Privatisation in Pakistan-Challenges and Prospects

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Describes the process,need and benefits of privatisation in a developing country ,traces its history in Pakistan and how it has befitted the state and the society.Ends with a suggested strategy of privatisation

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  • Privatisation of state owned enterprises is not a new phenomenon in Pakistan
    1960s-the first country to privatise factories built by the government to strengthen the private sector
    1970s-reversal of the policy and the state started wholesale nationalisation
    1980s-denationalisation of the enterprises nationalised during the previous decade
    1990s-accelerated privatisation and deregulation which has been termed as the most successful privatisation program in South Asia, Central Asia and the Middle East
    More than 165 transactions fetched over $ 9 billion proceeds (Rs. 476,421 million)
    80 to 100% state owned enterprises in the different sectors have been handed over to private sector.
    Most successful privatisation program in South Asia, Central Asia and the Middle East
    Over $ 9 billion proceeds (Rs. 476,421 million)
    167 transactions
    100% state owned enterprises in the chemical, textile, nitrogen fertilizer, cement, rice, roti and light engineering while 98% automobile industry, 96% ghee mills and 100% units of Phosphate fertilizer have been privatised
    Banking industry privatised substantially due to which 80% of the banking sector is under private ownership.
  • Privatization is an instrument of economic policy. It is the transfer of property or control of assets used to deliver goods or services from the public to the private sector.The narrow definition refers to privatization at the level of the firm or units within it. While there are different forms of privatization, a widely accepted definition of privatization encompasses the privatization of management as well as the privatization of ownership.
    Broadly defined, privatization is the abolition of barriers to private sector provision of services or the infrastructure necessary for their delivery. The broad definition refers to privatization at sector level (e.g., telecommunication, electricity, social security, etc.). It is more complex than enterprise level privatization as it often involves restructuring of a whole sector and not just one firm. It involves giving the private sector the right to use or access the public domain (radio spectrum, land, right of way, etc.) to build and operate a network industry. It also involves defining the “public service” dimension and licensing the private sector to deliver such services. The broad definition of privatization requires putting in place legal and regulatory mechanisms to ensure that private providers do not overlook the public dimension of the services they are licensed to deliver and do not fail to meet pre-announced policy objectives (coverage, access, etc.).
    Privatization, however, can also be used to refer to those measures taken by a government to increase the role of the private sector in an economy. It is in this sense that privatization was, and is, used in the case of the former socialist economies in Central and Eastern Europe and the former Soviet Union. But it can also be used in the case of some Arab economies that are undergoing transitions, albeit of a different kind. Some countries, such as Egypt and Tunisia in the 1980s and Algeria today, are striving to move from a state-controlled and dominated economy to a market-based economy where the private sector plays a much greater role. Other countries, such as the oil rich countries in the Gulf, have begun to realize the importance of privatization in diversifying their economic base away from a heavy reliance on the energy sector.
  • Once the FA or valuation firm (for industrial transactions) completes the valuation, it is considered to be the reference price and is presented to the Board and CCOP for approval. Board holds its meeting in PC which acts as its Secretariat.
    Prior to the bidding, a pre-bidding conference is held to address investor concerns and questions. While project team or FA propose the bidding process, it must be approved by the Board and media has to be invited to it according to law.
  • The buyer has to deposit the whole amount before taking over the entity. 25% (including earnest money) is to be paid within 15 days. Remaining 75% is to be paid within 45-90 days. On full payment LOA is issued after obtaining approval of the Board of PC and CCOP. If the successful bidder does not make payment within stipulated time then the earnest money deposited by him is forfieted. This earnest money is deposited by all pre-qualified bidders before actual bidding process starts.
    Bidding Process
    Round One:
    a) On the Bidding Date, when the Commission is satisfied that the Bidding Process can commence, the Commission shall request each of the Qualified Bidders to place the sealed envelopes containing their Bid Letter into the bid box.
    b) The Commission will open each of the sealed envelopes and announce the value of the bid received from each Qualified Bidder and will enter the same on the record sheet to be established by the Commission for this purpose. The omission of a Qualified Bidder’s signature on the record sheet shall not invalidate the contents and effect of the record. Any Bid Letter that does not conform to the format prescribed at Annexure ‘D’ shall be declared as non-compliant and shall be rejected.
    c) The Bidders with the highest three bids (“Three Highest Bidders”) in Round One shall stand eligible for participation in Round Two.
    Round Two: (Open Auction or Out Cry)
    a) The Commission shall immediately thereafter, invite the Three Highest Bidders who participated in Round One to participate in Round Two and bid through an open auction. The Three Highest Qualified Bidders invited for Round Two must not submit bids that are lower than the highest bid which has been submitted in Round One. The open auction shall commence from the highest bid submitted in Round One with a minimum raise of Rupees Five (Rs. 5.00) per share or multiples thereof. Where the sale does not involve shares an appropriate amount is determined for the raise.
    b) In the event, the highest Bid received by the Commission on conclusion of Round Two is lower than the minimum price acceptable to the Commission, the Three Highest Bidders shall be requested by the Commission to equal or exceed the ‘minimum price acceptable to the Commission’ in a manner starting first with the Highest Bidder in Round Two and thereafter, in descending order of the respective Bids. If one of the Three Highest Bidders equals or exceeds the ‘minimum price acceptable to the Commission’ then the bidding process will stand concluded and no further rounds will be held.
    All bids are required to be valid for a period of ninety (90) Business Days from receipt.
    Bidding takes place normally with three or more bidders but at least two are required to move ahead.
  • Privatisation in Pakistan-Challenges and Prospects

