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Turning the Clock back

"A government too soft on big business, is bad for economy, as a government too harsh on big business"
A Scottish Proverb
Privatization was advocated as the magic cure for Pakistan's economic woes by both Nawaz Sharif, the spiritual heir to military dictator Zia ul Haq and Benazir Bhutto, wearing the political mantle of her socialist father whom she and her party now call Shaheed (martyred) Bhutto. Both championed privatization on the plea that public sector enterprises being inefficient and corrupt were a drain on government resources and their sale help bridge the budget deficit, by curtailing the government expenditure and by using the proceeds of privatization for retiring public debt.

First Nawaz government in 1990 argued that " in economic terms, government has suffered a cumulative loss of Rs 27.8 billion on the operations of corporations under the Ministry of Production and resultantly, the inefficiency of public sector has deprived the national exchequer oflarge amounts of funds which would have contributed to the social sectors and industrial growth."

"The government believes that one of principal benefits to the nation from privatization of its public assets is by the way of reduction of our debt burden. The burden of domestic and international debt can be reduced from the sale of those very assets for which the debt was created" the second Benazir government in 1993 argued.

Privatization took-off earnestly in Pakistan on January 11, 1991 with the sale of Muslim Commercial Bank and seven years down the road, 90 units, including three financial institutions and a power plant had been disposed off. In addition 12 percent shares of Pakistan Telecommunication Corporation, 10 percent shares of Sui Nothern Gas Pipeline (SGNPL) and 10 percent shares of PIA have been divested.

Nawaz Sharif had marked 115 units for privatization in 1991 and thus more than 90 percent of the assets so slated originally have been sold-off, without making the slightest dent in the foreign debt and budget deficit or achieving the stated objectives of privatization. Yet officials and government leaders continue to hammer the point that the accumulated debt and budget deficit could be decreased through accelerated privatization.

How to change a lemon into an orange

Privatization in Pakistan is classic example of corrupt politicians and ever-corrupt bureaucrats working in concert to turn a lemon into an orange. This is how they did it.

A commission headed by N M Uqaili, chairman PICIC and constituted by Zia ul Haq to study the state of the State enterprises recommended in 1984 that " it should be the declared policy of the government to denationalize sick units." Immediately after coming into power in 1988, Benazir government engaged Rothschild and Sons to prepare a privatization plan who recommended widespread Thatchian-style privatization through stock exchange adn identified 14 units for privatization in two phases. Bhutto also employed consortium of Morgan Grenfell and Sidat Hyder to prepare plan for the privatization of Sui Southern Gas Company and Messers Fergusen for Muslim Commercial Bank. However her government could only privatize ten percent shares of PIA before it was dismissed by President Ishaq on August 6,1990.

Thus when Nawaz Sharif came into power in Oct 90, he inherited considerable spade work and infrastructure to launch priatization in an orderly manner. But he did his own game plan for privatisation. A Disinvestment and Deregulation Committee, set up by his government in Nov 90 recommended that " the govenmnet should completely retire from the production of industrial goods" and identified 105 industrial units for immediate privaitization.

On Jan 22, 1991, the govenment constituted a privatization commission whose terms of reference incluede " total or partial privatization of public sector industries and enterprises and ensure widest possible participation, to review and recommend measures for revival and rehabilitation of those industries which were close and shut down under the administerative control of the nationalized commercial banks." The commission identified 115 units for privatization. By Oct 1993 when Nawaz government was booted out of power, the privatization commission had privatized 68 units including two banks.

The second Bhutto government expanded the list of units marked for privatization. A major addition was Oil and Gas Development Corporation (OGDC) for which Hong Kong and Shanghai Bank was appointed financial Advisor but plan for this privatization did not materialised because of the objections raised by Farooq A Leghari, then President of Pakistan. When Bhutto was dismissed in Nov 96, a total of 84 industrial units and three financial institutions had been sold, with only 24 units from the original 1991 list left on the Privatization Commission's platter.

On September 16, 1997, Khawaja Asif; Chairman Privatization Commission told the National Assemly Standing Committee for Finance that the number of units slated for the privatization now stands at 70. However, it transpired during the 2-day Privatization Conference in Islamabad on March 30-31 that the list of units marked for privatization was swelling everyday because more and more units were being identified for privatization.

" the government has a declared policy of divesting as much of its enterprises as practical, and is confining the ownership and management to those assets only, which are either strategically important, or which the private sector is unable to own or manage," Zafar Ali Khan, Secretary, Privatization Commission declared at the conference.

