PRIVATIZATION IN PAKISTAN

PRESENTED BY: KHIZER FAROOQ - 12484

PRIVITIZATION: -

Selling of state owned enterprises to the private sector.

Also referred to as “denationalization”.

It’s a policy tool for generating growth & opening up the economy to

competition.

It is understood as a change in the objective of owners of the firm. (A

public firm maximizes social welfare & a private firm maximizes

profits).

HISTORY OF PRIVATIZATION The concept of Privatization is not new to the policy makers of this

country. In 1950s, Pakistan Industrial Development Corporation (PIDC) was established to boost up the industrial development in the country.

The corporation established over 50 Industrial undertakings & after their successful operation & management these units were transferred from the public to the private sector.

In 1970s, all major private industries were put under the government ownership in an intensified programme, called nationalization programme that led to the economic disaster.

Resultantly, the government controlled majority important industrial enterprises operating in banking, energy, communication & transport sectors.

State Owned Enterprises exhibited the following characteristics: -

1) Mismanagement & overstaffing

2) Poor quality of services

3) High debt & fiscal loss

4) Increased corruption

5) Political based appointment of decision makers & Sr. Officials.

The government that came in to power in 1978 recognized the problem & passed orders to begin the reverse of nationalization strategy. General Zia Ul Haq handed over Ittefaq Foundry to the Sharif ’s Lahore without inviting any bids. Two other nationalised units, Nowshera Engineering in the NWFP & Hilal Ghee in Multan were handed over to their original owners.

Privatization efforts in Pakistan began in 1988 during Benzair Bhutto regime, with the floatation of 10% shares of PIA however the pace of privatization picked up after the creation of PC.

The privatization program was launched on 22 Jan 1991 by Prime Minister Nawaz Sharif.

Program was visioned to improve the GDP growth of the national economy of Pakistan & attract foreign investment.

In 2004, a more intensified privatization program was launched under the presiding leadership of Prime Minister Shaukat Aziz.

Programme ended effectively at the end of 2007 when 80% to 90% of the industries were put under the management of private ownership.

ADVANTAGES:

1) Increase in efficiency and Profitability.

2) Lack Of Political Interference: -

• Most Govt. industries and services are inefficient and running in losses (Take for Example PIA), when these will be transferred to private sector, their administration will improve.

• Managers in SOEs are motivated by political pressures rather than sound economic & business sense. For Example: employing surplus workers to avoid negative publicity.

3) Retirement of debt:

The burden of domestic and international debt can be reduced from the sale of those very assets for which the debt was partially created. Privatization will also obviate the need for raising fresh debt for the rehabilitation and development of public sector industries. A substantial portion of the funds will be applied for retirement of debt,

4) Reduction in Fiscal Burden:

The annual allocation for subsidies to public sector enterprises continues to be a drain on the nation’s resources. The reduction in subsidies will be possible as assets are sold, which will be a positive contribution in reducing the budget deficit.

5) Short Term view

A government many think only in terms of next election. Therefore, they may be unwilling to invest in infrastructure improvements which will benefit the firm in the long term because they are more concerned about projects that give a benefit before the election.

6) Shareholders:

It is argued that a private firm has pressure from shareholders to perform efficiently. If the firm is inefficient then the firm could be subject to a takeover. A state owned firm doesn’t have this pressure and so it is easier for them to be inefficient

7) Increased Competition:

More firms enter the industry & increase the competitiveness of the market. Increased competition leads to improvement in efficiency. For instance: Competition in telecom.

DISADVANTAGES:

Private sector generally tries to avoid payment of taxes. Thus privatization of enterprises will result in the decrease of tax income.

1) Increase in Tax Evasion:

2) Exploitation by Private Sector:

Privatization will result in exploitation by rich people. They may charge more prices for their goods and services. They may terminate workers to reduce cost of production. Thus different types of exploitation may be started and the concept of welfare state for Pakistan will be jeopardized.

