In Pakistan, privatisation is part of the overall economic programme that embraces deregulation and liberalisation of the economy with a view to achieving higher growth rates through improved efficiency and better services at the most competitive prices to the consumers. It is also a response to the need of the State to liberate itself from its debt burdern and to minimise persistent budgetary support to the state- owned enterprises. This article examines the policy and programme of the privatisation process as well as its salient features and strategies, listing its achievements and describing future privatisation plans. The principles of privatisation policy, its aims and purposes, as well as its modes and outlook are among the topics examined in the latter part of the article. 1. INTRODUCTION The Government of Pakistan has launched a series of economic reforms so as to create a liberal economic atmosphere with a view to achieving higher growth rates. The main thrust of these reforms revolves around privatisation, deregulation, realisation of the potential of the private sector and foreign investment. Recognising that there is now a world-wide consensus in favour of an increased role for the private sector to work as the engine for growth, employment and income, the Government is conscious of the need to make privatisation in Pakistan both attractive and rewarding for potential investors from overseas and within the country as global competition to attract investment becomes more intense with each passing day. Incentives to foreign investors include: relaxation of foreign exchange controls, abolition of ceiling on payments of royalties and technical fee and removal of work permit restrictions on expatriate managers. Privatisation is now mainstream. In previous decades, industries were nationalised in many countries on the grounds of achieving a balance between public service and commercial efficiency. Public sector ownership was seen as the best way of preventing concentration of ownership and such other practices that were perceived to act against public interest. Unfortunately, for various reasons, inefficiency started creeping in the performance of the public sector enterprises which got manifested in the form of declining productivity, overstaffing and reduced profitability as well as losses. Recently, by contrast, it has been realised around the world that privatisation can create market discipline without running the risk of concentrating ownership. Through the use of newly developed capital market methodologies, state-owned enterprises can also be sold to small investors into the capital markets and promote equity, social justice and national unity. The success of privatisation, the world over, can well be guaged from the fact that more than 8000 state-owned enterprises have been privatised in over 80 countries in the past 12 years. In many countries the benefits of privatisation have trickled down to consumers, workers, investors as well as the Government. Large investments were subsequently made by new owners to expand and diversify production. As a result, domestic welfare improved. This we intend to replicate in Pakistan. In Pakistan too, the state-owned enterprises urgently required funds for modernisation and expansion which could only be raised through domestic and foreign borrowings, grants and taxation measures. It was considered prudent to inject the cash through private investment rather than adopting such measures which carried serious repercussions, economic as well as political. This view triggered the process of privatisation of state-owned enterprises. Conceptually, privatisation attracts suitable investors who not only provide equity, but in certain cases also bring in their technically qualified expert management team to restructure and run operations in a more efficient way. In addition, privatisation has an immediate impact on the Government’s borrowing requirements; it releases scarce resources for utilisation on alternate urgent requirements, such as building the infrastructure of the country, and helps in reducing public debt, etc. Serious efforts at privatisation in Pakistan began in 1988 when the privatisation process was initiated by floating the shares of Pakistan International Airlines Corporation. Also, a leading consultant firm was appointed to give its recommendations on the privatisation process. A Privatisation Commission was established on 22nd January, 1991 to implement the policy of the Government then in office. Subsequently, a brochure was published in November, 1991 outlining the objectives and implementation policy of the privatisation programme. Many organisational changes took place from time to time so that by the end of 1993 there was one Commission to deal with the privatisation of industrial units, banks and financial institutions, another for privatisation of the power sector and separate committees to look after the privatisation of telecommunications, transport and shipping companies. All these activities were subsequently amalgamated into the Privatisation Commission which was reconstituted on 25th November, 1993. The Government has also constituted a special Cabinet Sub-Committee on Privatisation to provide a mechanism at the highest policy making level for a continuous and close co-ordination between different ministries of the Federal Government. The policy for privatisation has been laid down for the benefit of prospective buyers both domestic as well as foreign. The Privatisation Commission will separately announce, from time to time, specific details of the enterprises to be privatised, including the procedures and timetables. 