PAKISTAN’S PRIVATIZATION PROGRAM

(Presented at the Advanced Executive Management Program on Privatization
at Washington D.C., USA, June 29-July 12, 1991)

PREAMBLE:

In over a hundred countries around the world, the policy makers, capitalists, pseudo-capitalists, and non-capitalists are all talking about PRIVATIZATION. This has become the buzzword of the 1990’s. Moving in a hurried fashion, the governments are reversing the trend under which the state encroached brutally on industries and grabbed them up voraciously. Today, privatization is the top item on their economic agenda. It has become not only a “fashionable” policy but also imperative in the messed up economics of countless countries.

START OF PROGRAM:

Privatization has also come to Pakistan. Prime Minister, Muhammad Nawaz Sharif, a scion of an industrialized family, whose government came into power in November 1990, has religiously adopted the policy of privatization. The bold venture undertaken by the Prime Minister is commendable if the background is examined pragmatically. The nationalization policy of the government of Zulfiquar Ali Bhutto alongwith the already monopolistic stranglehold of the public sector corporations culminated into a scenario of a systematic abuse of the once well managed corporations. This resulted in colossal monetary losses, infiltration of a heavy labor force in these companies, non-chalant emphasis on cost reduction, efficiency increase, and quality improvement, and above all, highly neglected managerial, administrative, and financial controls, which totally negated the very essence of public control over private enterprise. In Pakistan, these corporations followed the dictates of whichever government was in power and in dong so, they operationally turned into the proverbial white elephants.

The public sector corporations in Pakistan hold assets of more than |Rs 700 billion (US$ 29 billion) that is equal to Pakistan’s GDP. These public sector corporations have a share of 40% of the total fixed investment in the country and contribute 6.7% of the economy’s value addition. However, the post-tax return on equity has been around the 8% figure, much lower than the 20% in the private sector. A large percentage of Pakistan’s budget deficit, which is currently 7.4% of the GDP, is financed thru the issuance of government debt to the non-bank public at an interest rate of upto 15%. If the government is borrowing at 15% and the public sector corporations are only getting an 8% return on equity, no wonder Pakistan’s budgetary situation is in hot soup. Hence the logical solution: Privatization.

Furthermore, Pakistan is heavily burdened with external debt and its servicing. The total estimated commitments of foreign loans plus actual received by Pakistan aggregate US$ 43.3 billion. Of this, US$ 32.1 billion has been disbursed. Pakistan has, today, a liability of over US$ 16 billion. This envisages an annual repayment of over US$ 1.4 billion. On the domestic front, public debt is around Rs. 900 billion (US$ 37 billion). The domestic debt servicing will consume 53% of the estimated revenue receipts of Rs. 153 billion (US$ 6.25 billion) for 1991-92. The burden would decrease if government removes a large chunk of public sector corporations thru: Privatization.

The significant factors that generally contributed towards the lack of the needed performances by public sector companies can best be summarized as follows:

• The prevailing political instability which resulted in inconsistency and a myopic attitude towards formulation of long term strategies and directions.
• A vigorous dependence on adhocism.
• An insolent corporation syndrome.
• A conspiratorial vacuum in the process of accountability.
• An obsession towards the privilege of power, both by bureaucrats and politicians.
• A perpetual adherence to shifting the blame coupled with lack of concern by management.
• An on-going battle between professional management and bureaucratic controllers resulting in frustration and lack of operational efficiency.
• A lackadaisical approach towards initiatives and innovation.
• An impassive disregard towards improving the abysmally low productivity.
An ardent belief on personal right and benefits rather than emphasis on duties and obligations.

All these factors called for creating the economic environment for deliverance from this malaise that is possible thru: Privatization.

WHAT HAS BEEN DONE SO FAR:

The Prime Minister, while making the historic announcement of Privatization told the nation that “We can no longer afford to live like ostriches. The job of the government is to formulate policies. T is not its job to run industry, commerce, and hotels”. The privatization program envisaged the handing over of 115 government-owned enterprises. In the last week of November 1990, the government appointed Senator Lt. Gen. Saeed Qadir to head the Privatization Commission. He came across a study done by foreign consultants that had recommended disinvestment of seven companies. By December 03, 1990, General Qadir had his proposals on the Prime Minister’s desk and by early 1991, Muslim Commercial Bank Ltd., on of the five nationalized commercial banks was handed over to a consortium of industrialists.