The major units marked for privatization by second Nawaz government inclue Pakistan Railways, WAPDA, KESC, Pakistan Telecommunication Corporation, Sui Northren Gas Pipeline, Sui Southern Gas Company, OGDC, recently acquired Pakistan Petroleum Ltd, Saindac Copper Project, Pak-Saudi Fertiliser, Pak-Arab Fertiliser, Heavy Electrical Complex, Hevy Mechanical Complex, Pakistan Steel, National Shipping Corporation, National Tanker Company, Habib Bank Ltd. United Bank, National Bank, National Development Finance Corporation (NDFC), Industrial Development Bank of Pakistan, National Investment Trust, Investment Corporation Of Pakistan, Karachi Shipyard and Engineering Works, Convention Centre Islamabad, landside of PIA, facilities at 40 airports and two major ports, Karachi Water and Sewerage Board and WASA Lahore. Several of these projects were never considered for privatization in past.

According to PTV, a special cabinet meeting on March 2, 98 decided that the stateland owned by Federal Government, four provincial governments and all the government departments will be disposed off to generate cash for the cash-starved government. Prime real estate of PTDC, GTS and federal lodges in Murree have already been sold. Chamba House in Lahore which has been providing residence to federal employees in Lahore is next to be auctioned.

Provincial governments of Punjab, Sind and NWFP have set up their own privatization commissions and announce their own privatization plans.

" Golden opportunity for sound investment" proclaimed advertisements by Sind Privatization Commission in the National Newspapers in the last week of March 1998 while announcing the auction of " most valuable lands" comprising industrial, commercial, residencial, flat sites, agricultural in and around Karachi, Hyderabad, Thatta, Badin. Other units and property for which intersted parties were advised to contact Chairman, Privatization Committee included two evacue cinema houses in Hyderabad, Milk Plant near civic centre (37 acres), livestock form near air port, Korangi livestock form (300 acres), Tando Mohammad Khan livestock form, Kundi form near Rohari, KTS depots, 34 self propelling combined harvesters.

All units of Punjab Idustrial Development Board (PITB) and Sarhad Development Authority are being sold. A seperate desk is being set up in Privatization Commission for coordination and assistance to Provincial Privatization Authorities. The daily Jang, Rawalpindi of April 6 reported that assets being auctioned by the provincial governments included 212 rest houses in NWFP alone.

Major General (R) Hidayat Ullah Niazi, Chairman, Natioanal Highway Authority told the March 30, 1998 privatization conference that "the government of Pakistan, acting through NHA has fielded 11 road projects relating to Motorway for privatization. The Lahore Ialamabad Motorway has already been advertised for operation concessions..........there are also a number of bridges on river Indus, Chinab and Ravi which are planned for privatization."

Khawaja Mohammad Asif told the March 98 privatization conference that privatization is expected to yield 9-10 billion dollars, as against less than 1.5 billion dollars (RS 20 billions) in local currency and 1.2 billion US $ netted by the privatization to-date. Former Finace Minister Dr. Mahboob ul Haq, on the other hand has estimated that privatization could yield upto 80 to 100 billion dollars. Others including veteran journalist Sultan Ahmad (Privatization without Illusions, daily DAWN, April 2, 1998) however believes that Khawaja Mohammad Asif, Dr. Mahboob ul Haq, the press and the people might be shocked to see mega projects going at too low prices, because of their liabilities and bad debt. There are others who are ready to bet their life savings on what Sultan is saying. Consider for example the following facts about the major comapanies to be privatized.

1. Pakistan Telecommunication Corporation. Pakistan Telecom has been on the priority list of privatization since 91 when a committee headed by Deputy Chairman, Plnning Comission was setup to recomend methods of it's privatization. Since 91 four Financial Advisors have been appointed by Privatization Comission to help in it's privatization, starting with Bear Stern in 1991, followed by jardine Fleming in 1993, Morgan Grenfill in 1995 and Goldman Sach in 98 who is to be paid 20 million dollars.

" I am willing to put my life savings on the line to say that the new financial adviser will also come out and tell us in a few months that PTC can not be prvatized" , writer of an article , The exercise in futility, the PTCL privatization, in daily The News of 13 April 98 predicted. The writer had many reasons for his assertions like the fact that PTC has already mortaged next few years foreign exchange earnings under 250 million securitization loan, the monopoly of the company is to end in year 2002, under licencing agreements signed with cellular companies and several other telecome companies in the region was also awaiting privatization.

2. WAPDA. In 1990 Prime Minister Nawaz Sharif was in such a hurry to privatize Wapda that he refused to accept a World Bank loan to finance the study of privatization of Wapda and awarded it, out of government of Pakistan funds to Independant Resource Group (IRG) of United States to complete it in a short period of time. In last seven years only Kod Addu Power Plant has been privatized for 215 million dollars. However only 153 million dollars were deposited in Government Accounts after deduction of fees of Consultants and other conditions attached to the sale.

Within installed capacity of 13600 MW, WAPDA is proposed to be split into 21 companies comprising one company each for eight area electricity boards, ten thermal projects, two under construction hydel projects at Chashma and Ghazi Brotha and a national grid company. This is gigantic task for Privatization Commission, considering scale of corruption of WAPDA and performance of the commission in the deal with Kot Addu Power Company.

