FDI THROUGH PRIVATIZATION - NO SIGNS OF EXPANSION...

'Selling off utensils to run the household'
Quoted from the verdict on Pakistan Steel Mills Corp the State vs United Opponents)

MUNTAZIR HAIDER
Mar 26 - Apr 01, 2007

Privatization and nationalization are two different schools of thought having their distinct merits and demerits. Based on what actually the circumstances of the country are, they may move on to adopting either of the two policies. In Pakistan, the famous eras that are presently associated with the two are the Bhutto era (nationalization) and the Musharraf regime (privatization). It is really a matter of analyses and determining what is good for the state at a point in time, nationalization was condemned quite widely and was later accepted as a beneficial move. At present, privatization is not very welcomed across, except for the IPOs that allow general public to invest.

PRIVATIZATION & DFI TARGETS FOR 2006-07

It seems awesome to hear that the FDIs would make a new record at the end of the current fiscal year. It is definite that the privatization of public sector entities has restricted the government's role to policy making, good governance and has fostered competition and increased efficiency and revenues. Exciting investment opportunities in an environment of level playing field for both local and foreign investors, effective regulatory framework with liberal policies have made Pakistan an attractive destination for investment, which has also given boost to the investors' confidence. Three pillars of Pakistan's economy deregulation, liberalization and privatization have yielded encouraging results. These major economic reforms have been termed as role model in the World Economic Forum's discussions while IFC and World Bank has declared Pakistan as the top reformer in the South Asian Region and 10th in the World in a report titled, "Doing Business in 2006: South Asian Countries Pickup Reform Pace".

PRE-REQUISITES FOR PRIVATIZATION PROCESS - THE DO'S AND DONT'S

The process is complex and complicated and needs transparency throughout the procedure because the entity being privatized is a public holding, owned by the tax payers. In absence of any transparency, valuable assets may be sold at throwaway prices. Privatization should also avoid crony capitalism as in Chile and Argentina; it has been associated with giving away expensive public assets at cheap rates to political cronies. The sequencing and timing of privatization is also very important; it is crucial that the assets are sold gradually over a period of time. For privatization to be successful the economy should be deregulated and unnecessary restrictions and procedures for industrial enterprises should be done away with. In deciding upon the sequence, it is important to privatize the loss-making unit as a priority and then gradually move in the descending order of losses.

WAVES OF PRIVATIZATION IN PAKISTAN

There have been three waves of privatization in Pakistan so far, as mentioned below:

START

END

DIVESTMENT FIGURE

1992

1994

Rs.120 billion

2001

2002

Rs.65 billion

2003

To-date

Rs.XXX billion

DOES FDI MEAN PRIVATIZATION ONLY?

There is a huge misconception among masses that FDI stands synonymous to privatization. FDI can be in the form of a new firm or a joint venture as well. Therefore, privatization is just another tool to attract FDI, not the sole tool.

THE BENEFITS OF FDIS

Generally, countries prefer FDI for the fact that foreign investors coming in would bring all sorts of their existing skill-set along which would enhance the productivity of the country on the whole, and that these foreigners would be indulged in establishing new ventures that would increase the employment opportunities and the standard of living.

CRITICAL ANALYSIS OF PRIVATIZATION

Privatization in Pakistan has not met its objective as mentioned in the previous section. Rather than bringing in FDIs to get new opportunities created, the publicly owned entities are sold where people are laid off, and a negative impact is created for the FDI itself. Alongside, the pace is so quick that sooner than not, one may find hardly any government run institute. The 'investor-friendly-terms-and-conditions' are so friendly that the cost at which these entities are sold do not even cover the cost of good will alone; examples need not to be quoted as facts and figures are unleashed to everyone but the most recent one is Habib Bank Limit.

A BETTER CHOICE?

FDIs had been truly worth of, had the foreigners come in for organizational and industry development, creating more employment opportunities, improving local infrastructure, and for other benefits that are expected from them, in turn providing them ease and facilitation for production and other inputs at the most suitable rates. A similar example of the later has been the development of Export Processing Zones in various parts of the country.

THE INEFFICIENCIES OF THE PUBLIC SECTOR

It is an agreed fact that public organizations are generally over-staffed and there is a human resource issue, but these are all linked to the fact that the government has to maintain a certain level of employment. Failing to do so would be the failure of the government, therefore, at times they have to employee 20 in place of a mere 10 or even 8. Since private sector, particularly FDIs are just linked with their operational efficiencies and profits, they tend to lay off masses, giving birth to not just unemployment, but at times laying off experienced people who then stand for employment giving a tough time to the fresh employment-seekers.

PRIVATIZATION PACE

There are thick chances of losing economic sovereignty if the pace of privatization continues, and the economy might just be somewhere near the mid-point of it right now. Moreover, IMF's next demand would be to privatize Mangla and Tarbela dams, which would bring an utter ruin to the economy.

THE WITHDRAWN DEAL: PASMIC

Pakistan Steel Mills Corp (PASMIC), the biggest supplier of all sorts of steel material, was planned to be privatized for the good of the country and its economy. PASMIC has huge areas of land and production facilities. The deal that was finalized was quoted at an amount even less than the market value of the idle land that PASMIC holds. If the evaluation problem is let alone, PASMIC is a near monopoly in the steel markets today, as it holds a large chunk of the market pie, it employs thousands of workers, has separate facilitations for them, and the area in itself is moreover like a city. A few years ago, PASMIC was running in operational losses. But late Col. Afzal, former chairman PASMIC, brought in certain developments, policies and regulations, and had some development work done after which, it was running in operational profits of late. Selling off revenue generating huge profit asset could have had only a high level strategic thought associated, but made no sense to any associated personnel. Price can be an incidental evaluation error (though repeated with almost all cases e.g. HBL), however, the reason of the decision remains unknown. The judiciary did its job by withdrawing the deal, saving the employment of many and preventing a huge loss to the economy.

NET INFLOW OF FOREIGN INVESTMENT IN PAKISTAN

MILLION US$

 

FEB 2007

JAN 2007

JULY-FEB

CHANGE OVER LAST YEAR

FY06

FY07

ABSOLUTE

%AGE

Foreign Private Investment

1,158.6

300.4

1,992.5

3,952.0

1,959.5

98.3

Foreign Direct Investment of which Privatisation Proceeds

874.8

223.2

1,521.6

2,970.8

1,449.2

95.2

 

       

354.0

133.2

Portfolio Investment

283.8

77.1

470.9

981.2

510.3

108.4

Equity Securities

182.1

77.1

470.9

681.2

210.3

44.7

of which GDRs of MCB Bank

     

150.0

   

Debt Securities

101.7

-

-

300.0

300.0

 

of which TFCs of PMCL #

     

50

   

International bonds of PMCL

101.7

   

250

   

Foreign Public Investment

(10.0)

(6.0)

(126.0)

668.0

794.0

630.2

Portfolio Investment

(10.0)

(6.0)

(126.0)

668.0

794.0

630.2

Equity Securities

-

-

-

731.0

731.0

 

of which GDRs of OGDC

-

-

 

731.0

   

Debt Securities *

(10.0)

(6.0)

(126.0)

(63.0)

63.0

50.0

Total

1,148.6

294.4

1,866.5

4,620.0

2,753.5

147.5

# Investment in TFCs of Pakistan Mobile Communication Limited

* Encashment of Special US$ bonds, FEBC, DBC

Debt Securities: General term for any security representing money loaned that must be repaid to the lender at a future date. Bonds, notes, bills, and money market instruments are all debt securities.

Source: SBP