IS PRIVATIZATION IN PAKISTAN PURPOSEFUL?
Dr. Akhtar Hasan Khan
The philosophy of privatization stems from
the role of state in economic life. The thinking of the international financial
institutions and free market economists is that, as in USA, the state should
confine itself to regulation only and the operation and ownership of industrial
enterprises and utilities should be left to the private sector. However, there
is an opposite view expressed by a distinguished economic historian,
Gershenkron, in his seminal article “Economic Backwardness in Historical
Perspective1”. Gerschenkron’s argument is that in those states which start
late in the race of development, the public sector has to play a vital role in
accelerating the pace of economic growth. As is in developing countries, the
private sector is shy, inexperienced and not equipped to embark on rapid
industrialization. Pakistan alongwith other developing countries followed the
activist role for the state in industrialization and the rate of industrial
growth in Pakistan has been very high.
The second main thrust for privatization
is the belief that private sector units are more efficient than public sector
units. This is not true across the board. In a study2 which made a comparison between public
industrial enterprises and private firms producing similar goods, the
conclusion was that changing the ownership of industry from public to private
is neither a necessary nor a sufficient condition for more efficient operation
of specific industrial enterprises. However,
1 Gershenkron,
Alexander, Economic Backwardness in Historical Perspective, Praeger, London,
1962 2 S.N.H. Naqvi & A.R. Kemal, “The
Privatization of the Public industrial Enterprises in Pakistan”,
PDR
Summer 1991.
on the other hand it is often correctly claimed that due to
political interference and over-staffing, the efficiency of the public sector
units is reduced.
The third argument for privatization is its fiscal impact. The
favourable fiscal impact of privatization is expected from the sale proceeds
being used to retire national debt, as well as elimination of losses of the
public sector units as the losses were being financed from the budget. The
opposite view is that the public enterprises after nationalization in 1973
doubled the payment of their taxes as compared to the pre-nationalization
period. Moreover, if the public sector enterprises are making profit and giving
the government return higher than the rate at which it is borrowing from the
market, the privatization of profitable enterprises would have an adverse
impact on the budget. Hence this argument does not hold for profitable public
sector enterprises.
The fourth argument for privatization is to foster competition and
to strengthen capital markets. If all the units in certain sectors like cement
are owned by the state and these are sold to different parties, there would be
healthy competition. However, if the market situation is such that there are
public sector units as well as private sector units for the same commodity
there will be no further fostering of competition by privatization. Capital
market is strengthened, if the government share holdings are sold in the market
as was done in case of PTCL and more recently in the case of Muslim Commercial
Bank and Al-Falah Bank. Capital market is not strengthened at all, if one
public sector unit is handed over to the private party without some of its
shares being offered to the public. Hence it is necessary for strengthening and
deepening of capital market that some percentage of the shares of public
enterprises is sold to the public through stock exchange.
Another objective of privatization is to
encourage direct foreign investment. The direct foreign investment in
profitable public units is not likely to be beneficial for the economy, as
against the benefit of an initial purchase price, one has to calculate the
recurring remittance of profit in foreign exchange for years and decades to
come. Direct foreign investment therefore should be attracted by policy and
design into new and risky ventures rather than through the purchase of
profitable enterprises. In fact purchase of existing operational units by
foreign buyers is not an addition to the capital stock of the country.
I
Privatization is a complex exercise with multifaceted implications
and has to be conducted with a number of caveats. The first is that it should
be absolutely transparent process with full legal safeguards and watertight
procedures, otherwise the valuable public assets may be sold at throw away
prices and causing a huge loss to the national assets. It has also been
observed that privatization should avoid crony capitalism as in Chile and
Argentina, it has been associated with giving away expensive public assets at
cheap rates to political cronies. Privatization gives tremendous patronage to
the government in power which may be exercised to favour vested political
interests rather than to serve long run national objective, negating the basic
objective of improving efficiency in the economy.
The second imperative of privatization is sequencing and timing.
It is essential that all the assets should not be sold in a short period,
because in the short period the buying power of private sector may not be
adequate to offer the correct prices for all the privatized assets. It may
crowd out fresh foreign investment and lead to reduction in the rate of
investment in the economy.
