparent manner of the sale was also characterized by some major fault lines. The reserve price did not take the value of and or the stock in trade into consideration. The credentials of successful bidders regarding their good legal status, financial viability and management skills were not properly evaluated at the pre-qualification stage. The government also undertook to underwrite some of the liabilities after the acceptance of the bid on fixed terms.

In mathematical parlance, the cost benefit ratio of the transaction makes an interesting regarding. According to a leading analyst, against the sale proceeds of Rs. 21.68 billion, the government has agreed to pay Rs. 7 billion in golden handshake to 6500 employees besides tendering a post-dated cheque for Rs. 7.67 billion to clear off past liabilities. In addition, the CBR has waived off taxes to the tune of Rs 1.82 billion leaving a paltry Rs. 5.19 billion with the exchequer. Over and above, a number of assets were not taken into consideration including stores and spares valued at RS. 1.86 billion and stock in trade worth RS.9 billion.

The buyers also take possession of a bank balance of Rs. 8.88 billion and assets worth Rs. 21.78 billion. Also at stake is 4457 acres of land occupied by the plant besides 8270 acres reserved for future expansion.

The haste with which the whole transaction starting from bidding to final approval and delivery of acceptance document to the buyers in a time span of less than 48 hours makes the whole transaction suspiciously obscure. The PSM sale thus raises a whole lot of questions about the privatisation process, valuation of assets, true identity of buyers, their capacity to improving the working of national assets, flow of foreign direct investment, issues relating to transparency and final disposal of privatisation proceeds. The apex Court decision does not bar further privatisation, yet it provides a much needed respite for a fresh look about the policy making process.

The Privatisation Commission in fifteen years since 1991 to fiscal year 2005 has received amount worth of Rs. 395.2380 billion from the privatisation of an industrial, financial and other organizations and 90 percent amount spent on the payment of foreign loan while 10 percent spent on Poverty Alleviation Programme. A report issued by Privatisation Commission said that under the privatisation programme, the Privatisation Commission has collected Rs. 241 billion by selling it shares in the banking sector and seven banking units. Rs. 31.78 billion has been received through capital market, Rs. 57.5590 billion through electricity sector while Rs. 186 billion collects by selling government's shares in Telecom Industry.

The disposal of privatisation proceeds also calls for greater transparency. The Privatisation Ordinance stipulates that 90 percent of the proceeds will be spent on debt reduction and 10 percent on poverty alleviation. During the last three years, the government reportedly collected Rs. 295 billion (equivalent to nearly $ 5 billion), but the foreign debt has been reduced by only $ 2.3 billion to $ 36.6 billion. As for poverty alleviation, no assessment can be made unless the proposed poverty alleviation fund is created.

The whole process of privatisation has its snags, which must be carefully looked into. Further, it cannot be detached from matters of important public concerns like social, political and psychological values. Issues of health, education, social welfare and strategic assets can hardly be made subject matter of privatisation.








National Bank of Pakistan




February, 2002

Oil & Gas Development Company Limited


2.5% with green shoe option of addl. 2.5%


November, 2003

Pakistan Petroleum Limited


10% with green shoe option of addl. 5%


July, 2004

Kot Addu Power Company Limited


10% with green shoe of addl. 10%


February, 2005

United Bank Limited


10% with green shoe option of addl. 5%


June, 2005