2. STRATEGY FOR AND PRIN OF PRIVATISATION POLICY In each category of industry or service being offered for privatisation, features specific to each of them, require separate approach and attention. Certain factors are, however, common to all categories. The Privatisation policy of the Government of Pakistan is based on the following principles: • Privatisation will be conducted for the benefit of all, not for the privilege of a few; • Privatisation should make our industries and services more efficient and competitive within Pakistan and overseas; • Privatisation process should be transparent and equitable; • In appropriate cases, there may be a process of prequalification of bidders. Based on the above principles, the Privatisation Commission has developed the following broad strategy for Privatisation: (1) For industrial units, it undertakes an evaluation of the assets through professional valuators, advertises for open bidding to be undertaken on a given date, and sells the entire share holding of the public sector entity in such enterprises to the private sector investors. The payment of purchase price is required to be made in instalments: 40% at the time of transfer of management and the balance 60%. which is secured by a bank in lump sum a 5% discount; (2) For financial institutions, in the first stage bids are called from amongst leading investment bankers and ad The ad is sought to be appointed from amongst internationally acclaimed investment banks, with proven experience in the field of privatisation. The Athisor is required to: (a) Evaluate the assets and liabilities of the entity sought to be privatised; (b) Conduct legal, financial and technical due diligence and prepare an information memorandum: (c) Ad on the best means of achieving the highest value for such assets; (d) Identify potential investors, organise and conduct road shows, conduct the bidding process, advise on the acceptability of the bids, and negotiate the transfer agreements. A similar route as indicated above is being followed for utilities as well. Whenever required partial disinvestment of shares is done through the stock exchanges. 3. AIMS AND PURPOSES OF PRiVATISATION POLICY Across the world governments privatise state-owned industries and service organisations for the following principal reasons: To improve efficiency: Without the protection afforded by the State, industrial units are obliged to become competitive at home and overseas by raising their technical standards and refining management practices. To generate revenue: By eliminating large subsidies paid by the public exchequer to maintain state-owned enterprises and by sale of shares, funds raised from these two sources can then be utilised for the direct development needs of the nation. To develop capital markets: By stimulating the flow of investment both within the country and from overseas sources in Pakistani industries and services, privatisation helps generate savings and capital formation, thus strengthening the capital markets that are so vital for economic growth. To broaden ownership base: By offering shares through the stock exchanges wherever possible, and through subscription offers, the public at large is able to take a personal share in industrial ownership and investment so that industrial growth becomes truly participative, giving people from different income groups the opportunity to invest. The salient features of the privatisation programme in Pakistan are not different from these general aims. The Government’s programme for transfer of the ownership of public assets is unambiguously predicated on the principle of reducing the State’s direct participation in commercial activities without sacrifice of the social good and other adverse effects of totally unregulated private enterprise. It will always remain the overall responsibility of the Government to ensure equity and economic justice. This reinforces the need for regulation in strategic areas and the design of appropriate policies in order to ensure that the functioning of the economy is not distorted and that benefits are distributed in a socially equitable manner. Nevertheless, the Government is endeavouring to divest as much of its enterprises as is practical. It will confine its ownership and management to those assets that are by definition in the strategic interest of the State or those that the private sector is unable to own or manage. Thus the private sector will play a leading role in the economic development of the country. The Government is encouraging and supporting economic development through an active partnership between the private sector and a drastically reduced public sector. Such an arrangement envisages government participation with private enterprises, mainly in the promotion of infrastructural development and, in some cases, of strategic industries as well. On the basis of the above-mentioned approach, the broad features of the privatisation policy are as delineated below: • Privatisation, which includes franchising out of goods and services, is a feature of the overall economic programme that embraces deregulation and liberalisation of the economy. In this regard its scope is large, including all public assets that can be transferred to or managed by the private sector, both domestic and foreign. Furthermore, it is a comprehensive policy that recognises the need for extensive regulation. broad-based legislative support and careful planning; • The programme