The third essential condition for the success of privatization is
that the economy should be deregulated and unnecessary restrictions and
procedures for industrial enterprises should be done away with. Privatization
should therefore be part of a process to strengthen private sector by giving it
assets as well as improving regulatory framework for their operation. To give
units to the private sector but to keep it throttled by massive regulations
would not improve the operational efficiency. Hence the sale of privatized
units should be staggered over time.
Fourthly there should be a preference to
privatize first the loss making assets, then the less profitable and finally
the more profitable. In case the loss making units could not be sold
independently these could be bunched with a profitable public enterprise.
Fifthly the investment climate must also
be kept into view. Privatization after 11th September, 2001 was not an opportune time
because the international stock markets slumped and the investor’s confidence
slided sharply after that eventful episode. As a result of terrorist activities
in Pakistan and given the fact that Pakistan having a long border with the
Afghanistan, the investment climate in Pakistan deteriorated more sharply than
in other countries.
Finally it must be ensured that the party which is buying the
industrial units does not use it for stripping the assets and selling the real
state because if the party does this, there will be a serious loss of out put,
employment and taxes to the national economy.
III
There have been
two tides of privatization in Pakistan. The first tide is from 1992 to 1994 and
the second tide from July 2001 to October 15, 2002. In the first period assets
worth Rs.120 billion were divested and in the second period assets worth Rs.65
billion were divested. The consultants engaged by Asian Development Bank have
conducted a thorough study of the first period. It is a detailed report but the
following table sums up their findings with respect to the overall assessment
of the privatization process.
|
Table:
|
|
|
|
|
|
|
|
|
Better
|
Same
|
Worse
|
Total
|
|
|
PMEs * Misc. Ghee Mills
|
9 3 2
|
13 10 12
|
16 1 5
|
38 14 19
|
|
|
Rice Mills Banks Total
Percentage
|
2 2 18 22
|
-2 37 44
|
6 -28 34
|
8 4 83 100%
|
Source: Impact
and Analysis of Privatization in Pakistan: ADB Report October 1998.
* Public
Manufacturing Enterprises.
The above table clearly indicates that
only 22% of the privatized units were performing better than in the
pre-privatization period, 44% approximately the same and about the third i.e
34% worse than before. It is quite clear that the compelling reason for
privatization that of improving the efficiency of the units, was only attained
by about 1/5 of the units, whereas the rest were working with
the same efficiency or worse
than before. No wonder in the article* quoted above the authors had reached the
conclusion that, “in Pakistan there is nothing hardly
*
Ibid Page 1.
good or bad about public sector or
even the private sector for that matter”. On the
whole, operational efficiency
deteriorated after privatization.
Moreover,
the most tragic consequence of privatization was the closure of
many units which are listed below;
1) Naya Daur Motors2) Dandot Cement3) Zeal Pak Cement
4) National Cement5) General Refractories 6) Pak PVC7) Swat Elutriation 8)
Nowshera PVC9) Nowshera Chemicals10) Pak China Fertilizer 11) Karachi Pipe
Mills12) Metropolitan Steel13) Pak Switchgear 14) Quality Steel15) Indus Steel
Pipe16) Fazal Veg. Ghee17) Haripur Veg. Oil18) Khyber Veg.19) Suraj Ghee
Indus.20) Hydari Veg. Ghee
The closure of these units has played havoc to the
national economy and
the
first phase of privatization has contributed to the lower rate of industrial
and
economic
growth. The GDP growth which was above 6% in the 1980s declined to
around
4% in the post privatization period.
The reasons for closure are many. First the units were
sold out without
checking
the creditworthiness of the party. Schon Group whose horrible
reputation
is household knowledge in Pakistan was given three units, National Fibre, Pak
China and Quaidabad Woolen Mills. All these were closed after privatization.
The ADB consultants have opinioned: “It has been suggested by some that these
were not privatized transparently and Schon Group were able to access other
offers before submitting their bids”. Moreover, they did not pay the first
installment and the Privatization Commission did not take a strong line to
forfeit the bogus investors. The Consultants were shocked to observe: “Both
companies are being bailed out without underlying ownership problem being
resolved”. Messrs. Saeed Qadir and Sartaz Aziz owe an explanation to the nation
for the unwarranted favour shown to Schon Group and also to Tawakkil Group, if
we do not doubt their integrity, to say the least.
