KARACHI, Dec 21: Privatization is a complicated and very complex business. It requires a well thought-out strategy, that sets priorities and schedule for sale of state assets in fast changing investment environment.

The sell-off process becomes more intricate, difficult as well as sensitive when strategic assets are put on the privatization agenda. Its handling requires more sophisticated skills. It is not a simple retail sale. It is a sale of a strategic asset to a strategic investor.

Privatization has to be a part of an overall strategy for investment, employment and economic growth.

The issues involved are many and varied. Should investment be diverted from creation of new productive capacity to sale and purchase of existing running profitable enterprises. Or should losing state enterprises be on the priority sell-off list to turn sick units into earning units by induction of an efficient private sector management?

Barring rare exceptions, the government has sold good assets and has been left with many loss-making units that eat up Rs100 billion annually. This is drain on national exchequer and inflates budget deficits.

No doubt, market has more appetite for viable running businesses and far less for sick units. Here, the Privatization Commission faces a challenge that needs to be met.

Instead of competing for private investment for privatization of profitable units, the government should focus on fresh investment for creating new productive capacities that generate new employment opportunities. The bad assets must be turned into good assets or sold on “as-it-is basis” to reduce losses.

Privatization of strategic assets carries more risks. For example, in normal times, the sale of an oil marketing company (OMC), in the public sector, may not appear to be hazardous. But, if a super power is planning to attack Iraq to seize its oil fields, it only indicates that privatization of PSO, the largest oil company, is not a simple affair. Iraq is the second largest oil producer after Saudi Arabia and is strategically located, sharing common borders with Saudi Arabia, Iran , Jordan and Syria. Pakistan-US relations have been governed by fluctuating fortunes, from multi-layer sanctions to a key US ally in the war on terror. Can US companies be trusted with strategic assets, if Indians cannot be trusted with trade, without resolution of Kashmir dispute.

This is an issue for policymakers to ponder. And to quote financial analysts, “PSO now maintains its market share” despite tough competition from two multinational companies. It is the by far the largest oil marketing company.

In case of a war, will the foreign companies take “risks” to keep the flow of oil supplies, to meet the country’s needs for heavy imports and at what price. There is speculation that the price of oil may jump up to $100 per barrel, given the global corporate culture and the imbalance in demand and supply. Financial analysts say that OMC’s margins have gone up as a result of higher oil prices, closely linked to tensions on a possible US-Iraq conflict.

The bidders for PSO are Kuwait Petroleum Corporation, Caltex Pakistan, Fauji Foundation and Al-Kharfi and Sons, Saudi Arabia.

If the PSO goes to any western oil company, there is a risk of oligopoly emerging in the oil sector, a situation in which few companies dominate the market to sell at prices higher than in a competitive environment. In the US and other European countries, market competition is giving way to oligopoly which also being defended by even scholars. “The industrial structure that fosters productive innovation best is oligopoly, says William Baumol, professor at Princeton University. He presents oligopoly as “the free market innovative machine”, a few firms compete with each other, not primarily by trying to charge lowest prices, which are usually higher than a perfectly competitive market. Instead oligopolies complete by making their products differ slightly from their rivals.”

“If President Musharraf’s assertion that “Pakistan comes first” is applied to privatization, strategic assets should be sold to local entrepreneurs or joint ventures with foreign partners from states with whom Pakistan enjoys stable relationship and has no conflict of interest. Arabs could be considered for such joint ventures.

In principle, all strategic assets must be sold to the domestic private sector and should be retained by the state till such time that it develops the appetite for for such investments. With foreign exchange reserves at $9 billion, there is no need for distress sales.

In case of PSO, the bidding process is pre-mature as the evaluation of the assets is dependent on the recovery of outstanding amounts from Wapda and KESC. PSO has also long-term contracts with IPPs for exclusive furnace oil supply to Hubco and the GoP guarantees the performance. Shell has asked the government to do away with the contracts once the PSO is privatized to ensure open competition for all.

Any prospective buyer would like to know decisions on the issues before making a serious bid. It is perhaps, these issues plus the political situation that prompted the parties, to seek a postponement of the pre-bid meeting scheduled in November.

It is not the business of the government to do business. It’s primary responsibility is to serve as a regulator and facilitator. But privatization does not mean just sale of state assets to highest bidder. For example, banks cannot be sold to the highest bidder, who cannot be trusted with depositors’ money. There is much more to it.