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How privatized units are evaluated, priced?

We have stated above that valuation is the most important step in the whole process of privatization because it helps the Privatization Commission in putting a price tab on the units marked for privatization, by determining the reference price below which the unit would not be sold. This fact is also vouched by a booklet, Privatization in Pakistan, published by the Privatization Commission in 1998. While talking about the process of valuation of the assets and setting up a reference price for units to be privatized, it observed that " This (valuation) is perhaps one of the most important steps in the process of privatization."

The growing subscription of the Pakistan Muslim League government to the process of accountibility warranted tha valuation of units, the most important step in the process of privatization was made more transparent and less discreet, in the light of experience gained during last seven years. Reverse has happened. The formula for valuation has been made more flexible to create more avenues for corruption.

Following was the valuation method used by Privatization Commission in first Nawaz government, as elaborated by booklet, "Privatization Policy and its implementation" published by Ministry of Finance in November, 91.

It said that " Privatization Commission initiates the process of valuation through indedpendant consultants, assessors, surveyors, chartered accountants. Wherever possible the breakup value share is indicated on the basis of revalued net assets......After the valuation report is cleared by the Commission, it is placed before the cabinet committee on Privatization for consideration and apporval of a reserve price. The reserved or reference price normally reflects:

1) Current value of the assets, less all liabilities at book value.

2) Level and growth of earnings.

3) Future earning potential.

Seven years later, Privatization Commission of second Nawaz government reflected on the valuation process in following manner in the booklet, Privatization in Pakistan. " A leading firm is hired to conduct valuation of the unit. The approaches usually used are ( Discounted Cash Flow-DCF, CCOP's earning potentials, etc.). The valuation information is only for Privatization Commission's purview and is not shared with bidders...............Reference or reserve price is just a benchmark price used for reference purposes to ascertain the minimum value of the unit. The PC however believes that the market is the final determinant of the value of the unit which will come out at the time of bidding. From the valuation received from valuators, a refernce price is derived after certain adjustments (if any) for approvel of the competent authority".

During the last seven years, no reference was ever made in any official booklet or literature about privatization to the "DCF, CCOP's earnings" approach for evaluation of the units marked for privation. It is very difficult to understand what is Discounted Cash Flow (DCF) and CCOP's earning potential. The method of determinig DCF is not explained in any literature of Privatization Commission. However, the rationale for its incorporation as an approach, "usually used" for determining the reference price would be clear to the reader after going through first case in some landmark cases of corruption in privatization mentioned later the chapter.

Accelerated privatization under a formula which is rooted in corruption and is further being corrupted would only doom Pakistan to consequences of far greater magnitude than those born out of Bhutto's nationalization. It would only mean more of the same, turning into reality the prediction that Pakistan's future is Pakistan's past. Now that second Nawaz government is determined to privatize bulk of the state enterprises and facilities developed by successive governments during the last 50 years, with tax payers money and foreign and local debt of rupees thee trillion, the least that must be demanded of the government is a new declaration about its agenda for privatization, the methods and objectives and how the government hopes to achieve them. The people of Pakistan have a right to demand from champions of transparency and freedom of information that the sale agreement of 90 privatized units be made public and people taken into confidence on whether or not the new owners have abided by these agreements, particularly their undertaking to repay liabilities of these units.

In his first term, obsession with the Motorway earned Prime Minister Nawaz Sharif the name of " second Sher Shah of Sour", the Afghan King, remembered fondly in the subcontinent, for construction the road linking New Delhi with Kabul. It appears that in his second term, Nawaz Sharif is determined to go down in Pakistan's history, as a modern-day King Richard who used to say "I would sell London, if I find a suitable buyer".

Owning the liabilities, transferring the assets

The unkindest cut on the people of Pakistan inflicted by privatization relates to the liabilities of privatized units. Under the privatization carried out in last seven years, assets have been transferred to new owners, but government has been left holding the liabilities of the privatized units which are manifold the yields from privatization.

As explained above, the formaula designed by the Privatization Commission is 1991 envisaged that the reference price of a unit marked for privatization should be worked out on the basis of "current value of assets, less all liabilities at book value". It was maily because of this provision of reducing the value of the assets, by the amount of liability to arrive at a reference price that 88 privatized industrial units have fetched only Rs 15 billion.

No exercise has been undertaken by the Privatization Commission or govt. about the foreign and domestic debt that has been transferred to the owners of privatized units. It is the sale agreement that spells out the liabilities of the privatized units to the national commercial banks, World Bank, International Finance Corporation (IFC), Asian Development Bank, bilateral donors and commercial lenders. The supreme irony of the whole exercise is that the foreign debt incurred by the Govt. of Pakistan is non-transferable. Thus after privatization these liabilities are only technically transferred to the new owners. Whether or not the new owner abides by the sale agreement, govt. is required to meet its repayment obligation with respect to the foreign loans of privatized units.

It can be safely said that the debt liabilities of the privatized units are manifold the yield from privatization since, in case of Naya Daur Motors whose sale agreement was made available to the author, the liabilities are many times the bid price.

Naya Daur Motors were sold to Tawakkal for Rs 39 million while the new owner had undertaken to clear the liabilities of Rs 145 million outstanding against the Asian Development Bank, Republican Motors and National Development Finance Corporation (NDFC). The amount is in default four years after privatization.

Interviews and case studies have revealed that neither Benazir nor Nawaz Sharif followed a clear cut policy for post-privatization liabilities. However Finance Minister, Sartaj Aziz told several press conferences attended by the author that Benazir Bhutto had sold the units on "as is where is" basis which meant without liabilities while Nawaz govt. privatization required the new owner to take over the liabilities.

In theory Nawaz policy was sound but in practice it has worked out to be the same as that of Benazir Bhutto since huge amounts of loans are outstanding against units privatized by both. According to the list of defaulters published by caretaker Prime Minister Meraj Khalid, Rs2,303 million was in default against six privatized units namely Metropolitan Steel (Rs1,128 million), National Motors (Rs 464 million), Quality Steel (Rs 295 million), Naya Daur Motors (Rs 215 million), Associated Industries (Rs 103 million) and National Fibre (Rs 90 million). An amount of 1.5 billion was outstaning against Ghazi Textiles, Harapa Textile and Pasrur Sugar Mills privatized by Nawaz Sharif, as Chief Minister, Punjab in 1984-86.

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Privatization--Turning the Clock Back

Robber Barons of Pakistan