3. Karachi Electric Supply Corporation. With an installed capacity of 16900 ME, it is proposed to be privatized as single entity. According to report in daily, The News, Islamabad of 15th April 98, the company is facing a short fall of RS 32 billion and has decided to defer all its foreign exchange liabilites of RS 10.8 billions due to aggravating financial crisis. In 1996, privatization commission have assessed KESC total assets at RS 33 billion. It has debt liabilities of 22 billion.

4. United Bank Limited. On April 12, 1998 the State Bank of Pakistan that it was accepting a plea of new UBL management to inject RS 21 billion into the United Bank to prepare it for privatization. The amount to be invested in UBL is in excess of total proceeds of privatization of 90 industrial and financial units of last seven years and makes the mockery of the process of privatization.

5. Habib Bank Limited. The team of 14 Citibankers who have taken charge of Habib Bank at an annual cost of Rs 150 million per anum are reported by Sultan Ahmad to have stated that the liabilities or bad loans of government banks are far more than acknowledged. Opposition leader Benazir Bhutto, in a letter to Governor State Bank alleged that Habib Bank has allowed all the defaulters to absolve themselves of any claim, by paying 25 % of the outstanding amounts which would greatly reduce the value of bank. The fact was confirmed by Habib Bank in a clarification reported by the newspapers on April 15, 1998.

Pakistan State Oil, Oil and Gad Development Corporation, Pakistan Petroleum Limited, Sui Northern and Sui Southern Gas Companies have a circular debt of Rs 70 billion, in addition to their own individual debts. PIA has total short term and long term external liability of 360 million US dollars. All the other units marked for privatization are sunk up to the neck, into quagmire of debt and their financial position is deteriorating because no serious effort is being made to arrest it. In these circumstances, the assessment that privatization would yield 10-80 billion US dollars is nothing but self-deception.

While estimates of proceeds from privatization are muddy and could be less than 9 to 10 billion dollars estimate of Khawaja Asif, the Commission has appointed 37 consultants and nearly a dozen financial advisers, several of whom are to be paid hefty amounts in foreign exchange, whether or not the units are privatized.

Foreign financial advisors appointed by Commission during last one year include the followings

A Privatization Formula rooted in Corruption, further being corrupted

The formula worked out by Privatization Commission in 1991 passed on the liabilities of the privatized units to people of Pakistan and assets to new owners. It appears in hindsight, that those who designed it, were not interested in fetching a fair price of the privatized units, but to facilitate their sale to favourites at throwaway prices.

The most important step in privatization n Pakistan or anywhere else, is evaluation or putting the price tag on the units marked for privatization. Next in importance is the decision whether the units should be sold through stock exchange or auction. If they were to be sold through auction, should government divest all its shares or simply majority shares?

The formula worked out by Privatization Commission provided different approaches for units of different catagories. It provided that for industrial units, bids should be invited for majority shares i,e 51 percent of equity. However the management of the privatized industrial units was to be handed over to the new owners after a down payment of 40% of bid price (for 51% shares).

In case of banks, bid were invited for 26% of the equity but the new management was rrequired to acquire the balance of 74% of shares over a period of time. In respect of utilities like Pakistan Telecommunication, WAPDA, KESC and gas companies, management was to be transferred to a strategic investor, preferrably a foreign multinational after it acquired 26% of stakes.

The formula for handing over the management to private owners, acquiring 26% stakes was criticized by both the national and international press. It was argued that the method of handing over the control of an undertaking to an individual or group, upon their acquiring 26% of equity is extremely suspect, since the normal corporate practice was to pass on the control, at the purchase of 51% of shares.

" It could be that it has been made easy to facilitate the purchase of what one might the whole of Pakistan" an article by I A Hussan, in daily The News of Islamabad of June 2,1991 observed.
The formula also provided that Employees Buyout will have 10% preference over other bidders and that the workers of the privatized units will have a right to Golden Handshake whose cost would be equally shared by the Privatization Commission and the new owner. It was this corrupt formula which facilitated bogus employees buyout and the sale of the family silver at throwaway prices to the favourites.

It was hammered by Finance Minister Sartaj Aziz in his speeches and press conferences that in respect of industrial units, banks and utilities, even after privatization government would retain between 49 to 74% shares and would thus, benefit from dividends in profits of these companies resulting from the efficiency of the private sector. The hollowness of this argument and craftiness of the privatization formula is evident from the fact that the first unit privatized in 91 i.e Muslim Commercial Bank has built hefty reserves but not announced a single dividend during last seven years, thus depriving the government which still owns 49% equity, of its shares in profit. Some of the most profitable units like National Fibres, Zeal Pak Cement, Pak-China Fertilizer and five of the six privatized engineering units stand closed because they were bought politically influential and unscrupulous element to strip these units of their assets and not to improve their operational efficiency.

How the unit are evaluated

Table of Contents

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