BASELESS PRIVATIZATION POLICY
Feb 23 - Mar 01, 2009
The managers of the new Government announced the New Privatization Policy. The Federal Minister for Privatization, Syed Naveed Qamar said that 26 percent share and management of 21 State owned entities would be transferred to the buying parties. However, the Policy did not fix the time or targets for the completion of privatization process.
He said we should wait for the appropriate time and better price to make them efficient through bringing in the private sector management in a transparent way as the private sector management is always efficient and effective. But his assessment is not true because past experience depicted that the units privatized increased the prices of their products and went into layoff of a large number of workers.
Only 2 percent more shares would be allotted to the workers. Earlier the share of workers in privatized units was 10 percent
The remaining shares would be kept by the government and after turnaround of the units, the sale of such units would be considered by the government. It is said the regulators would protect the interest of consumers.
The policy approved privatization of four electric supply companies. Here we must recall the bitter experience of Karachi Electric Supply Corporation, KESC, whose privatization has not brought any improvement but deteriorated efficiency resulted in 5 to 6 hours load shedding even in winter season. Therefore, there is little possibility of any improvement.
The Cabinet Committee on Privatization also approved leasing out of two thermal power plants of 1054 MW capacity, in Jamshoro and Kotri, for 15 years. The Minister blamed the past Government-with out mentioning any achievement during his one year in the office-that during eight years not a single MW was added to the power system. The past government forced IPPs to leave and to close down their running projects, resulting in 5000 MW short fall subsequently leaving no room for industrialization and development.
The reason of State Life Insurance Corporation privatization is also not known because the entity is doing well and making huge profits, paying a large amount under the head of taxes to the national exchequer. Besides, 97.5 percent income is distributed to the policy holders. It also pays highest bonus in the life insurance sector. Moreover, National Insurance and Pakistan Reinsurance Company may not be easy to sale due to bad law and order situation that made this business highly risky.
The interesting point is that Policy indicated that Utility Stores Corporation would also be privatized to further strengthen its financial position and bring improvement in its efficiency. It is said, however, the government would continue to use this organization for provision of essentials at low cost to the masses. While the actual position is that the majority of outlets are in the rented premises and about one billion rupees subsidy per month is required. The subsidy has already been abolished on ghee, sugar and flour etc.
Therefore, the concept of essentials at low cost to the masses will turn up a dream.
The two public utility services, i.e., Pakistan Railways and Pakistan Post would also be privatized. The PR will be privatized in phases as its different departments require new investment and improvement in services. The Policy said privatization of Pakistan Post would be based under the Public-Private Partnership (PPP) model. It indicated that this important organization would be converted into Post Office Bank after privatizations.
However, it was not mentioned how the government would change the structure of a privatized unit while the management will be under the new hands. Moreover, the world over public utility services, like rail, road, post office, supply of water and sanitation etc., remain under the control of government as they are not for profit making but to serve the people who pay taxes to the government. Thus, there is no logic to privatize such public services.
Globally, over the last few decades, a change of opinion has emerged regarding the role of state and private enterprises in promoting economic growth.
According to the definition privatization is the incidence or process of transferring ownership of business from the public sector (government) to the private sector (business). In a broader sense, privatization refers to transfer of any government function to the private sector including governmental functions like revenue collection and law enforcement.
Origin of the term: It has been claimed that the term was first used in the 1930s by the economist in German economic policy.
TYPES OF PRIVATIZATION
There are three main methods of privatization:
Share issue privatization (SIP) - selling shares on the stock market
Asset sale privatization - selling the entire firms or part of it to a strategic investor, usually by auction or using Treuhand model
Voucher privatization - shares of ownership are distributed to all citizens, usually for free or at a very low price. Share issue privatization is the most common type of privatization.
Pro-privatization believe that private market factors can more efficiently deliver many goods or service than government due to free market competition. In general, it is argued that over time this will lead to lower prices, improved quality, more choices, less corruption, less red tape, and quicker delivery.
However, market failures and natural monopolies could be problematic.
Anti-privatization said the governments are proxy owners answerable to the people. They believe that certain parts of the social services should remain closed to market forces in order to protect them from the unpredictability and ruthlessness of the market.
Growth can be made through private sector led development and that the Government's role should be limited to providing a level playing field and providing a favorable business climate.
In Pakistan, the privatization of state owned enterprises (SOEs) program is being implemented since the early 1980s. It was in the policy agenda of every government after 1977. But it was actually initiated from 1990s. The aim of the privatization program was to enhance quantity and quality of goods and services, strengthen public finances, broaden and deepen capital markets, reduce opportunities for corruption as well as to avoid mismanagement. However, majority of the targets could not be achieved.
Historically, the concept of privatization in Pakistan is not new and can be traced as back as in 50s, when Pakistan Industrial Development Corporation (PIDC) was established to boost up the industrial development in the country. This Corporation established over 50 industrial units in the country and after their successful operation these units were transferred from public to private sector. The nationalization spree swept the whole economy in the first half of 70s, was reversed in 1977.