Among the other major units which closed after
privatization was Zeal Pak Cement. The buyer was not interested in running the
factory but in stripping the assets. This is a frequent bane of privatization.
Assets strippers buy, pay one installment, remove the machinery, sell the real
state and then walk away. Obviously, this is not effective privatization.
All the
engineering units except Millat and Al-Ghazi Tractors (both are running well)
were closed after privatization, as their buyers had no intention of running
them. Operating engineering units is not like running the rice mills and in
fact the buyers lacked management and technical expertise to run engineering
units. Hence privatization was a big blow to the engineering sector in
Pakistan, which was already very weak and had a small base.
The Privatized units also formed cartels to exploit
the consumers. A cartel was formed between D.G. Khan Cement and Maple Leaf
Cement to exploit the consumers in that region.
Of the three privatized banks MCB is reported to be
running better. Same is the case of ABL. Nevertheless the latest figures from
January 2002 to June 2002 reveal that both these privatized banks have declared
much less profit compared to Habib Bank Limited. The third privatized financial
unit Bankers Equity Limited (BEL) has been closed after privatization as
billions of depositors money was swindled by the party to whom it was
privatized. The credentials of the party were not investigated and it was
obvious that the purchase money was paid from the deposits of BEL. The chairman
of the Board of Directors of BEL before privatization was the Governor of the
State Bank of Pakistan and after privatization a well-known thug. A leading
financial institution was closed as a result of privatization and it had the
strong negative impact on financial markets.
Another
rule for effective privatization, which was not observed in this period, is not
to give more than one unit to a party. Considering the slogan of 22 families
and the cry against concentration of industrial wealth in the 1960s, the Government
should have learnt from the history and evolved a prudent policy – one unit for
one party. However, two big units i.e. MCB and DG Khan Cement were given to
Mian Mansha and three units to the scandalous Schon Group.
Analysis of the first tide of privatization has shown
that it has not been able to achieve the intended goals of privatization. The
procedure according to ADB Consultants was not transparent but smacked of
cronyism and corruption. The credentials of the parties were not properly
investigated. Even the anticipated fiscal impact was not realized because the
proceeds of privatization were not credited to a separate Debt Retirement Fund
but were put into Federal Consolidated Fund from where these were utilized for
current expenditure.
VI
Kot Adu
was major privatization during Benazir’s second term as Prime Minister. Kot Adu
is WAPDA’s biggest generating unit with the following capacity ;
|
KAPCO
|
MW
|
|
Combined Cycle 1-4, 9&10
|
624
|
|
Gas Turbines 5-8
|
40C
|
|
CC Unit 11 & 12
|
20C
|
|
Gas Turbine 13 & 14
|
264
|
|
|
1,488
|
|
Combined cycle 15 – June 1997
|
1,621
|
There
was no need to privatize an already existing big power unit which was running
efficiently. Its units were either gas turbine or combined cycles which can use
either oil or gas. Gas is far cheaper than oil for generating electricity and
Kot Adu was mostly running on gas. However, the government decided to sell 26%
stake in it at a price of US$215 million. Subsequently 10% shares were to sold
for US$76 million and the government realized only US$291 million from the sale
of 36% share.
The most interesting feature this privatization was
that the government handed over the management of the unit to minority
shareholders, which perhaps has never been done in the corporate history of the
world. It was provided in the sale agreement that there would be nine directors,
four independents, four nominees of the purchasers and one of WAPDA. As a
result of court’s intervention it was decided that there would be seven
directors, four nominees of WAPDA, two nominees of the purchasers and one CEO
appointed jointly by WAPDA and purchasers. However, it meant that although the
government is the largest shareholder yet it will have no representation on the
board as the foreigner purchasers did not want government interference.
Initially it was decided that after privatization
KAPCO will sell electricity to WAPDA at a tariff of 5.6 US cent per KWH.