Privatization of large industrial units and services sector such as banks and insurance companies will increase concentration of wealth in private hands.

3) Concentration of Wealth:

4) Unemployment:

In privatization more workers are declared surplus and thus are fired by the company. Therefore, there is an increase in unemployment rate which will eventually increase crime rate in the society.

There are many industries which perform an important public service, e.g health care and public transport. In these industries, the profit motive shouldn’t be the primary objective of firms and the industry.

5) Public Interest

Progress to Date:

Although the PC mandate initially restricted to industrial transactions, by 1993 it had expanded to also include Power, Oil & Gas, Transport (aviation, railways, ports and shipping), Telecommunications and Banking and Insurance.

During January 1991 to August 4, 2014 the Commission completed 169 transactions for Rs 529.650 billion.

Progress to Date:

About 58% of the proceeds received were transferred to the Federal Government, 31% was returned to legal entities whose shares were sold, 5% was used for restructuring expenses associated largely with golden handshakes and rehabilitation, and 2% was used for PC’s privatisation-related expenditures

90% of the proceeds are being used for debt retirement & 10% for poverty alleviation.

Number of privatized transactions:

SUCCESS STORIES:

1) MCB:• It was incorporated by the Adamjee Group on July 09, 1947.

• Nationalized in 1974.

• First bank to be privatized in 1991, with the issuance of 26% shares to National Group at a price of Rs. 56 per share .

• Ranked 4th among the largest national banks with an asset base of US$ 7 Billion as at quarter 1, 2012. Largest by market capitalization recorded at $1.2 billion at year end 2011. In 2011, reported a profit of PKR 19.4 billion.

• Compared to 1991, in 1995 bank deposits had increased by 184%.

• Took new initiatives & marketed new products & services to cater the varying requirements of its diverse customer.

• Some of them include: Mahana Monthly Kushali Scheme, Capital growth certificate scheme, Self-supporting scheme etc.

FAILURE:

1) K-ELECTRIC:• Incorporated on 13th Sept 1913.

• Nationalized in 1952.

• In 2005, Govt. privatized K-Electric.

• The Utility was sold to Siemens AG who had no previous experience of running a similar business.

• It was expected that the consortium would turn KESC into a profitable entity but as of June 30th 2008, the company continued to suffer losses amounting to PKR. 35.5 billion.

• It was also expected that distribution, transmission, generation will be improved but unfortunately it did not happen

• In 2009, The Abraaj Capital a firm based in Dubai bought the power utility.

• As of May 14 2014, K-electric is not only defaulter to the government but is also a major defaulter of Sui Southern Gas Company limited and Sales tax department of billions of rupees.

• The utility purchased power of 230 billion from NTDC in September 2009 out of which government has paid 180 billion in form of subsidies given to KESC.

• Karachi Electric experience as a private utility cannot be termed as successful as it still depends on subsidies provided by the government

SPONTANEOUS PHASE: (1989 – 1993)•A large scale privatization program was launched on 22 January 1991 as the primary economic policy by Prime Minister Nawaz Sharif who came to national power after securing a flight-winning victory in the 1990 general elections.

• The Program was in direct response to Bhutto’s nationalization.

• denationalization of banking sector and industries to private sector, starting first with MCB limited

Sharif termed his privatization program as:

"turning Pakistan into (South) Korea by encouraging greater private saving and investment to accelerate economic growth".

• This phase was promulgated by Sartaj Aziz with the goal to transform the enterprises into profit-seeking businesses, not depended to the government subsidies for their survival.

•The mega-energy corporations such as WAPDA , KESC and PTCL were set off to private sector.

•From 1990-93, around 115 industrial units were hastily privatized, including the privatization of two major banks, 68 industrial units and 10% Shares of Sui Northern Gas Pipelines Limited.

