September 11, 2006	Monday	Sha'aban 17, 1427

LIKE other developing countries, Pakistan has opted for privatisation to step up its economic growth. Privatisation has also received impetus from poor performance of state-owned enterprises (SOEs).

In the early 1970s, Pakistan had relied on the public sector to operate virtually all infrastructure and financial services and many industrial units. But the experiment resulted in inappropriate and costly investments, mismanagement, overstaffing, poor quality products, high debts and financial losses. The profits were well below their potential. These enterprises were mandated to work for socio-economic objectives and not on commercial considerations.

During the 1950s and the 1960s, public sector dominated the nascent private sector, especially with its investments in the long-term development projects and non-traditional activities.

In the 1970s, a rapid rate of public sector expansion and nationalisation of a large number of private sector units were observed. But the outcome fell short of expectations.

The Privatisation Commission (PC) was created on January 22. 1991 In its first phase (1992-1994), sales were limited to industrial sector only. Later it was expanded to include, transport, telecommunication, banking, insurance as well as energy sector.

According to the Commission’s annual report 2005-06), from 1991 to June 2003, it had completed 132 transactions for Rs101.027 billion. The privatisation proceeds in 2004-05 amounted to Rs43 billion and in the following year it went up to Rs218 billion. To date, the government had completed or approved 160 transactions at gross sales of Rs395.24 billion.

The public enterprises listed for privatization are; (a) Pakistan State Oil, (b) Sui Northern Gas Company, (c) Pakistan Petroleum Limited (d) Karachi Shipyard, (e) National Construction Company, (f) Printing Corporation of Pakistan, (g) Peco land, (h) NIT, (i) Oil and Gas Development Corporation Limited and (j) power distribution units of Jamshoro and Faisalabad.

The foreign direct investment (FDI) and the privatization proceeds doubled from $1.524 billion in 2004-2005 to over $3.5 billion per annum in 2005-2006.

But the privatisation has not been an unmixed blessing. Its main objective is to sell off non-profitable units to reduce fiscal deficits. If the objective is to finance current account deficits which has swung from $1.8 billion surplus in FY-2003-04 to an estimated deficit of $5.7 billion in 2005-06, the foreign debt should have gone down. The foreign debt is up by $2.3 billion to $36.6 billion in seven years. The financing of deficits from the privatisation proceeds has led to sale of profitable state enterprises like Kot Addu Power.

A similar senseless transaction included the sale of a very profitable organization like Pak-Saudi Fertilizers to Fauji Foundation. This is no privatization, to say the least.

The Asian Development Bank has conducted a thorough study of the first phase of privatisation whose findings are summed up in the following table:

The ADB findings clearly show the poor performance of the privatised units. Dismal results of privatisation are visible in the form of closure of many profitable units like (1) Nowshera Chemicals (2) Pak China Fertilizer (3) Karachi Pipe Mills (5) Naya Daur Motors (6) Dandot Cement (7) Zeal Pak Cement (8) National Cement (9) General Refractories (10) Pak PVC (11) Swat Elutriation (12) Nowshera PVC and many more.

This depressed the industrial growth rate and GDP declined to nearly four from six per cent in the 1980’s. There was also lack of transparency during the transactions and the buyers’ lack of interest in running the units. They were interested only in stripping the assets. Another negative impact was the formation of cement cartels to exploit the consumers.

A glance at the second phase of privatization (1994 to date) reveals that the most prominent transactions were the sale of GOP “working interest” in six oil concessions. The decision was taken after oil discovery in order to ensure that oil is drilled in the national as well as private interest of the company.

We can analyse the sale of the “working interest “ as a golden opportunity to foreign investors to use the natural resources in their own interest, not for Pakistan. Organisations like OGDC and PSO are profitable units, there is no need to privatise them. The net sales of OGDCL went up to Rs73.710 billion in 2004-05 from Rs51.326 billion in 2003-04, and its profit after tax increased to Rs32.968 billion in 2004-05 from Rs22.414 billion a year earlier.

PSO sales during fiscal year 2005 stood at Rs254 billion. The company earned highest-ever profit before tax of Rs9.2 billion, up by 47 per cent. Currently, PSO, NITU, NPCC, PPL, OGDCL, Jamshoro Power Company and Faisalabad Electric Supply are in the final stages of privatisation. For the privatisation of SNGPL and SSGC, 34 SoQs have been received for pre-qualification.

First, the sale of profitable units have to be consistent and flawless. Gross irregularities should not occur and transparency ensured. Privatisation should be restricted and handled with care as China did.

China stopped new investment in public sector and did not sell its state units to foreigners. The public sector now accounts for only 30 per cent as compared to 90 per cent 30 years ago. Perhaps, Pakistan can also benefit from that experience.