PRIVATISATION - AN ECONOMIC IMPERATIVE?

SHAMSUL GHANI
(feedback@pgeconomist.com)
May 3 - 16, 20
10

Privatisation may come to the minds of many as an economic imperative when it is done to relieve the government from the responsibility of managing loss-making business and industrial organizations. The post-privatisation poor performance of such organizations may raise doubts in the minds of the same many about the wisdom behind selling them.

Nevertheless, there is no cut and dried formula to ascertain the efficacy of a certain privatization deal. Financial, energy and telecom sectors sell-offs during the period 1991-2008 dominate the list of total 167 privatization transactions worth Rs.476.5 billion.

SUMMARY OF PRIVATISATION DEALS (1991-2008)

SECTOR

FROM 1991 TO JUN 06

FROM JUL 06 TO JUN 08

FROM JUL 08 TO DEC 08

NO OF DEALS

TOTAL AMOUNT BILLION RS

NO OF DEALS

AMOUNT BILLION RS

NO OF DEALS

AMOUNT BILLION RS

NO OF DEALS

AMOUNT BILLION RS

Banking 7 41.0         7 41.0
Capital Mkt. 18 32.2 4 100.9     22 133.1
Energy 14 51.8         14 51.8
Telecom 4 187.4         4 187.4
Automobile 7 1.1         7 1.1
Cement 16 11.9 1 4.3     17 16.2
Chem/Fertiliser 20 24.4 2 16.2 1 1.3 23 41.9
Engineering 7 0.2         7 0.2
Ghee Mills 24 0.8         24 0.8
Rice/Roti plant 23 0.3         23 0.3
Textiles 3 0.2 1 0.2     4 0.4
Newspapers 5 0.3         5 0.3
Tourism 4 1.8         4 1.8
Others 6 0.2         6 0.2
Total 158 353.6 8 121.6 1 1.3 167 476.5

The telecom sector privatisation ushered into an era of information revolution. The unprecedented competition amongst the telecom market players opened a new vista of cheap and swift communication that not only transformed the lives of individuals but also revolutionised business, trade and industry.

While the change was taken for granted, no real efforts to measure the magnitude of its positive effect on lives and economy were ever made. Putting aside some cynical doubts about the efficacy of the revolution, the privatisation of telecom sector has brought in its fold immense economic benefits.

Banking sector privatisation included direct sell-off (Allied Bank, MCB, Bankers' Equity, Habib Credit & Exchange, United Bank Limited, Bank Al-Falah, and Habib Bank Limited) and IPOs through stock exchange (MCB, NBP, ICP and UBL).

Other capital market transactions pertained to IPOs of Pakistan Oilfields, OGDCL, Attock Refinery, Pakistan Petroleum Limited, SSGC, and KAPCO from energy sector, and DG Khan Cement and PIA from other sectors. The banking sector privatization can evoke a mixed response when seen in retrospect. The move has cartelised the sector and thus strengthened it. The huge profits earned during high liquidity and changing interest rate periods came to the rescue of this sector during global financial crisis.

The historically highest banking spread during the same period, however, denied the bank depositors their due share of bank profits. The privatisation of banking sector could therefore be described as a change that imparted strength to the financial sector of the country but at the same time created income disparity by short changing the bank customers.

Irrespective of the sector, the key to privatisation success is the presence of genuine competition. Telecom sector grew because of this competition. The role of regulating authority is also important and this is where PTA emerged as a better referee than the SBP.

The energy sector privatisation, particularly on the production side can better be managed through private-public partnership concept which aims at transferring management to the investors against the purchase of 26 per cent shares.

The Privatisation Division's yearbook 2007-08 explains the private-public partnership (PPP) model in the following words:

"The main objective of Privatisation Policy through PPP is to put national resources and assets to optimal use and in particular to unleash the productive potential inherent in Pakistan's State Owned Enterprises (SoEs).

The policy of privatisation specifically aims at enhancing value of GoP shareholding value, maximisation of profits, modernisation and up-gradation of State Owned Enterprises; exploration and creation of new assets; management and technology transfer benefits; increasing investments in the SoEs by identifying business benchmarks and outputs, remedial measures, and generation of employment. Government would continue to ensure that divestment does not result in alienation of national assets and reduction in quality of production and service to the detriment of its people."

Privatisation of OGDCL, PPL, Attock Refinery, KAPCO etc. seems to have gone well. The privatisation of distribution companies like KESC, however, needs to be reassessed before any other such move. Its sale to Hassan Associates against 73 per cent offloading of government shares in November 2005 has put a big question mark on the privatisation of energy distribution companies as the move has failed to produce any healthy economic effect. The reasons for the near failure of this deal are varied and numerous from theft and pilferage to high distribution and transmission losses, obsolete and unreliable transmission system, sponsors' lack of will to inject further investment capital, reliance on oil-based generation, unstable international oil prices, and government organizations' and feudal elites' temerity to dodge bill-payment to circular debt. The fact however, remains that both the seller and the buyer failed to do their part of homework. The buyers should have tactically prepared themselves for the problems the management of such organisations is likely to encounter.