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Certainly, it is not the business of the state to do business. It is the private sector, which has to run the businesses under the patronage and facilitation of the government. The government should only play the role of regulator and facilitator of corporate businesses. Since 1990, the country sold off 167 SOEs. During 1997-2000, the complete denationalization of the banking sector was carried out. A privatization program was initiated by former prime minister Shaukat Aziz in 2004 and under his leadership many of SOEs had been registered in stock exchanges of the country in order to promote business competition in the country. During the period from 2001 till 2008, the non-banking sectors were sold off. There are, however, some prerequisites for the privatization process to be fair, transparent and successful. The privatization process should be transparent and on merit.
Present government is focused on privatization. Headed by Zubair Umar, the Privatization Commission (PC) has short-listed 31 institutions to be privatized. According to Chairman PC, the privatization process is absolutely on and financial advisers are performing their job, whether it is the Pakistan International Airlines (PIA), Pakistan Steel Mills (PSM), National Power Construction Company (NPCC) or power distribution companies like Iesco and Fesco.
Last year, the government completed the third capital market transaction by disposing of its remaining 131 million shares — 11.5 percent of the total paid-up share capital of the Allied Bank Ltd — at a price of Rs110 per share. With the completion of the ABL transaction, the government has no shares in ABL and UBL, while in the case of PPL the government had divested five percent shareholding but retained the management. This year, the government intends to speed up the process of sale of strategic assets. The government wants to carry out divestment of the Heavy Electric Complex, NPCC, Fesco and Lesco with management control, while in the case of PIA it wants to go for restructuring followed by divestment of 26 percent government equity stakes to strategic partner with management control. The appointment of financial advisers for privatization of Lesco has already been finalized.
SOEs or white elephants
Corruption is perhaps the biggest issue in Pakistan. Whether it be state-owned enterprises, tendering or bidding process or even spot-fixing in sports, serious corruption scandals and financial scams have come to surface.
Pakistan is keeping and feeding the white elephants in the shape of state-owned enterprises (SOEs), which are not serving the nation, but the nation is serving and keeping them. These SOEs have virtually gone bankrupt, both financially and functionally. Major SOEs including PIA and PSM are showing huge losses and seeking bailout packages to stave off their imminent closure. Submerged in corruption, the PIA and PSM have reached the verge of bankruptcy. These SOEs, which live on cash injections, are perpetual drain on national exchequer.
Financial scams and scandals in SOEs is a well established phenomenon in Pakistan. Corruption in the SOEs is the major cause of financial mess. Corruption has plagued major SOEs. Critics say that almost all the large SOEs have become white elephants, which are perpetual drain on national exchequer due to rampant corruption that has also eroded efficiency of the SOEs. For example, mismanagement, overstaffing and corruption has turned PIA, the country’s flag carrier, from once prestigious carrier in South Asia into a burden on national exchequer. Today, the country is just paying the price for the prestige of having an international air carrier, which heavily relies on bank borrowings and government’s bailout packages.
In the past 20 years, the airline’s financial health has continuously deteriorated. With burdened balance sheets, PIA is presently in troubled waters.
Selection of SOEs
For a transparent privatization, the proper selection of SOEs is the first decision, as the faulty selection of profitable SOE could cost dearly to the nation. Moreover, the hasty proceedings, missing policy guidelines and a lack of transparency in processes related to privatization must be avoided.
The privatization of a profitable institution has its own repercussions. Oil and Gas Development Company Limited (OGDCL), a profitable SOE, was offered by private sector in international market. In 2007, the official listing of OGDCL, the country’s flagship company in the energy sector, took place at the London Stock Exchange. The listing and trading of OGDCL’s global depository shares (GDS) represented a significant milestone in Islamabad’s privatization program.
Critics say the former government had caused losses to investors by selling shares at a throwaway price, objecting to the calculation of a 10% discount on the plummeted price of Rs127 and not on the average price of the past three months. The financial advisers had calculated the strike price on the earning multiple of 10 for fiscal 2007, while it should have been on multiple of 14. Most mutual funds had to bear huge losses, for they had been carrying OGDCL stock at the price of about Rs135. Some market players had insisted that if the government was unable to get a ‘fair’ price for the stock, it could have scrapped the deal.
Similarly, privatizing Pakistan State Oil (PSO), which is high profit earner, is irrational. Privatization of profitable institutions would cause loss of billions to the national exchequer. It will also deprive the general masses of the comparatively cheaper prices of services offered by these profitable entities. We had bitter experience of privatization. In the past, the process caused more un-employment and monopoly in the market. Many institutions privatized were totally transferred from the government to some select families, which had control over the economy.
Prerequisites for privatization
The process needs a conducive environment in which investors would show confidence. It needs a strong government able to enforce the agreements with the private parties. We are, on the contrary, facing a law and order problem across the country. We are currently at war with the extremists, terrorists and extortionists, both in our tribal and settled areas. The security situation discourages the potential investors and the buyers of the state’s strategic assets.
Privatization is good if it is aimed at strengthening the private sector, improving the efficiency and service delivery of the SOEs. The country privatized bulk of its SOEs in the second generation privatization carried out in the 1980s and 1990s. The privatization policy should ensure that fresh investment is not only diverted to buying SOEs but is also used to secure the future of the new generation.