Subsequently this tariff was reduced to 4.9 US cent per KWH. WAPDA’s cost of
generation at Kot Adu with gas feed stock was not more than 2.5 US cent per
KWH. Hence, the government received US$291 million but WAPDA became a bankrupt
organization after the sale of KAPCO and setting up of other independent power
plants like HUBCO. The foreign party has been able to repatriate the total amount
of US$291 million during the last six years and WAPDA is being forced to pay
twice the cost at which it was generating electricity at KAPCO before
privatization. This is the most senseless privatization in Pakistan. In fact
the whole policy of IPPs has terribly ruined WAPDA and its consumers all over
the country are suffering because WAPDA has to pay such high rates to the IPPs
including KAPCO and HUBCO. The electricity tariff in Pakistan which is deemed
to be the highest in Asia has also made the industry uncompetitive in world
market.
V
The second tide of privatization was from July 2001 to
October 15, 2002. The major privatization which took place during this period
included; (1) sale of GOP “Working Interest” in six oil concessions, (2) sale
of 51% GOP stake in UBL, (3) sale of Pak Saudi Fertilizer Ltd., and (4) two
capital market transactions amounting to Rs13.6 billion.
It is interesting that whereas in the entire financial
year 2001-2002, the total value of privatized transactions was Rs19.6 billion,
alone in the last three and half months before handing over power to the
elected representatives, the privatized transactions amounted to Rs15 billion.
The privatization of this period is too recent to be analyzed fully in its
operation and impact. One thing is clear that it was pushed by IMF as the
privatization of all programmed public assets was part of the undertaking given
to the Fund for its latest financing facility under the name of Poverty
Reduction and Growth Facility (PRGF).
However, long-term national economic interest and
strategic consideration were not kept in view while drawing up the list for
privatization. The time honoured and prudent government policy dictated by
national interest for all concessions was that to have “Working Interest” in
the oil companies formed after oil discovery in order to ensure that oil is
drilled both according to the national as well as private interest of the
company. As a result of this “Working Interest” arrangement, GOP had a seat on
the Board of Directors. Oil and gas companies therefore could not hide anything
from the GOP regarding their output, royalty etc. Now GOP has sold its “Working
Interest” leaving the field open to the oil and gas companies to play the game
of multinationals. The sale of “Working Interest” was therefore not in national
interest.
Pak Saudi Fertilizers was a very profitable public
sector unit producing Urea. It has been sold to a group led by Fauji
Foundation. The sale of unit from Public Sector Corporation to Fauji Foundation
is not privatization, to say the least. It was a very profitable unit yielding
handsome profit to GOP and now the profit would go to the Fauji Foundation.
The sale of shares of MCB & NBP and other capital
market transactions were the correct decision as the privatization through
gradual sale of shares to the public is the most preferred form of
privatization.
The sale of UBL to Abu Dhabi and Best Way Group is
altogether inexplicable. First GOP poured Rs30 billion into UBL to cover its
nonperformance loans and make it privatizable. This was not done in the case
of earlier sale of MCB and ABL. After pouring such a huge amount of Pakistani
tax payers money it has been sold to foreigners for Rs12.35 billion. In the
first bidding Mian Mansha was shown to be the highest bidder but bidding was
held again and Abu Dhabi and Best Way Group were on the top in the second
round. GOP lost Rs17.65 billion in its privatization exercise. GOP has not
explained as to why Rs30 billion of tax payers money was poured in UBL for privatization
and what was the hurry in handing over this unit a week before the national
elections.
Therefore, whereas the gross proceeds from
privatization during the second period amounted to Rs34.7 billion but if we
deduct Rs30 billion poured in UBL then the net receipts are only Rs4.7 billion.
In the second phase the government has sold public assets which were highly
profitable for a trivial net amount of Rs4.7 billion.
VI
Policy makers have a great advantage in a modern age
of internet as with a click of the mouse they can learn from the experience of
other countries in the field of privatization. International experience of
privatization has been varied. Chile is a successful case of privatization but
Yotopoulos3 has pointed out there was serious charges of
sales to the cronies in Chile. There were similar charges of crony capitalism
in Argentina where privatization proved a failed exercise. In India
privatization has proceeded at a slow pace and is stalled at present due to
protest from the unions of public enterprises, which were to be privatized.
Stiglitz4, an
American Nobel Laureate in his recent book on Globalization has pointed out
that rapid pace of privatization in the USSR at the behest of IMF has led to
sharp economic decline.
