December 25, 2006	Monday	Zilhaj 03, 1427

PAKISTAN will receive a record $5 billion in Foreign Direct Investment (FDI) in the current financial year, forecasts Adviser to the prime minister on finance Dr Salman Shah.

Privatisation will contribute a record $3 billion because of the delay caused in the execution of mega units’ transactions by the critical judgement of the Supreme Court, halting hasty sell-off of Pakistan Steel. And the rest $2 billion will come from other sales.

The government wants to raise $15 billion in five years through stepped up privatisation at the rate of $2 to $3 billion each year.

Because of the large projects to be privatised soon including PSO, Pakistan Petroleum, Sui Southern Gas Company and Sui Northern and NIT, and possibly State Life, the government could raise the desired amount in five years.

The privatisation proceeds will be used to offset the large deficit in external trade, expected to cross $12 billion. But the government is committed to use these proceeds in reducing the external debt and poverty reduction.

Following recent reports that the privatisation proceeds were being used to meet the current expenditure of the government, it was officially clarified that 90 per cent of the sale proceeds were used for debt relief and 10 per cent for poverty reduction.

But Dr Shah has again said the $5 billion from the FDI, $4.5 billion home remittances and the financial assistance from donor agencies will keep the fiscal and trade deficit within reasonable levels in the current fiscal.

He said the external debt ratio has come down to 53 per cent of the GDP.

The sale proceeds of privatisation will bring down the external debt further. When the large assets are being liquidated, the liabilities should also come down to that extent, instead of the current account external deficit met by the privatisation proceeds.

The current budget already provides for a deficit of 4.2 per cent of GDP which is to be met through domestic borrowing or printing of currency notes. If the deficit has become larger, the government would resort to temporary borrowing or reduce other expenditures and divert the savings to meet new needs.

The Privatisation Commission has decided to put on sale the heavy electrical complex, while retaining the heavy engineering complex, modernise and expand it to play a central role in the engineering sector. A pre-qualification committee has been constituted to sell the heavy electrical complex built in the 1970s with great hope of developing the electronic industry.

The government has become wiser in the diverse areas of privatisation following the Supreme Court judgment which overturned the sale of Pakistan Steel to a Saudi Arab buyer. The most important change that has come about is units will not be sold on the basis of the value of the assets, but on the basis of future cash flow.

We have been promised absolute transparency in all such transactions and the balance sheet of the unit will be published full relevant details before the sale of a project.

A price evaluation unit for each project will be setup long before its sale to determine its future cash flow which is a modern method of privatisation instead of the old sale of the units on the basis of the value of the depleted assets.

And a special purpose vehicle (SPV) will be set up for the specific purpose of buying each unit put on sale. The sale will be not only of the whole units but also of the shares of state owned companies.

New rules will be framed for the privatisation now in the light of modern practices in place of the old rules which will ensure greater transparency.

The question which immediately arises is why such new rules and latest practices for privatisation were not introduced by the government earlier in spite of its varied foreign experts and consultants, why did it wait for the Supreme Court to abort the sale of Pakistan Steel and disapprove many of its practices.

The projects to be sold now like the PSO, PPL, the twin gas companies and NIT are very large and very resourceful. It is not clear now whether the government intends to sell the State Life. Anyway the country should get the best out of such sale proceeds which should be used very well.

Earlier when the privatisation was initiated, major western companies were expected to come in with their latest technology and modern business practices. Most of them have not come in and many who competed did not offer the highest price. But the Arabs competed spiritedly and offered the best prices in many cases.

Later when they realised they had agreed to higher prices or they had agreed to the prices tactically, they began to bargain for reduction in prices, as in the case of PTCL and agreed to pay the purchase price in instalments.

In the case of KESC,the first Saudi Arab party which won the bid resigned from its commitment and the company had to be offered to the second highest bidder who is facing problems. In a few cases the bidders were enabled to raise local loans and pay their dues. They were also enabled to pay the dues out of the profits they made.

The Arab buyers are finding making payments in instalments or by raising local loans or out of the profits of the company when it will be easy instead of having to make bulk payments in one go so,more and more of the units privatised will go into Arab hands particularly of the UAE. The country may not gain much by way of new technology.

Anyway the Overseas Investors Chamber will become more powerful than it is and the Arabs may have their own chamber.

How can we sustain an industrial policy under which we have an SRO which prescribes an import duty from five to 20 per cent for acrylic co-poly used in the textile making while the finished product comes in duty free.

So a Chinese company which set up a unit with 200 Pakistani workers has been hit hard and has been running from pillar to post to seek relief. It has approached the investment board and the ministry of industries and other agencies but they are of no help to the company.

How can we have such an irrational policy if we are serious about industrialisation? But there are many such anomalies in the industrial policy which we have been too slow to remove. If what is so obvious cannot be rectified and even a Chinese investor cannot be helped, how can we hope to achieve rapid industrialisation of the country?