of privatisation is flexible and not unduly rigid. It is being organised in such a manner that adjustments are made and necessary changes accommodated as privatisation proceeds, in order to ensure successful conclusion of divestiture transactions of public enterprises: • The privatisation policy is an important feature of the economic liberalisation agenda that will lead to effective management of domestic industry, greater domestic investment and economic growth; • The programme is designed to enable the State to liberate itself from micro- management of individual enterprises and to reduce the need for persistent budgetary support to the public enterprises resulting from their continuing losses; • The policy envisages the creation of a mechanism for the reduction of debts so that our children inherit an industrialised, not a bankrupt, nation; • An important aim of the privatisation process is the generation of hard currency transfers that provide balance of payments relief, improve foreign exchange reserves and enable retirement of foreign debt The aim is also to generate funds from overseas Pakistanis and foreign investors by inducing them to invest in public enterprises proposed to be ‘divested; • During the process of privatisation, the Government has ensured that significant improvements are brought about both in operational efficiency of the enterprises and their programmes for expansion and creation of additional capacities, especially in the case of utilities, so that they can keep up with the growing demand, improve the quality of service, and keep pace with developing technologies: • An effort is being made to harness the resources of the domestic private sector, foreign entrepreneurs. as well as international financial intermediaries to support the privatisation process. Effort is also being made to draw upon the experience, expertise and financial support of the multilateral agencies: • Safeguards are being introduced to achieve broad-based ownership and to prevent the concentration of resources in a few hands, while promoting privatisation through competitive bidding. Genuine interests of the employees working in units/entities proposed to be privatised are being adequately safeguarded. In this respect. pro of reasonable compensation to the employees rendered surplus as a result of privatisation and help in their re-training for employment elsewhere is an important policy objective. An agreement has been reached with the All Pakistan State Enterprises Workers Action Committee (APSEWAC) which provides for excellent terms to their workers and allows them guaranteed employment for 12 months, no lay-off of any employee is allowed at least during the first 12 months of privatisation. or an option to accept a Golden Hand Shake. or finally they have the option to buy out the state enterprise themselves, in case the size of the unit and expected requirements in terms of capital. technology or management allow. In addition, ten percent shares of the privatised industrial units are also offered to the employees at mutually agreed rates. Benefits are also extended to the managerial cadre by offering them VSS (Voluntary Separation Scheme). or guaranteed employment for 12 months or an option to buy the unit, • Steps are being taken to ensure that the interests of consumers are protected. especially in respect of fair price and quality of product. The Government intends to safeguard these interests by formulating a regulatory framework prior to disinvestment, particularly in the case of utilities. In this regard, a “Telecommunications Act” has been passed which provides for establishment of a Pakistan Telecommunications Authority (PTA) to regulate telecom services and grant licences to telephone operators. Likewise, similar bodies arc being established in the power sector called the National Electricity Power Regulatory Authority (NEPRA) and the Gas Regulatory Authority (GRA) in the gas sector; • Above all, learning from previous experiences, the process of privatisation has been made manifestly transparent. Towards that end, detailed and meticulous preparation has been undertaken in respect of the privatisation of each enterprise. The timetable is being announced well in advance. Appropriate details of the proposed transactions are being provided to prospective buyers and they are being allowed adequate time to participate in competitive bidding. It is equally important that privatisation is seen to be fair and successful by the public. Successful privatisation is a strong motivating factor which should whet the appetite of future investors. Everything is being done to support transactions that are fair and that lead to successful operations subsequently. 4. MODES OF PRIVATISATION While ensuring that privatisation remains transparent and equitable, the methodology to be adopted for the privatisation of different categories of industries and service organisations, sub-categories or specific individual enterprises will vary. This variation is necessitated by the basic differences of scope, structure and organisational characteristics of each unit. Another major consideration in adopting a flexible methodology is that, whereas in certain types of enterprises it is in the public interest for all 100% shares to be disinvested by the State and offered to the private sector, in certain other cases the public interest requires that disinvestment takes place on a gradual and staggered basis while the State retains management control until such control can be relinquished. Whatever the exact method (to