Upcoming privatisation

Another controversy in the making

“It is not government’s job to run these state-managed entities…” Mr Ishaq Dar was heard while addressing a packed press conference. So the finance ministry finally has decided to do its job which I am sure many would question is what? While the international press has partial praise for the way our finance minister dragged the economy out from a default state, the credit is still too far from due Mr Dar who actually has been severely criticized for raising utility fuel prices by 60 per cent, unleashing inflationary pressure, disturbing monetary policy, and sending rupee to free fall against dollar within weeks of joining the cabinet. Job well done?

If there is anything to the government’s credit it is the lopsided IMF deal for nearly $6 billion loan which to some was tooth and nail fight for the ministry. The sudden interest in privatization when real economic problems and ministry’s true jobs remain a mess is simply being attributed to the IMF’s clauses and conditions for the loan.

The net result is that the privatization commission, again headed by Mr Dar, has put forward 31 ‘units’– actually huge, though some of these profusely bleeding, corporate entities – on the auction block for ‘quick disposal’.

Within days PIA and Pakistan Steel, Pakistan Petroleum, National Insurance Corporation have been cleared by the Cabinet Committee on Privatization (CCoP) for auction. However the urgency with which these units are being divested, the lack of a coherent strategy, and the reasons posted in the press for putting up these units are the start of yet another controversy for the government.

Painful past & forgotten lessons

When you visit the past and try to locate lessons learnt on privatization, most seem to have been archived after learning little. Not long ago, the political government toyed with the concept of privatization in the 1990s only to see that it benefited a handful, patronizing a few favourites, and dodging some basic questions regarding fair play, employees’ welfare, transparency, and the public interest.

Currently the rumour mills working overtime at the stock markets carry stories that are raising shares prices of some corporate entities. It is on the grapevine that the owners are likely to make huge killings owing to the largesse of the Sharif government. Some of these groups have formed an alliance, and are interested in the privatization of PIA and the Pakistan Steel Mills.

It is apt to remind the readers that it was Arif Habib group which was party to a bidding process of the Pakistan Steel Mills in the Musharaf–Shaukat Aziz era. The very privatization of the Pakistan Steel Mills, and how it was being awarded to the Arif Habib consortium, that Supreme Court of Pakistan had to intervene in the 2005-06. The entire privatization process and the subsequent suo moto notice has often been cited as one of the reasons for the fallout between the Supreme Court and the chief justice and the then Musharaf-Shaukat Aziz combine in the government. The court ruling is an open indictment on the privatization process.

Another sour example is that of the KESC during the same Musharraf-Shaukat Aziz regime and the way it was managed was detrimental to all stakeholders, like the regulator, government and most importantly the disgruntled public, but it benefited the investor. The government reportedly injected nearly Rs147 billion into the KESC between 2002 and 2010, of which almost Rs109 billion before privatization and Rs38 billion after its privatization. It has only been recently that the entity has reported some profit and that too after a lengthy political turmoil.

Another privatization example is that of the PTCL during the Musharaf era which has been dragged in the media as “flawed and incomplete”, leaving displeased Arab buyers. There were disagreement on the installments and terms of the privatization amongst the parties. Even though the PTCL led to telecom liberalization, healthy competition which benefited the public at large, but it was also led to voluntary and forced retirement of a large number of employees. Any political economist knows this redundancy comes at an economic and social cost, for though they may no longer be the PTCL’s problem yet they are still unemployed citizens – a problem for the government and society.

Extrapolating past mistakes: What might go wrong

The first obvious lesson is that the receipts from the proceeds will not plug the budgetary gap. If someone is made to believe that the receipts will help close the budget gap, it will only appear as one time receipts in the books, and then it will disappear into the abyss of the budgetary deficit. So the privatization should not be about receipts rather about the terms of handover. Privatization is not about revenue maximization, and is bound to be painful if this becomes the key consideration.

The asset valuation, and receipt that will flow through the auction will come under a lot of criticism and rightly so if the intent is to favour the buyer. It is too early to pinpoint flaws in the process, for it has not yet been put on the table, however it will come under criticism if the due diligence process, the appointed advisor or the consultant are influenced to mark down valuations. The PIA, the Pakistan Steel Mills own buildings, precious real estate, a hotel in down town New York worth billions of dollars. There is a lot of talk in the stock market that the price of PIA is being “manipulated” to benefit the buyers.

Just because manmade errors have caused financial losses does not make up for selling the valuable state assets at throwaway prices under the pretext of “doing what is necessary” like it was done in the past.

It will take years before the PIA, the Pakistan Steel Mills or even the government of Pakistan can generate enough cash flows to buy prime property as Roosevelt Hotel in the New York cosmopolitan or that much land in Karachi’s industrial hub as owned by the PSM? As a matter of fact, one leading bank now buys most of its buildings in cosmopolitan cities instead of renting them out. Yet its majority shareholder is often heard advocating the sale of the PIA’s famous Roosevolt Hotel in New York to pay off the debt. Have the leading privatized banks and other entities sold off their lands /foreign assets? Was the Pakistan Steel Mills not profitable during a brief stint in the Musharaf era when it was managed by professionals?

The owner of the privatization process is often a consultant/firm engaged to oversee government’s interest and ensure fairness in the valuation. Currently the list of advisors /auditors as displayed on the privatization commission is not exhaustive and needs work to be done. It is also common knowledge that most of the auditors or consultants on the list are also directly or indirectly associated with some of the potential buyers.

Likewise, timing to divest either through the stock market or to offer to foreign buyer is not right at this point in time. Simple logic: if you cannot attract foreign buyers due to fragile political, law and order situation, you end up getting peanuts for something worth pearls value. Karachi’s law and order situation will not attract many buyers for the PSM. Similarly privatization should attract buyers of repute, not old friends or Arabs who shelter politicians in dire times. Instead it should attract terms which are favourable to all outgoing employees, the Pakistani public, future investments and the reform program in general.

Our stock market is another place where timing will make all the difference. Not to miss the fact: the stock market has been accused of being manipulated easily by a handful of investors who can play with the prices and skew it to their advantage. If the market is depressed it will put the PIA and the PPL stocks under stress as well. The PIA stock has been yo-yoing from Rs3-Rs12 and it is often a victim of speculators which will suppress fair valuations.