China’s economic achievement is unique in human
history. A nation of more than one billion people has been able to quadruple
its per capita income in less than two decades. The Washington Consensus and
international financial institutions have been putting pressure on China to
privatize its public enterprises, some of which are running at a loss. However,
China did not pay any heed to the foreign advice but what it did was to stop
fresh investment in public enterprises. Thirty years ago public enterprises
accounted for about 90% of the national industrial output. At present they
account for only 30%. As the fast expanding new investment especially by
multinationals have over taken the public enterprises. In the process many loss
making enterprises which could not modernize themselves have closed or
automatically phased out.
3 Yotopoulos Pan (1989) Tide of Privatization
Lessons from Chile World Development (1989)4 George Stiglitz Globalization 2002 Harper and
Row
Pakistan
should have followed China’s example and instead of undertaking sweeping tides
of privatization conducted in a non-transparent manner, detrimental to national
interest, we should have rather lured private investors alongwith foreign
investors to set up new industry which would have gradually reduced the size of
public sector enterprises.
It seems
we have not learnt a lesson from our previous privatization and now the
government intends to privatize major assets like PSO, OGDC, PTCL and HBL, and
NBP. PSO, PTCL and OGDC are highly profitable organizations and their profits
for last two years are as follows ;
(Rs billion)
|
Organization
|
2000-01
|
2001-02
|
|
PSO
|
2.25
|
3.19
|
|
OGDC
|
16.49
|
16.37
|
|
PTCL
|
18.19
|
19.81
|
Source:
Ministry of Finance.
PSO is
Pakistan’s largest corporate unit and the only corporate unit included in
Asia’s 500 leading enterprises. The other two oil distributors are foreign
companies Shell and Caltex. If we sell PSO, foreign companies can throttle oil
supply to different points in time of emergency. Hence both economic and
strategic consideration demand that PSO should not be privatized.
OGDC produces 36% of domestic crude oil
and 29% of natural gas in the country while the remaining production of oil and
gas is by foreign companies. OGDC operations are spread all over the country
and privatization of all these public enterprises producing oil and gas would
again be a strategic blunder. Moreover, it is a revenue spinner and giving
handsome profit to the government.
Secondly,
if OGDC is privatized, a number of new drillings will be entirely in the hands
of foreign companies whose decisions may not be in Pakistan’s interest.
It is an ideal competitive situation in which public
sector PSO and OGDC are competing with foreign multinationals and both of them
should be encouraged to drill more. Moreover, no developing country has handed
over its entire oil and gas sector to foreign countries. In most developing
countries the oil and gas sector is a public enterprise as the scale of
operation is so large and the profit so huge, that none except Pakistan has
found it in their national interest to privatize the entire oil and gas sector.
PTCL is
again a revenue spinner and the only company with ground lines in each nook and
corner of the country. Handing over this profitable strategic asset to a
foreign company will be devastating for Pakistan’s economy and security.
HBL and
NBP should not also be privatized. This would incapacitate monetary and credit
policy of the government to realize national socio-economic goals particularly
in the context of advancing credit to small borrowers to correct imbalances
created by advances to large parties only by the private banks.
Privatization
in Pakistan has not met its objectives, for the reasons noted above. At present
it is in national interest to remove PSO, OGDC, PTCL, HBL and NBP from the list
of privatization, as their privatization would be strategically dangerous and
economically unjustifiable. If we go along with the announced pace of
privatization our economy, which already in recession will suffer and we will
lose our economic sovereignty. Moreover, IMF’s next demand will be to privatize
Mangla and Tarbela dams, which would bring an utter ruin to the economy.
BIBLIOGRAPHY
1. Gershenkron, Alexander, Economic
Backwardness in Historical Perspective, Praeger, London, 1962
2. S.N.H. Naqvi and A. R. Kemal, “The
Privatization of the Public Industrial Enterprises in Pakistan”, PDR
Summer 1991.
3. Yotopoulos, Pan A. The Tide of Privatization:
Lessons from Chile, World Development (1989)
4. Annual Reports Privatization Commission of
Pakistan 2000, 2001, 2002.
5. Asian Development Bank, Impact Analysis of
Privatization in Pakistan, October,1998.
6. Stiglitz George, Globalization 2000.
7. Economic Survey 2001-02, Government of
Pakistan, Islamabad.
8. Annual Report of the State Bank of Pakistan, 2002.