be determined on a case to case basis) to privatise any unit, large or small, vertically or horizontally it is being ensured that the process remains fair, open and accountable. Public announcements are made before each disinvestment is initiated to provide opportunities to all those interested and eligible to participate in the pre-qualification/bidding process. The following are some of the modes of privatisation. In appropriate cases, other methods may also be adopted: Total disinvestment through competitive bidding. In some instances, pre-qualification of bidders may be required. In others, all bidders fulfilling a minimal general requirement may be eligible to participate in the bidding process. Partial disinvestments with management control. In the case of certain specified enterprises, a minimum of 26% of shares may be offered to private investors along with control of management. The remaining shares max’ be offered later in total or in partial tranches. Partial disinvestment without management control. In large scale service organisations serving a vital public function, a minimum of 26% of shares may be offered to private investors through international and national stock exchanges without control of management. Sale/lease of assets and property. In case of certain units/entities, sale/lease of assets and property may be offered. In appropriate cases, the Privatisation Commission may engage reputable financial advisors to facilitate transition from public to private ownership. For each of the above modes of privatisation and in the case of each single unit, the methodology to be applied will be specified at the time that the public announcement is made. Actual methodology to be adopted will be stated/specified for that particular unit/entity. 5. METHODOLOGY OF IMPLEMENTATION The methodology to be adopted for implementation of the privatisation programme will involve the use of multiple methods keeping in view the following: • Widespread dispersal of ownership (including provisions for participation by employees and the management, wherever possible) without excluding experienced entrepreneurs, especially in sectors where managerial efficiency is of critical importance: • Transparency in the process of sale and transfer; • Thoroughness in preparation of analytical reports, information sheets and bidding documents by utilising the services of competent outside consultants; • Strong public awareness campaigns in order to build understanding and support among employees, investors and the public. Valuation of Assets: The valuation of assets is always a complicated task and requires thorough study, if it is to be properly accomplished. Firms of Chartered Accountants and other Specialist Consultants are being engaged to carry out the valuation of each enterprise. For this purpose they are being pro% guidelines by the Privatisation Commission. Though the real value of an enterprise is what the market determines it to be, there may be situations where the offers are not realistic. In such cases, it is particularly ensured that the enterprises are divested at a reasonable price. Divestiture of Weak Public Enterprises: Public enterprises are generally being divested on the basis of their existing condition without attempting any physical improvement. New investment is being avoided in units proposed to be privatised as the private entrepreneurs can best determine technical and financial requirements in order to upgrade efficiency. Nevertheless, the enterprises in difficulty are being carefully studied and their potential analysed before offering them for divestiture. Various options. including leasing or contracting management to private entrepreneurs for a specified period, grouping of good with less efficient enterprises, liquidation, etc., are being given due consideration. In the case of enterprises with poor records of performance, the causes which can be removed without any additional investment would be removed and the possibility of financial restructuring carefully examined. Choice of method for Privatisation: There cannot be a universal application of a single method for all cases of privatisation. The precise methods for disinvestment are being determined on a case to case basis. The Commission has developed a detailed strategy addressing the specific requirements of individual sectors in which privatisation is to be effected. The Commission has also spelt out a detailed procedure to be followed in each case. The Commission will choose from. inter alia, the following methods to dispose of public undertakings, either partially or fully: (1) Use of domestic and international stock exchanges. Institutional shareholders such as private pension and pro funds, foundations, insurance companies and mutual funds would be welcome to contribute towards the equity of units to be privatised in order to achieve a broader dispersal of economic power: (2) Inviting sealed bids from pre-qualified bidders: (3) Open public auctions of specified units limited to pre-qualified bidders. in appropriate cases: (4) Open public auctions of specified units without pre-qualification of bidders; (5) Inviting sealed bids without pre-qualifications: (6) Management contract with foreign or domestic operators for specified periods in the case of enterprises requiring technical expertise of a high calibre or which are found to need technology transfers. Preference for Full Payment: Preference would be accorded in the sale of public enterprises to bidders who are prepared to pay the entire amount at the time of transfer. A suitable incentive is being given for this purpose. Communication with Employees: Reasonable communication with employees of units to be privatised is being maintained to achieve harmonious transition from public to private sector. Public Awareness: The public is being kept fully informed about all stages of the privatisation process. The methods of disinvestment, the procedure for pre-qualification, its importance, process of bidding, terms of sale and other similar aspects are being explained from time to time in public briefings. If tenders arc cancelled or fresh bids in the reasons are being made public. In this way, public support for this important exercise has been enlisted. 