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Privatisation in Pakistan-1

By | on March 17, 2014 | 0 Comment

Privatisation in Pakistan-1

Pakistan is soon starting what may be called her fourth generation of privatisation. The first round, which  started in 1950s and peaked in 1960s, was meant to strengthen a nascent private sector which was  reluctant to invest in industry  either due to paucity of requisite resources at its disposal or  high risks involved or both. Consequently the state built factories in strategic and other important sectors and handed them over, at very nominal rates, to the businessmen which laid the foundations of Pakistan’s industrial sector. The second generation privatisation, carried out in 1980s was mainly the de-nationalisation of industries nationalised during the 1970s.However 1990s and to some extent early 2000s were the heydays of privatisation when large number of  state owned enterprises were sold to private sector to improve the efficiency and service delivery of the SOEs, by bringing in the incentive and reward mechanism of the private sector who would inject capital, technology and better management practices to  reap efficiency gains more than reducing state losses.

As compared to above mentioned three rounds, the forthcoming fourth generation privatisation will be carried out by the newly inducted PML-N regime to eliminate/reduce the huge state subsidies being given to those SOEs which are continuously incurring losses but they could not be closed or privatized earlier because of social welfare considerations or due to their strategic nature even though better alternatives were available in the private sector. Some very positive developments will help the PML-N in its endeavour to carry out its agenda. Not only there is a broad spectrum consensus on the need and benefits of privatisation/ deregulation in the country but a robust private sector is ready to take on big State Owned Enterprises. Unconditional support of international organisations particularly of World Bank and International Monetary Fund and availability of a comprehensive legal and institutional framework which has matured during the last 20 years will go a long way in expeditious privatisation process. Thirdly given the emergence of an aggressively penetrative social/electronic media, an extremely intrusive civil society and a very activist judiciary, the process will be very transparent

Incidentally the new regime is known for its pro private sector leanings because not only the Prime Minister is one of the leading industrialists of the country but the team he has gathered around him also consists of businessmen or have extensive business interests. In his last two stints in the 1990s as prime minister, Nawaz Sharif went all out for the liberalization/deregulation of economy, de-nationalisation of nationalised industries and privatisation of state owned enterprises. Hailed as the most successful privatisation program in South Asia, Central Asia and the Middle East, it brought more than $ 9 billion (Rs. 476,421 million) from 167 fairly transparent transactions to the state coffers.  100% state owned enterprises in the chemical, textile, nitrogen fertilizer, cement, rice, and light engineering sectors, around 98% automobile industry,96% ghee mills and  100% units of Phosphate fertilizer were privatised. Similarly banking industry was also substantially privatised substantially due to which 80% of the banking sector came under private ownership.

This large scale privatisation was a win-win situation for all the stakeholders. Besides ensuring convenient availability of better goods and services at affordable prices to the general public, it also resulted in increased tax revenue to the state exchequer in the form of corporate taxes as well as dividend yields to the public on the one hand and to the state, which still holds substantial share holding in these entities, on the other. Emergence of robust private sector induced investment, transfer of technology, improved management/productivity and introduction of international best practices in different sectors of the economy. Last but not the least, it created fiscal space for social sectors and infrastructure development resulting in employment generation and poverty reduction

In his third term, he is expected to repeat the same not only to reduce the budget deficit for which he will be under great pressure from the IMF but also to reap efficiency gains. All options will be exploited from outright/partial sale of assets and business through open auction and public offering of shares through a stock exchange to Global Depositary Receipts (GDRs) and Exchangeable / Convertible bonds i.e. taking loans from international funds against collateral of shares.

However this time around the privatisation process will be a great deal challenging for several reasons. The number of units to be privatised is not as large as they were when he started the ‘third generation privatisation’. Secondly, not only the number of such entities is limited, they are now what we can say ‘hard core SOEs’ riddled with structural rigidities and management inadequacies. They need lot of hard core reforms before they can be privatised.  Thirdly domestic and international financial crisis have resulted in huge losses of SOEs which may serve as a disincentive to attract investors. Lastly managing public interest in industries with social repercussions such as power and transportation as well as the limitations imposed on the federation of seeking provincial concurrence in each transaction as a result of 18th constitutional amendment are other handicaps in the speedy privatisation of state units.

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