April 7, 2003	Monday	Safar 4, 1424

Mr Abdul Hafeez Shaikh, Advisor to the Prime Minister on Privatization, has reaffirmed the government would go ahead with privatization of major public sector enterprises, as scheduled.

They may be delayed a little because of the war in Iraq but not abandoned because of opposition to privatization from various quarters in the country. A major reason for going ahead with the privatization of major enterprises, like the Habib Bank, the PSO, and the Pakistan Telecommunications company is the insistence of the IMF and the World Bank and other donors that the government should shed these enterprises before they become heavy liabilities like other enterprises. White elephants like Wapda and the KESC provide classic examples. As they continue to ask for more and more financial support from the government.

Financial experts have been arguing and Mr Shaukat Aziz agrees that the government has been losing Rs 100 billion a year on the public sector and now following partial privatization that loss has been reduced to Rs90 billion. So when the going is good, and this is the best moment for privatization as the official finances are pretty strong for the privatization to be undertaken.

And there are three new realities which make not only privatization easy and more rewarding now for the first time,due to internal and external factors. In the past the government wanted to sell the enterprises to foreigners as it needed the foreign exchange to repay the heavy foreign loans or service them. The need to earn foreign exchange seemed to receive higher priority over all else as the dollar kept going up against the rupee and the rupee cost of the foreign loans became too heavy along with the cost of servicing them.

But now the government has mobilised more than 10 billion dollars. And more money is coming in than going out and the falling dollars is easily available in the open market. In fact by building up the over 10 billion dollars foreign exchange reserve the government is losing. Since it bought the dollar at a higher price it has come down to Rs57.70 from over Rs60 to a dollar.

In the earlier years the State Bank of Pakistan had lost heavily through its exchange risk cover to the private sector as the dollar shot up far above the anticipated, and now it has been losing money by building up the reserve in dollars which has lost a part of its value in rupee, while the euro too has been appreciating. The State Bank many now keep a substantial part of the reserve in the Euro as the U.S. economy and the dollar may face serious convulsions.

The second reality is the new bidders for the enterprises to be privatized are coming not so much from the West or the U.S. but from the Middle East, the Gulf in particular. Such investors fear bad or unfavourable treatment if they invested in the West as they had been doing in the past. There is the risk of forfeiture of the investment, too, on political or even religious ground in the manner $1.9 billion of Iraqi deposits have been forfeited by the US government.

The United Bank has been bought by the UAE Shaikhs. Enquiries for several of the banks have been coming from Saudi Arabia. The major US energy company AES Corporation is selling its power production system in Pakistan to a Bahrain company. Many Arab parties are interested in the Habib Bank. And they are happy to employ Pakistanis as top managers. The Gulf Arabs do not want to set up new units here now. They prefer acquiring running companies, banks in particular. May be if this process is successful they will invest on new units, or if they get the right Pakistani partners ready to play straight.

The stock exchanges are doing very well. At 2695, the Karachi Stock Exchange 100 share index is way above the 1200 level or below that as that used to be for long. Companies are declaring dividends, and coming out with bonus shares. Still investors are not coming up with new share flotations. Instead they prefer Transfer Finance Certificates which seem to suit them as well as the big buyers.

In such an environment the people are ready to buy the shares of the companies to be privatized, like Habib Bank, PSO or PTC? But the price demanded by the government should be fair and should not be like Rs30 for a share of PTC and then Rs55 abroad or Rs40 for the shares of Sui Northern after the old share holder had issued to themselves too many bonus shares. The new buyers should not be exploited by the government or the privatization Commission with rosy pictures of the future to come and charged very high prices for their shares. The people who had bought Sui Northern shares at Rs40 had seen those go down to Rs8 and the people who had bought PTC shares at Rs30 and then at Rs55 had seen them go down to Rs17 or even less.

But the people who welcome sale of shares of the companies to be privatized to the general public instead of a strategic partner first do not realise one grave danger. That system worked very well in Britain and the West as a whole. But what happens if a Sikander Jatoi, or a Tawakkal or the Schon group buys off the shares from the public and become the strategic investor and controls the privatized unit as they controlled Bankers’ Equity? It is hence important that the small shareholders should know first who is going to be the strategic or majority shareholder and how safe is their capital with him. The fiasco of the wrong people taking hold of the units to be privatized and then stripping the companies of their assets, as was done in the case of Zeal Pak Cement, should not take place again.

The quality of the strategic partner or majority owner and his track record are as important as the money he offers to buy a unit to be privatized, particularly when they are very large units. Otherwise we may have more of failed privatized units and increasing opposition to further privatization. Instead of the small share holder getting share of the national cake, what little he has on his plate should not be seized again. The small saver or investor will want to buy shares now. The interest on national savings scheme is being reduced consistently. The banks are reducing their interest rates steadily. Banks are to give only 5.5 per cent interest on fixed deposits.

In such an environment the savers would want to buy shares of companies, NIT units etc. to get higher incomes to sustain themselves. And the privatized units who sell their shares to them should be able to help them in real national interest. Having sold their shares the government should be watchful of the interests of small buyers of their shares and be truly helpful to them, unlike in the past.

Those who oppose privatization should realise that if the British government with its efficient management and administrative skills could not make a success of the various nationalised units the Pakistan government with its reputation for inefficiency and gross corruption cannot make a success of the nationalised enterprises.

The senior bureaucrats, of course, would oppose privatization. Usually they come to head such organizations after they retire and they do not want to lose that lucrative opportunity. But the people should not fall into their trap.

After 30 years of nationalization it is time to take a firm decision and move fast. The army, too, has an interest in status quo as they are heading many of the public sector units and staffing them down the line. Look at the tragic state of Pakistan Engineering Company which was once the flourishing Batala Engineering Company. It has shrunk hopelessly and has been a heavily losing company.

If many of the units sold through privatization earlier got small net sales proceeds, it was because the companies had large liabilities. They owed a great deal of money to the government and the banks. They had even made use of the provided funds and other savings of the staff. And they had not paid taxes for long. So the sale proceeds of such units were very small, after a part of that was used for giving golden hand shake.

In addition the government had to pump in a great deal of money to the UBL to improve its finances before its sale. The same has been done with the KESC. And the country cannot continue to spend Rs100 billion on such units instead of getting Rs100 billion out of them as profits. And these units need further investment for expansion and employing more persons. The new owners had done that with the Muslim Commercial Bank.—S.A