6. ACHIEVEMENTS AND OUTLOOK FOR THE FUTURE The following achievements could be recorded since the launching of the process: Outright sale of entire government shareholding: Eighty Nine industrial units privatised in the following sectors: Automobile 7 Engineering 7 Fertiliser 1 Cement 11 Ghee 16 Chemicals 12 Rice 8 Roti 12 Miscellaneous 11 Partial disinvestment without management control: • 10% shares of Pakistan International Airlines floated; • About 12% shares of Pakistan Telecommunication Company Limited floated. Partial disinvestment with management control: • Muslim Commercial Bank (51% shares with management control); • Allied Bank Limited (51% shares with management control); • Bankers Equity Limited (2 shares; eventually 51%); • Kot Addu Power Plant (26% shares with management control). With respect to the future outlook the privatisation policy formulated by the government will stimulate economic development through increased capital formulation, widespread ownership of the privatised assets and reduction in the burden of subsidies. Direct participation of the Government in commercial activities is being progressively reduced. The Government is instead focusing on two broad areas. First, building up an environment that encourages investment but, at the same time, safeguarding the public interest through a regulatory framework. Second, helping to create a suitable physical and technological infrastructure required for the unhindered economic development of a rapidly growing society. As a result of this strategy, the pace of development in the social sector would be accelerated, which would, in turn, build momentum for increasing investment leading to prosperity for all. There are a number of large scale privatisations which are in the process of being privatised, including: Pakistan Telecommunication Company Limited (PTCL): PTCL is the national telecom operator providing local, long distance, fax, data transmission, telex and telegraphy services. PTCL has a growth rate of 22% and 70% of its network is digital. PTCL has 2. 13 million lines in service. It has shown an impressive net profit margin of over 50%. The telecom will be privatised by offering 26% shares and management transfer. The key features of the privatisation include a 25-year licence and a 7-year monopoly. A 3-year holiday from all income and wealth taxes is being provided through a statutor order. Habib Bank Limited (HBL): HBL is the largest Nationalised Commercial Bank of Pakistan. Its total assets are approximately $8.5 billion and has deposits of approximately 55 billion. The bank has 1868 domestic and 66 foreign ones. Initially. 26% shares with management control is being offered. United Bank Limited (UBL): UBL is the second largest amongst the Nationalised Commercial Banks. Its total assets are $5.2 billion and has deposits of $3.1 billion. The bank has 1698 domestic and 21 foreign branches. Initially 26% shares with management control is being offered. Sui Northern Gas Pipelines (SNGPL): SNGPL is involved in the business of purification, transmission and distribution of natural gas. Its total assets are approximately $5 13.5m. Its total capacity of transmission is 650 mmcfd. The distribution network is 2 1 00 km. Again 26% shares and management control is initially being offered. Sui Southern Gas. Company (SSGC): SSGC is involved in the business of purification, transmission and distribution of natural gas. Its total assets are approximately $533.2m. Its total capacity of transmission is 688 mmcfd. Distribution network is 500 km. 26% shares and management control is being offered initially. Karachi Electric Supply Corporation (KESC): KESC is involved in the generation, transmission and distribution of electric energy. It is the second largest power utility company with an exclusive franchised area in greater Karachi, which is the hub of most industrial and commercial activities in Pakistan. Its total assets are approximately $1.12 billion and its total generation capacity is 1738 MW, while its total transmission capacity is 1850 mva. The distribution system is spread over 13612 km. Again 26% shares with management control is offered. Faisalabad Area Electricity Board (FAEB): FAEB is involved in the distribution of electric energy. It is one of the eight area electricity boards that operate in Pakistan. Its total assets are approximately $600m. Total power distribution capacity is 1000MW and the area covered is 2 10x280 km. 1 This text combines material derived from two sources: a) the speech delivered by M. Abdullah Yusuf, Secretary, Privatisation Commission, before the participants in the workshop on Privatisation held on 19-20 October 1996 in Bhurban, Pakistan, and b) the document entitled Privatisation Policy of Pakistan and published by the Privatisation Commission in April 1996.
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