The privatization of SOEs thus again became an important instrument of economic policy of the government in late 80s. Since 1991 the privatization process in Pakistan gained sufficient momentum. From January 1991 to February 2007, GoP has privatized around 166 units and earned Rs475.08 billion, approx $ 8.9 billion.
The transactions carried out during July 2007 to February 2008 include: 25 percent shares of UBL divested that fetched $650 million, which was the biggest book building ever in Pakistani banking history. Initially 21.74 percent, 175.95 million shares were divested in June 2007 for total proceeds of $565.43 million. Another 3.2 percent, 26.39 million, shares were divested in July 2007 for total proceeds of $84.81 million. The stock was priced at 5 times to book which is the highest valuation compared to similar transactions globally.
HBL-IPO was the largest offering ever in Pakistan in terms of value and number of successful applicants. Total subscription of Rs18.94 billion was received against the base offer of Rs8.11 billion resulting in an over subscription of 2.33 times. The IPO has generated gross proceeds of Rs12.161 billion against the divestment of 51.75 million shares.
Total 163 transactions completed from January 1991 to February 2007. Sector wise details are as follows:
TELECOMMUNICATIONS: PTCL, TIP AND CTI.
Financial & Banking: Habib Bank Ltd, United Bank Ltd and NIT/ ICP.
Capital Market: Public offer of various entities including NBP, HBL, MCB.
Monitory share-holding: POL, ARL. Divestment of 49 percent shares in ABL.
Oil and Gas: Working interest in oil/ gas fields (namely Badin-I, Minwal, Turkwal and Mazarani (Bidding already held.), working interest in nine oil/gas fields, Oil & Gas Development Co. Ltd, Pakistan Petroleum Ltd, Pakistan State Oil, Sui Southern Gas Pipelines Ltd. and Southern Gas Company.
Power Electricity: Karachi Electric Supply Co. and National Power Construction Co.
Industrial: A.C. Rohri Cement, Javedan Cement, Thatta Cement, Mustehkam Cement, Lyallpur Chemicals, Hazara Phosphate, Sind Engineering Limited, PECO (Badami Bagh), Pak-American Fertilizer Ltd., Pak-Arab Fertilizer Ltd., Republic Motors Ltd., PECO (Kot Lakhpat), Bolan and Lasbella Textile Mills.
Others: Faletti's Hotel, Lahore, Malam Jabba Resort Limited and National Construction Company. New sectors would also be studied for PPP model while the Policy indicated that SME Bank and Heavy Electrical Complex have been included in the new privatization list.
People have lost confidence in the privatisation process due to certain past deals such as KESC, which produced worst results and the buyer could make no expansion. In spite of this the Minister totally ruled out any possibility of reversing the privatization of KESC and said that now the new management has started working to improve the performance of the company, which would take its due time.
That how much time would be required was not specified, as about 3 years has already passed.
The Minister claimed that significant quality improvement has been witnessed in PTCL after its privatization, but the users said they have seen only improvement in the charges of these services.
Naveed Qamar said that privatization proceeds were misused by the previous governments and assured that the current regime would not use the money to finance the budget deficit.
The proceeds will be used to eliminate poverty and retirement of domestic and foreign loans. But the present situation is that the hard earned money of taxpayers is already being used for the payment of luxury items imported for elites.
Experts opine that out of the 26 units, to be privatized, at least 13 to 16 units would not attract any buyer as they have no scope of profit making or improvement in their performance. Moreover, only 4 months are left-this program would be implemented in start of FY10-. By that time, documentation has to be completed that sounds impossible.
|EXPECTED PRIVATIZATION PROCEEDS|
|1.||PTCL 26% B class shares - Installments||18,117|
|2.||Kot Addu Power Company (15% shares)||6,800|
|3.||National Bank of Pakistan (20% shares)||38,148|
|4.||Small Medium Enterprise Bank||3,400|
|5.||Divestment of OGDCL (10% shares)||51,000|
|6.||Jamshoro Power Co. (51% shares)||3,851|
|7.||Faisalabad Electric Supply Co. Ltd. (56% shares)||4,354|
|8.||National Power Construction Co||438|
|9.||Pakistan Steel Mills Corp (10% shares)||2,500|
|10.||Printing Corporation of Pakistan (assets)||3,500|
|11.||Services International Hotel||1,000|
|12.||Pakistan Tourism Development Corp||800|
|13.||Pakistan Machine Tool Factory (90% shares)||2,000|
|14.||Morafco Industries Ltd. (Assets)||250|
|15.||Sind Engineering Ltd. (Assets)||200|
|16.||Lakhana Coal Mining Project||1,500|
|17.||Khewra Salt Mines||1,500|
|Source: Privatization Commission|