The newly-elected government has brought about welcome changes in the privatization policy being pursued earlier. The first change is in the form and second in the substance. The latter is obviously more important than the former.

The Cabinet Committee on the Privatization (CCOP) has been expanded. Previously it had four nominated ministers and a nominated chairman. Now it has five elected Ministers plus Adviser to the Prime Minister on investment and privatization. In addition, 10 secretaries of the economic ministries and the chairman, Security Exchange Commission, have been made members by designation. It has almost the same composition as the ECCC (Economic Coordination Committee of the Cabinet). It would have been preferable if the Prime Minister himself was the chairman of this important committee. However, one can expect that this committee will not proceed to privatize as a theology dictated by the IMF but process the cases on the basis of national interest only. They would also take into account the appropriate timing and sequence of privatization.

The more important change has been announced by the Adviser on 8th March 2003. He indicated a fundamental shift in privatization strategy. Instead of selling big units to so called strategic investors, the big SOEs (state-owned enterprises) will be privatized through divestiture of its shares through the stock exchange.He correctly pointed out that this situation would help in deepening and broadening the base of the stock market and facilitate the participation of the common man in privatization process.

Privatization through gradual and broad based offering of shares of SOEs is the most preferred form of disinvestment. The shares are off-loaded in instalments and no single party can buy more than a specified number. Moreover they are non-transferable for first three years in order to avoid benami purchases. Slow sale of small lots of shares does not affect its existing stock price but helps to deepen and broaden the base of the stock market.

The ideal form of privatization was evolved by Mrs. Thatcher when she privatized many of the industries which had been nationalized by the Labour government after the Second World War. She called this form of privatization, “peoples capitalism” and offered the shares of profitable public enterprises at the book value and all those who got these shares made a small profit. These shares were widely dispersed and helped Mrs. Thatcher to win the next election.

In this process of privatization there is no sudden change of ownership and management of big SOEs but a gradual dilution of government shareholding. This dilution did not result in any loss of profits or managerial difficulties. With the share-holders’ equity increasing, their representation on the board of directors also increased and the management was gradually de-bureaucratized. There was sunshine on all fronts.

The Adviser on Privatization also stated that the privatization of the PSO will go ahead. One does not appreciate as to why the PSO has been excluded from this revised policy. Wapda and the KESC owe over Rs10 billion to the PSO and no one will buy the PSO unless these credits are cleared. One hopes that unlike the UBL, the Government will not pour tax payers’ money into PSO so that it can be sold to foreign investor who may be a mask for India or Israel and paralyze Pakistan’s oil movement during emergency.

Now that the government has changed its privatization strategy it should also change its policy with regard to appointment of CEO of SOEs. At present there is no procedure for selection of SOEs. The previous petroleum minister selected his superannuated cronies and one of them died due to rigours of office. India, whose institutional frame-work is far better than Pakistan’s and has far more SOEs has a well-defined procedure of selection of SOEs.

There is a screening committee consisting of renowned bureaucrats who have spines, public representatives and subject matter specialist who interview the candidates and present a panel of three to the Prime Minister who selects. The Indian Prime Minister cannot and will not appoint a CEO who has not been recommended by an impartial screening committee.

Pakistan should have similar system and for appointing CEO of the Habib Bank and the National Bank one could have a committee of people like of Mr. A. G.N. Kazi, Mr. Hanafi,etc. Moreover the CEOs must have a fixed tenure. It has been calculated that between 1974 and 1990, each of the five nationalized banks had ten CEOs with an average term of 1.6 years. One CEO of a nationalized bank lasted only one day as he was asked to extend a political loan which he refused.

The PSO, the OGDC, the PTCL and the Habib Bank are mammoth SOEs whose combined profit during 2001-02 was Rs44 billion. These organizations as well as other SOEs deserve a highly competent and professional CEO. The logical concomitant of new privatization strategy would be to institutionalize the procedure for selecting the CEOs.

Similarly the new strategy should propel changes in the composition of the board of directors. As the government’s shareholding gets diluted the shareholders must be allowed more representation on the board and a stage should come when the CEO should be selected with the approval of the board.

In Germany, labour unions are allowed 25 per cent representation on private and public enterprises. Experience has shown that this representation of workers on the board has led to better labour relations and avoidance of strikes and waste of national output. In Pakistan’s SOEs the government should also appoint two directors, one representing the low-paid workers and the second the senior staff. The dedication and commitment of the entire workforce will improve as at present the workforce feels totally isolated from the management of non-professional cronies.

Dr. Nawab Haider naqvi and Dr. A.R. Kamal, the past and present Directors of the Pakistan Institute of Development Economics (PIDE), in a study on the Privatization of SOEs in Pakistan reached the conclusion that there is very little difference between the efficiency of public and private enterprises in the same industrial field. The reason is that the management of both is not professional.

In the private sector the CEOs are appointed on family grid and in the SOEs they are appointed on the political grid. Both are equally efficient or inefficient and studies have shown that only 20 per cent units improved in efficiency after privatization and the remaining 80 per cent were either closed or operating worse than before.

The efficiency of enterprise improves not with ownership but with professional management and committed workforce. If we appoint the CEOs on the basis of competence and not connections and give staff and workers representation on the board, the SOEs can out-perform the private sector, which is managed by cousins and uncles.