•In 1992, the Leader of the Opposition Benazir Bhutto, vehemently criticized the whole policy measure program at the public circles while Commerce minister Faisal Hyatt and Finance Minister Sartaj Aziz enthusiastically projected the privatization as a "success phase“

SECOND PHASE: (1993 - 1999)•The second phase of the privatization program began in 1993 under the "disciplined macroeconomics policy" of PM Benazir Bhutto.

•It involves the privatization of financial institutions, telecom, thermal power plants, oil and gas sectors.

• Benazir's government did not privatize all state corporations, especially those who were collecting large revenues abroad; only certain industries were privatized which were at the brink of financial collapse.

•The first attempt was made to privatize the UBL but the proposal met with great hostility by the workers union and opposition.

•Proposals were also made to put the private-ownership to Pakistan Railway but it was rebuffed by Prime minister Benazir Bhutto who quoted:

"Railways privatization will be the "black-hole" of this government. Please never mention the railways to me again”.

•By the end of 1996, 20 industrial units, one financial institution, one electric power plant and 12% shares of Pakistan Telecommunications Ltd. were privatized by Benazir Bhutto.

•The second phase remained continued until 1998 when it was abruptly ended by Prime Minister Nawaz Sharif after imposing economic emergency after ordering to perform capability of nuclear deterrence in response to Indian nuclear aggression.

•All stock exchanges, stock markets and the second phase of the privatization program were immediately halted by Prime Minister NawazSharif until his government was ended in 1999.

INTENSIFED PHASE: (1999 – 2008)

•Pervez Musharraf invited Shaukat Aziz to take the control of declining economy of Pakistan

•The GDP rate had declined from 10.0% in the 1980s to 3.6% in 1999, with foreign debt increased to 44% up as compared to 1986.

•Major economic reforms were introduced by Shaukat Aziz who first consolidated the industries under one platform and restructured them before selling them to privatization market.

•Starting from 2003 until 2007, Aziz successfully privatized 80% of the banking industry into private-ownership enterprises, while privatizing the numbers of shares of Pakistan International Airlines and other mega-corporations into the public circles.

•Aziz defended his privatization program as “these institutions viable while they were on the verge of collapse".

•Aziz's privatization program subsequently improved the country’s growth rate by 6.4%—8.6% a year. Inflation rate dropped to 3.5% as against 11-12% in 1990.

•However in the end of 2007, Aziz's privatization program suffered a major setback which initially halted the privatization program in the country.

• The Supreme Court halted the privatization of Pakistan Steel Mills after transferring the inquiry from FIA to NAB, while issued standing orders to keep the Steel Mills under the nationalization program.

•The proceedings and Supreme Court's decision initially halted Aziz's intensified and aggressive privatization program at the end days of his tenure.

• Although the program produced a relatively efficient way of promoting competition & enhancing growth, on the other hand it resulted in increased unemployment.

• Privatization has received significant support from media. In an editorial written at the Dawn, it argues the programme has been a “constituent of structural reform” programs.

• Overall, the GDP rate grows smoothly as opposed to nationalization programme that dropped the GDP growth rate, Dawn maintained.

• The Express Tribune, argued that the national railways’ condition has gotten from bad to worse under the government ownership, & only privatization can save the railways.

EVALUATION OF PRIVATIZATION PROCESS:

EVALUATION OF PRIVATIZATION PROCESS:

• Privatization Commission Ordinance 2000 has two primary objectives –payment of foreign debt & poverty alleviation. In 1991, the debt was $23 Billion & today the external debt stands at 60 Billion Dollar & approx. 43% of population lives below the poverty line.

• Sale of assets at throw away prices, HBL was sold out to Agha Khan Fund for only 22 Billion rupees while its total assets exceeded more than 570 billion rupees. KESC was sold out for only 16 billion rupees & it failed to increase electric supply.

• The govt. handed over MCB to Mian Muhammad Mansha at 19 Billion, ignoring the highest bidder (Tawakal Group). The single transaction involved a corruption of about 60 Billion.

• In 1988, the suger mills of Pakistan Industrial Board were privatized at a throw away price of Nawaz Sharif.

