PRIVATIZATION IN PAKISTAN: A MENACE OR BLESSING
MULAZIM ALI KHOKHAR
Feb 23 - Mar 01, 2009
Is privatization healthy for the economy? Does it spawn long lasting benefits for the people at large? Does it bring efficiencies to the economy? These are the basic questions hovering in every individual's mind and the answers to these questions are subject to very dynamic economic environment.
Government of Pakistan has privatized about Rs. 475.42 billion worth stakes in different public entities since 1991 to date. The major privatization deals included stakes of banks, energy sector, telecommunication, industrial units like cement, textile, chemicals, automobiles, fertilizers and others.
Following notes discuss performances of privatized units, so that we are all clear about the questions in our minds.
PRIVATIZATIONS IN BANKING & FINANCIAL SECTOR Bank
Rs (in millions)
Allied Bank Limited (51%) 971.6 Muslim Commercial Bank (75%) 2,420.00 Bankers Equity (51%) 618.7 Habib Credit & Exchange (70 %) 1,633.90 United Bank Ltd. (51%) 12,350.00 Bank Alfalah (30%) 620 Habib Bank (51%) 22,409.00 Total Banks 41,023.2 Capital Market Transaction 115,804.2 Financial Sector Total 156,827.4
As evident from the table, we have witnessed about Rs. 157 billion worth stakes of government entities in financial sector being disowned in favor of private sector since 1991.
All the major banking sector deals were finalized until mid 90's except for UBL, HBL, and Bank Alfalah, which were privatized in 2002-03 while capital market transactions, IPOs and GDR started getting on fire since start of millennium and attracted Rs. 115.8 billion from the private sector.
Since 2000, there have been very dramatic and positive banking sector reforms and the sector's performance increased drastically. Yes, the privatization process has brought upsurge of competition and raised standards of living of ordinary individuals in the country. Increase consumer spending has proved a blessing in disguise. As the spending increased, it paved way for more local productions and thus the industry base enlarged.
The banking sector has also been very helpful for industrial growth as most of the industries on average are operating on debt, which helps them achieve financial efficiencies.
The privatization process of banking sector has brought prosperity to the country in general and has brought efficiencies in money flow. No doubt, efficiencies are the result of strict regulation but the mother of the idea is higher private equity base.
To save private sector from mounting losses in case of default government increased pressure for the implementation of these regulation.
Thanks to BASEL implications on banking regulation, By virtue of that today our banks are safer in the highest risk scenario in Pakistan. The banks are now moving to higher consolidation to be stronger and flexible. This new scenario may reduce number of banks but will further increase their efficiencies.
PRIVATIZATIONS IN TELECOM SECTOR TELECOMMUNICATIONS
RS (IN MILLIONS)
PTCL (2%) 3,032.5 PTCL (10%) 27,499.0 26% (1.326 billion) B class of shares of PTCL 156,328.4 Carrier Telephone Industries 500.0 Total 187,359.90
The privatization of PTCL has been the biggest deal of privatization in Pakistan, which earned government Rs. 156.32 billion during 2005. Overall sector's privatization proceeds have mounted to Rs. 187.36 billion. Initially, 12% was divested through IPO during 1994 and then in 2005 the heavy deal was made.
The induction of the private equity in telecom sector has changed the sector's dynamics altogether. It has brought the very positive changes for individuals as the communication has become very economical and has provided the government with huge revenue in the form of sales tax. According to government sources, the mobile sector contributed approximately Rs. 63 billion taxes to the national exchequer accounts during FY-07. The sector's revenues were Rs. 236 billion during FY07.
Are the changes long lasting? Yes, the changes are long lasting as the companies have established heavy equity & asset bases and their products (mobile communications) are now becoming necessities for people across the country. The industry has achieved 52% tele-density and the remaining 48% is yet to be explored. The sector has still higher prospects and the increasing private equity holdings will increase competition, expand tele-density, and benefit individuals, government, and the industry as a whole.
PRIVATIZATIONS IN ENERGY SECTORS
ENERGY SECTOR RS (IN MILLIONS) Mari Gas (20%) 102.4 Kot Addu Power Company (26%) 7,105.0 Kot Addu Power Company (10%) 3,046.0 Kot Addu (Escrow A/c) . 900.7 SSGC LPG business . 369.0 SNGPL LPG business . 142.0 Badin II (Revised) . 503.2 Adhi . 618.9 Dhurnal . 161.0 Ratana . 24.6 Badin I . 6,433.0 Turkwal . 75.6 NRL (51% GOP shares) . 16,415.00 KESC (73% GOP shares) . 15,859.70 Total . 51,756.10
This is another very important sector, which is to be privatized by the government. Although some of the private entities are operating in the sector, but mostly there are public sector entities. In the oil sector, PSO rules the front end and PPL, OGDC rule the back end, while Oil & Gas Regulatory Authority of Pakistan governs the pricing mechanism. The private sector has very less to speak on their part.
On the other hand, electricity sector is ruled by WAPDA. KESC is actually troubled with the fact that it cannot do much but with the permission of government.
Now back to the analysis; the sector is very lucrative and renders huge profits to the government. However, the benefits from the sector are not directly flowing to the public at large. Public cannot benefit of global oil price reduction. The sector is the most heavily taxed and individuals and the entities operating in the sector cannot do much to bring the benefits for individuals at large. There is no competition factor involved, which reduces the efficiencies of the companies operating in these sectors.
Practically speaking, privatization has more benefits for the economy, individuals, and companies, if government fairly regularizes it like happened in banking sector and furthermore if there is fair competition between the entities.
The government is planning to privatize PSO, SME Bank, electricity companies and some more stakes in the privatized companies. It is important to note that PSO's privatization is a very different case from the above-mentioned examples.
PSO holds about 60%-80% of different oil and gas products in the country. This means PSO has the monopoly in the sector. Monopoly by the government is relatively beneficial for the masses but when it is bestowed with private ventures, it has always-negative implications for the public.
The current government will face many problems in privatizing PSO as its management is not in favor of the government policies and secondly, the nature of the its business is of such an immense importance that the buyers and the government will always remain in conflicts at different regulatory matters. Advisably, PSO should not be privatized until it holds sway over the sector.