Privatization of public enterprises

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Pakistan has a long history of a mixed economic system, starting with laissez-faire and the total nationalization of industries and enterprises and ending with privatization. The concept of privatization dates back to the 1950s, when the Pakistan Industrial Development Corporation (PIDC) established industrial units and subsequently handed them over to the private sector.

The privatization process was reversed with the introduction of the nationalization policy in the early 1970s by ZA Bhutto when all major industrial enterprises were taken directly under state control. This policy was interrupted when General Zia took control in 1977.

The privatization process accelerated with the introduction of economic reforms by Nawaz Sharif in the early 1990s. State enterprises were offered to the private sector as part of the liberalization of the economy. Later, the government of Muhammad Khan Junejo formed a cabinet divestment committee in 1985 to identify loss-making units that could be privatized to get rid of the burden of the national chessboard. A real procedure was developed at the time to assess and negotiate with the stakeholders participating in the divestment process. The divestment committee headed by the then finance minister made the final decision.

The government of Nawaz Sharif has vehemently and vigorously pursued the policy of privatizing state-owned enterprises by declaring privatization as its main economic objective. He proposed a wide range of industrial units, development finance institutions, telecommunications, infrastructure and banks to be privatized.

The privatization of state-owned enterprises has mixed results – a combination of successes and failures – in terms of contributing to incomes and creating jobs. If we look at the total number of units privatized by sector in the past, we can easily calculate about 100 such entities in the industrial, financial and utilities sectors. The break-up of these units reveals that car manufacturers, cement factories, oil factories, fertilizer factories, etc. represented 87 of these units. Five commercial banks were among the privatized units. The process also involved the divestiture of shares of around eight utility companies, including Mari Gas and Pak Telecom.

It was a great opportunity for the private sector to capture the market by securing rights on a property basis. It was a win-win situation for investors and the government as the units were offered at throwaway prices to private parties with all kinds of favors and disfavors at the time.

This was the time when crony capitalism engulfed all industrial units including 45 nationalized units, which were initially recommended for divestment, ultimately privatizing the entities that favored the favorites. The privatization process was strengthened and institutionalized with the establishment of the Privatization Commission (PC) in 1991.

The commission was mandated to carry out the process of privatizing all state-owned enterprises, starting with loss-making entities. But the commission had its own shortcomings, and the capacity and capacity of its human resources was a matter of concern.

The commission is still functioning today. The privatization of public enterprises is a cumbersome process because it involves a competitive bidding process. Selling shares as part of the divestment of financial institutions or banks requires due diligence, and then comes the complex process of determining its true value for privatization purposes. The privatization of Muslim Commercial Bank and the methodology adopted for determining the value of its shares are still under discussion.

The same is true of other units that were privatized in the 1990s, accusing the government of favoritism. This is one of the reasons for the slow process of privatization of state-owned enterprises in Pakistan. Fear of the NAB is another reason for the laxity we see in the privatization process.

There are approximately 212 state-owned enterprises of which 85 are commercial, 44 non-commercial and the remaining 83 are subsidiaries of commercial public enterprises. The 85 state-owned commercial enterprises are intended to be privatized through appropriate processes and procedures designed for such exercise by the privatization commission. These entities are primarily from energy, oil and gas, infrastructure, transportation and communications, manufacturing, mining and engineering.

In fiscal year 2018-2019, the annual revenues of the 212 state-owned enterprises were calculated to be around 4 trillion rupees, and the book value of their assets was worth 19 trillion rupees. State-owned commercial enterprises recorded net losses of around 287 billion rupees and 143 billion rupees in fiscal years 2017-18 and 2018-19 respectively. The poor performance of the business entities was worrying and disheartening and also necessitated a swift decision on the privatization of these entities.

The government has already approved the privatization and liquidation of 44 state-owned enterprises. The SOE reform program is already in place as part of discussions with the IMF, the World Bank and the Asian Development Bank. The Ministry of Finance has set up a central monitoring unit for public enterprises for the reforms to be implemented through the improvement of the management of corporate governance.

Pakistan Railways and Pakistan International Airlines are the first to experience restructuring and reforms to improve their financial performance, as both suffer losses of over Rs 100 billion per year. The list of active privatizations includes Pakistani steel mills, SME bank, etc., as well as the divestiture of shares of the oil and gas company (OGDCL) and Pakistan Petroleum Limited (PPL). The Roosevelt Hotel in New York, owned by PIA, is also on the list.

Recently, the Cabinet Committee on Privatization (CCoP) approved the auction of Services International Hotel, Lahore on the recommendation of the Privatization Commission which awarded it to the highest bidder 1.9 billion rupees. Cabinet reportedly referred this matter to committee for further due diligence, as some critical flaws were identified in the process. In addition, there are around eight loss-making DISCOs with State Engineering Corporation, Pakistan Textile City Ltd and Telephone Industries of Pakistan which are set to be privatized in the coming months.

Zarai Taraqiati Bank (ZTBL), Sui Southern Gas Co (SSGC) and Utility Stores Corporation (USC) are all set to divest and privatize as they are loss making entities. The Industrial Development Bank of Pakistan (IDBP) is already in the process of liquidation to avoid further losses to the Treasury.

According to the World Bank report “Hidden Debt: Solutions to Avoid the Next Financial Crisis in South Asia,” released on June 29, 2021, there is an immediate need for a reform agenda that includes four principles of goal, d ‘incentives, transparency and accountability to mitigate the risks of financial crisis.

The privatization of public sector entities is the need of the hour to achieve efficiency, improving the overall performance of industries and enterprises. The government is working to get rid of loss-making entities by privatizing state-owned enterprises for economic growth and development. The slow process must be accelerated. This is the only way forward to avoid the looming financial crisis. The Privatization Commission must be strengthened by recruiting professionals and technocrats in place of the old school bureaucrats.

The writer is an economist.

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