The scandalous Schon Group & Tawakkal bought assets worth more than 120 Billion rupees at a throw away price including MCB, 5 Cement plants, Pak China Fertilizer, National Fiber and Balochistan Wheels. This clearly shows the first tide of privatization failed to achieve the actual goal of privatization, because it was not transparent & badly affected by corruption.

Crises in agricultural sector due to the privatization of fertilizer public companies. Pak Arab Fertilizer was handed over to Arif Habib Group for only 13 billion rupees though the price of the land of the factory was over 40 billion rupees.

The Price of a pack of fertilizer has gone up from Rs. 1300 to Rs. 3700 after privatization.

PTCL after privatization lost its base as its subscription declined from 5.12 million to 4.40 million in 2008. Their financial statement shows a continuous growth till 2006 while after privatization the company is facing severe financial short comings.

• The labor & workers in public sectors remained hostile towards the privatization programme. In 2005, during the privatization of PTCL, worker’s revolted took place in ISB. Despite the resistance, the SOE was privatized by Shaukat Aziz.

• 26% shares privatization of PTCL to Dubai based Aitsalat for only 157 billions rupees. At the time of privatization in 2005, they announced none of the 70,000 workers would lose their jobs however in 2007, 30,000 workers were laid off.

• Privatisation programme was severely affected due to war on terrorism which adversely affected investment climate in the country.

• The trend of monopolizations have increased & the multi-national companies have further monopolized the economy.

• Lack of transparency & openness has been observed during the privatization process which was evident from the steel mill case.

• In the name of privatization, a corruption of Rs. 3000 billion has taken place since 1947 & as a result good deal of the national wealth fell into the hands of relatively small group of so-called business oligarchs (tycoons), and the wealth gap increased dramatically (According to Media Report).

• Since 1990, over 160 institutes have been privatized and many of them have been shut down.

• The privatization program came with great surrounding controversies with lacked competition as the program was largely controlled by favored insider.

• The perception that a change in the ownership is the only solution to turn around loss making enterprises is not always true & it seems irrational that instead of tackling corruption the state should sell public assets to the private sector.

• Privatization in an attempt to eliminate corruption is not appropriate in the sense that same corruption problem emerges during the privation process.

• Selling of SOE is an unwise decision.

• Another view that corporations should first be restructured & reformed to make them profit-oriented & then privatized also seems rubbish because there is no need to sell them.

• There are examples all over all the world where public utilities are running successfully under state control. Indian Railways is the largest SOEs in the world, if that can be profitable, so can Pakistan railways with better management & good governance.

CONCLUSION/MY OWN ANALYSIS:

http://www.slideshare.net/sidranaeem90/should-pakistan-privatized-its-state-own-enterprises

http://www.economicshelp.org/blog/501/economics/advantages-of-privatisation/

http://shahletters.blogspot.com/2014/01/why-privatization-of-pakistan-owned.html

http://www.guesspapers.net/2884/advantages-of-privatization/

http://merlin.fae.ua.es/fauli/privatization.pdf.

http://www.asia-pacific-action.org/node/69

http://www.guesspapers.net/2887/disadvantages-of-privatization/

http://www.policy.hu/bokhari/History%2520and%2520Evolution%2520of%2520Privatization%2520in%2520Pak..pdf

http://www.privatisation.gov.pk/Policy%20and%20Objectives/Objectives%20of%20Privatisation.htm

http://tribune.com.pk/story/417919/is-privatisation-the-solution-for-state-owned-enterprises/

www.sdpi.org/publications/files/KESC-final-june25.pdf

http://www.dailytimes.com.pk/business/14-May-2014/ke-fails-to-share-any-profit-with-its-consumers

http://www.dawn.com/news/1078851

http://alaiwah.wordpress.com/2012/01/24/kesc-privatization-responsible-for-the-present-power-shortage-mess-in-karachi/

REFERENCES: