Privatization of Strategic Pakistani Assets

Professor Dr Shahida Wizarat

Dean CESD, President IEPP

Every government that comes to power with external blessings embarks on an ambitious privatization agenda. At a time when countries are reversing liberalization and protecting their economies, present Pakistani government, like its predecessor, is bending over backwards to appeal to its external audience. The government reiterates that it is resorting to privatization in order to reduce the burden on the national exchequer, as these State Owned Enterprises (SOEs) are running in losses. But it always starts with the privatization of the most profitable companies like PPL which earned a net profit of Rs 61.6 billion last year and OGDCL whose net profit last year was to the tune of Rs 118.4 billion. These profitable companies are contributing to the national exchequer, and their privatization will increase the budget deficit. But the Government believes in the motto that ‘you can fool all the people all the time.’

Earlier the deal the Nawaz Sharif government signed with the IMF contained the conditionality that the shares of oil and gas cos will be floated in the international capital markets, and bureaucrats in the ministry of petroleum were trying their very best to facilitate the purchase of these shares by US cos. Foreign and dual nationality holding bureaucrats in the ministry of petroleum were heard exerting pressure to facilitate US companies to purchase the shares of our oil and gas sector companies. Present government’s enthusiasm on privatization reflects that this conditionality on the facilitation of purchase of shares of Pakistan’s oil and gas sector by US companies has been retained in the deal signed by the PTI government with the IMF.

Oil and gas sector is the backbone of an economy. Allowing the US or any foreign power to acquire control of our oil and gas sector will increase our dependence on the USA/ outside powers. A few years back a tiny country like Ukraine was encouraged by the European Union to sign a gas deal for $10b with Chevron in order to reduce its dependence on Russian gas imports. By increasing our dependence on US, a country which is a strategic ally of India, our arch rival, amounts to giving a leverage to the US to control us and prevent us from becoming independent in our foreign policy endeavors vis e vis China. And in view of the reservations US and some European countries have on CPEC, it amounts to surrendering our vital national interest.

Moreover, our natural resources are mostly found in Sindh, Baluchistan and KPK. There is already resentment in these provinces and a sense of exclusion in the population. By awarding these natural resources to outsiders, won’t we be increasing this sense of deprivation which is already posing a serious threat to Pakistan?

US has a special interest in Pakistan’s power and petroleum sectors, and is it just a coincidence that both these ministries have Special Assistants to the Prime Minister (SAPMs) that are dual US citizens? A recent meeting was held between the Minister for privatization, SAPM Mr. Nadeem Babar and SBP governor to complete the sell off transactions of Balloki and Haveli Bahadur power plants. The meeting was also attended by the presidents and group chiefs of all the banks and the Deputy Governor SBP. In this meeting Mr Mohammad Mian Soomro emphasized that it is critical that potential bidders are able to secure sufficient rupee dominated financing to complete the transaction successfully. He emphasized the importance of local banks to provide confidence to potential bidders for closing the transaction successfully. This clearly shows that the GOP is trying to transfer the ownership of strategic Pakistani assets with financing from within Pakistan. Even with the inflow of money from outside such transactions are unacceptable. Does this disinterest in Pakistan’s strategic interests have something to do with the fact that aliens are heading these ministries/institutions?

In countries where governments are composed of their own nationals full privatization with transfer of control of strategic sectors is not being attempted. Russia, China and India are not even fully privatizing the non strategic sectors. For example, in response to a foreign exchange crisis in 1991, India undertook massive economic reforms aimed at deregulation and privatization of the Indian economy. The goal of the Indian government was to reduce government ownership to 26 per cent of equity in all non-strategic firms. But until 1998 the government had sold an average of just 16 per cent of equity in 36 of the 258 firms with majority stakes in none. Using data on the population of Indian state-owned enterprises Gupta in his 2002 study finds that partial privatization had a positive impact on firm sales, profits, and productivity using data on 341 manufacturing and service sector firms owned by the federal and state governments. There are many other examples of partial privatization, which have resulted in increasing government revenues without reducing government control over strategic assets.

Moreover, there is overwhelming evidence that when privatizing strategic state industries governments retain control over key distribution assets. Berkowitz and Semikolenova’s 2006 study on Russian privatization of the oil sector during 1994-2003 is a useful case study, where the federal government privatized oil production but retained monopoly control rights over the transport of crude onto the world markets.

Privatizations of strategic sectors all over the world have been “partial” because national governments either manage to keep a major stake in the privatized companies or often retain control of a strategic distribution method, even for fully privatized companies as stated by Megginso’s 2005 study. For example, the state share is very large in the gas and oil sector including Petrobras in Brazil (32%), Eni in Italy (36.9%) and Sinopec in China (77.4%). In India, the generation of electricity has been privatized, but the transmission of electricity is monopolized and done by government electricity boards. The Indian national government has been using its control over electricity transmission to force generating companies to supply electricity to poor rural areas at below-market prices as reported by Smith’s 1993 study.

Comparing the behaviour of the Government of Pakistan (GOP) with the behaviour of the countries cited above we observe: First, the GOP doesn’t seem to be aware of the importance of strategic sectors. Second, GOP doesn’t seem interested in retaining control over strategic sectors. Third, GOP is not using its state power for the benefit of the people of Pakistan like other countries are doing. Why is the GOP not bothered about our strategic sectors falling in foreign hands? Is it because foreign nationals are not foreign for our foreign and dual nationality holders, so they might be facilitating the ownership of our strategic sectors to investors who might be foreign to us, but one of their own citizens!

There are reports that a Jewish company Franklin Templeton Co has been quietly purchasing OGDC shares. The complete sell off of OGDC by the Nawaz Government was stopped at the last minute due to intervention from some one in the establishment who was committed to Pakistan’s national interest. Do we still have sufficient number of personnel interested in Pakistan’s strategic interests in the corridors of power? Other important institutions of strategic importance like the Pakistan International Airlines (PIA) are not only being prepared for privatization but the statement emanating from relevant minister regarding the qualifications of PIA pilots will facilitate foreign buyers through reducing company valuation. And have we forgotten the performance of the present Adviser on Finance with handling the privatization of the Steel Mill when he was Finance Minister in the People’s Party government?

Pakistan’s  privatization  experience for the last three decades shows that privatization has not improved performance of SOEs, whether it is the Karachi Electric Supply Corporation, or others. In fact, their performance seems to have deteriorated considerably after privatization. Previously, the malaise may have been on account of inefficiency, but may now be explained through abuse of market power, switching from the use of quality copper to cheaper substitutes, board room corruption resulting in fantastic salaries to higher management and laying off laborers and linemen as a cost saving measure. What strategy should be adopted when there is both government failure and market failure as is the case in Pakistan?

In the light of the above discussion, the following recommendations are being made to the GOP: First, the GOP has to realize that its audience is the people of Pakistan and not governments in rich countries or the international fiinancial institutions. Second, the privatization policy of the GOP will have to distinguish between strategic and non strategic sectors. For the non strategic sectors GOP may resort to full privatization or partial privatization. Third, in line with government policies in countries cited above, strategic sectors should not be privatized. Fourth, GOP should start with restructuring and privatization of loss making non strategic units. Starting privatization with profiitable units will increase budget defiicit further. Fifth, GOP should use its power to benefiit the poorer segments of the Pakistani population, rather than teaming up with big foreign companies, which will create misgivings in the minds of the public about government motives. And finally, since we like to call ourselves democratic, GOP will have to answer the question why our strategic interests are being sacrificed in order to accommodate foreign and dual nationals in the corridors of power?


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