The government has a list of companies that are to be handed over to the private sector. It includes 14 in Chemicals and Ceramics, 1 in Steel, 7 in Fertilizers, 12 in the Automobile sector, 11 in Engineering, 16 Roti Plants (bread-making), 14 in Cement, 3 in Energy, 24 in Edible Oil, and 8 in Miscellaneous. There are, of course, the Banks, Development Finance Institutions, the Communications sector, and Newspapers, etc. that are also on the “Shedding List”.

As mentioned above, the government has already handed over Muslim Commercial Bank to the private sector. It has also given up a Roti plant, Balochistan Wheels, Al-Ghazi Tractors, United Industries Limited, etc. Bids have been invited for Allied Bank Ltd as well as other industries. The policy makers recently held a briefing session for over 70 representatives of companies interested in buying the Pakistan Telecommunication Corporation. The PTC is a 40 year old behemoth having 1.18 million telephones, 4300 long distance public call offices, 5000 telex connections, 2 International Gateway Exchanges with 1900 circuits, and substantial holding in two manufacturing facilities. At present, there is a backlog of 750,000 telephone applications, plus there is an imperative need to upgrade the present archaic facilities.

The privatization of MCB got off to a bumpy start. The initial time period given was too short and full of ambiguities. Nevertheless, industrialists responded with enthusiasm. The SITE ASSOCIATION OF INDUSTRY, the largest industrial association in Pakistan representing over 1800 industries, considering the previously announced but unimplemented privatization policy of former Prime Minister Benazir Bhutto and the carefree attitude of the caretaker Prime Minister Ghulam Mustafa Jatoi, came out with a proposal that the bank should be handed over to a consortium rather than one family, the price should not be less than Rs 55 instead of the reserve price of Rs 26 and, above all, the bank MUST be privatized at any cost. This stance paid off and the actual result proved right the Association's contention.

The SITE Association was also apprehensive that the bureaucracy would magnify the anti-privatization posture of the labor unions and certain opposition parties, and thwart Premier Sharif's program. The Association publicly warned that "hidden hands are out to destroy the privatization program." The Association also called for a rapid announcement of more companies to be privatized. Its fears were proven correct when efforts were made to sabotage the MCB deal. However, the planned transfer went on smoothly.

In the case of Allied Bank, its employees have proposed an ESOP (Employees Stock Ownership Plan) for ABL. This idea was mooted by one of its Directors and has caught on. Preliminary reports show that 7500 ABL employees have endorsed this idea and have set up the Allied Management Group to put into operation their bid for ABL. They have also pledged to freeze their wages for two years. They have also shown their desire to buy out all 100% shares of ABL. In this case too, the SITE Association welcomed the move by saying in its press release that if the bank is handed over to the employees, "the nation will witness how successfully the bank can be managed by employee-owners who will not only raise productivity and efficiency, but will also keep the bank free from bureaucratic and political influence." This approach will also initiate a broad-based ownership and take into account any fear of retrenchment of "surplus labor", the major hindrance in rapid privatization.

Naturally, there will be opponents of privatization. Take for example the pronouncements of the Leader of the Opposition, Benazir Bhutto. While in office as Prime Minister, she talked a lot about privatization and, in fact, Muslim Commercial Bank Ltd was first put on sale during her tenure. Unfortunately, she is doing a full reversal lately. She has bitterly criticized the privatization program of the Sharif government claiming that it was designed to benefit the rich industrialists only with little thought given to the consequent usurpation of the rights of labor. This one-dimensional view is not only ill advised and highly irregular, but the effects of this tirade could hurt the privatization process by giving workers unnecessary fuel for adopting a provocative posture.

NEXT STEPS PRESENTLY PLANNED:

The government has also modified its stand and has advocated atleast 10% ownership by the workers/employees. However, the workers of public sector corporations have rejected this offer. The prevailing concept that once the industries are privatized there will be a huge unemployed workforce sounds too hollow to be taken at face value. The recent example of MCB also belies this point. The management has not laid off any worker. According to Mr. Hussein Lawai, President of MCB, the first thing he did on taking over was to instill confidence in the employees. Being a professional banker and a model of success, he stressed productivity and controlled any abuse of privileges. Promotions are being made on merit and not on recommendations or sycophancy. The present union leadership of the public sector corporations avowedly practices the notion that one should have the cake and eat it too. The unions, in collusion with the incompetent management, have been largely responsible for the pathetic environment in the public sector. The government is aware of this and has therefore left the question of final decision on "surplus labor" on the prospective buyers of these corporations.

On the other hand, the government has not clearly defined the privatization process. The Privatization Commission is a recommendatory body. It invites bids, evaluates them, suggests the sale price, the methodology for disposal, and works closely with the Prime Minister. There is no well-defined legal framework. No “Privatization Law” has been enacted to detail the procedures. There has been no public announcement on criteria for pre-qualification, no publicity on the evaluation of corporations by recognized auditors. No scientific process has been conceived. This is a significant bottleneck. Thee has been no report about the ate of “sick” industries and whether the government will turn off the financial tap and let them whither away or whether the government will dispose them off at “bargain” prices.

There has also been no clear-cut directive by the government with regard to the right of previous owners. A number of industries who lost their enterprises to nationalization have formed an Affectees Group Their main demand is the restoration of their management control over these enterprises. Their contention is that “selling units to the highest bidder to balance the budget or meet the short-term financial needs of the government will mean buying short-term gain with the long-term national interests. It will mean pitting the original owners against moneyed groups who may be interested in the same.” This group has not been able to convince the Prime Minister to treat their taken-over industries as a special category in the privatization process and give them first refusal rights. The issue gained momentum when the original owners of Muslim Commercial Bank were sidelined and a group of eight upstart industrialists was preferred, thus creating much bitterness.

OBJECTIVES PURSUED:

The government has initiated a process where, as a first step, corporations like Water and Power Development Authority (WAPDA), Oil and Gas Development Corporation (OGDC), Pakistan Telecommunication Corporation (PTCL), Civil Aviation Authority (CAA), etc, are being encouraged to resort to more and more self-financing. Secondly, a very important step has been taken to open up the financial sector for the private enterprises. Thirdly, 22 new shipping companies have been given licenses to operate in the private sector. Fourthly, the Aga Khan sponsored company has been allowed to directly compete with the national flag carrier, PIA.

The objective of the government is to spur economic growth thru privatization. The burden of huge losses on the national exchequer has to end. The government is striving to mobilize resources for implementing its varied programs to bring about a significant improvement in the quality of life of its citizens. Privatization will usher in a wide spread network of social work programs like the "Tameer-e-Watan" ("Building the Nation") program which is a major component of the present government's election manifesto. The financial pressure due to the budgetary constraints can be reduced thru infusion of additional resources from the sale of these corporations. There are also the conditionalities of IMF to deregulate, disinvest, and denationalize the economy on broad-based private entrepreneurship.

OVERALL RESULTS:

The privatization policy of Prime Minister Nawaz Sharif has been widely acclaimed by the industrial community and economic experts. The transfer of MCB and a couple of other corporations displayed the seriousness of the program. The opening up of the communications and financial sector to private enterprise has renewed confidence in the industrial and business community. The bullish trend in the Karachi Stock Exchange is a significant sign of this confidence.

There is every possibility that the government advertisement companies calling for bids for most of the public sector corporations will elicit a positive response from prospective buyers. It is highly probable that in the next few months there will be more transfers to the private sector.

The problems presently encountered were initial hostile reaction by the worker force. This was evident in the MCB case. The leaders of the unions of various banks have always maintained a high profile and have been vociferous in their objections to privatization. However, pragmatic thinking on the part of government, the members of the unions, and private sector resulted in a conducive working atmosphere at MCB. This could be the harbinger for future labor-related imbroglios. The government also had to settle certain legal wrangles that would have put a monkey-wrench in the privatization process.

It is now to be seen how much liberal the government is with "glasnost" in coming out with detailed information on units to be privatized. There has to be a free flow of data thru the press, radio, and TV so that the citizens of Pakistan can comprehend the disaster wrought upon the economy of Pakistan by those who have criminally abused the assets of the nation. This may create a backlash by workers and bureaucrats. However, a "White Paper" on this must be released and made public. It is hoped that it may then create an awareness in the citizens that, after all said and done, privatization is one efficient panacea for the economic ills faced by Pakistan today.

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