    1. 1. Shahid Hussain Raja Independent consultant-public policy www.sanoconsultants.co.uk www.shahidhussainraja.com
    2. 2.          Introduction Privatisation : Concept & Need Modes of Privatisation Privatisation Process Functions of Privatisation Commission Privatisation in Pakistan Prospects & Challenges Way Forward Q&A 2
    3. 3.  Privatisation-not a new phenomenon in Pakistan 1960s-privatised factories built by the state to the private sector at nominal prices to enhance its role 1970s-reversal of the policy, wholesale nationalisation 1980s-denationalisation of the enterprises 1990s-privatisation and deregulation to reap efficiency gains 2000s-privatisation to reduce state losses on subsidies  More than 165 transactions fetched over $ 9 billion proceeds  80 to 100% state owned enterprises in the different sectors have been handed over to private sector 3
    4. 4. “…. a transaction by virtue of which any property, right, interest, concession or management thereof is transferred to any person (entity) from the Federal Government or any enterprise owned or controlled, wholly or partially, directly or indirectly, by the Federal Government”. (PC Ordinance 2000) 4
    5. 5. Generally the state has one or more of the following objectives of privatisation ; 1.Strengthening of private sector. This was the motive behind the first generation of privatisation carried out in Pakistan in 1960s when the state built factories in strategic sectors and handed them over, at very nominal rates, to the businessmen who were reluctant to invest in these sectors due to paucity of requisite resources at their disposal and high risks involved. 2. Improving the efficiency and service delivery of the SOEs, whether profitable or not, by bringing in the incentive and reward mechanism of the private sector who would inject capital, technology and better management practices. Pakistan privatised bulk of its SOEs in the second generation privatisation carried out in the 1980s and 1990s. 5
    6. 6. 3.Eliminating/reducing the huge state subsidies being given to those SOEs which are continuously incurring losses but they cannot be closed because of social welfare considerations or their strategic nature even though better alternatives are now available in the private sector. This is the philosophy behind the third generation of privatisation in Pakistan in 2000s and it is still being done under Public, Private Partnership (PPP).Here at least 26 % of the shares with management control of an SOE are given to a strategic investor who injects capital and improves the management 4.Raising funds in the local and global capital market by divesting shares of the profitable SOEs. This is resorted to when the state needs cash and starts selling shares of its blue chip SOEs in the global market or locally. 6
    7. 7.  Established as a body corporate by the promulgation of Privatisation Commission Ordinance 2000 by the President of Pakistan  The Commission is governed and administered by a nine (09) member Board with Minister for Privatisation as Chairman  The Board is independent, autonomous and is dominated by the members from Private Sector 7
    8. 8.  Recommending Cabinet; privatisation policy guidelines to the  Preparing comprehensive privatisation programme;  Planning, managing, implementing and controlling the privatisation programme approved by the Cabinet;  Taking operational decisions on matters pertaining to privatisation, restructuring, deregulation and regulatory issues. 8
    9. 9.  Proposing regulatory framework, establishment and strengthening authorities; including the of regulatory  Advising the Federal Government in selection and appointment of the head and members of a regulatory authority;  Advising measures to the Federal Government for improvement of public sector units till their privatisation; 9
    10. 10.  Assisting in the implementation of Federal Government policies on deregulation and privatization and advise the Federal Government on deregulation of the economy;  Performing any other function that is incidental or ancillary to carry out the privatisation programme approved by the Cabinet. 10
    11. 11.  Outright sale of assets and business through open auction  Partial sale of shares through public auction or tender  Public offering of shares through a stock exchange  Management or employee buyouts 11
    12. 12.  Award of long term leases  Management or concession contracts  Global Depositary Receipts (GDRs): Euro Bonds etc  Exchangeable / Convertible bonds: Taking loans from international funds against collateral of shares 12
    13. 13.  Approval of Council of Common Interest (CCI).  Cabinet Committee on Privatisation (CCoP) decision to privatise an entity  Hiring of a Financial Advisor (FA) or Valuer  Due diligence by FA and Privatisation Commission  Finalization of transaction structure 13
    14. 14.  Restructuring and regulatory reforms, if needed  Invitation of Expressions of Interest (EOI)  Submission of statement of qualifications  Prequalification of firms  Due diligence by potential buyers  Sharing of Bid Documents/Instructions with pre-qualified bidders and pre-bid conference 14
    15. 15.  Approval of valuation (reference price) by CCOP  Bidding process (media invited to observe bidding)  Approval of bidding results by PC Board and CCOP  Issuance of Letter of Intent to successful bidder  Finalization of sale agreement between PC and Buyer  Handing over of the entity 15
    16. 16. Privatisation in Pakistan 16
    17. 17. 1960s First Generation Privatisation Objective Create / Strengthen Private Sector Strategy 1990s Build factories and Sell them Second Generation Privatisation Objective Reduce Government Losses Strategy 2000s Objective Disinvest, Deregulate Third Generation Privatisation Improve Efficiency & Profitability Strategy Seek Strategic Investors 17
    18. 18.  Most successful privatisation program in South Asia, Central Asia and the Middle East  Over $ 9 billion proceeds (Rs. 476,421 million)  167 fairly transparent transactions  100% state owned enterprises in the chemical, textile, nitrogen fertilizer, cement, rice, roti and light engineering while 98% automobile industry, 96% ghee mills and 100% units of Phosphate fertilizer have been privatised 18
    19. 19.  Banking industry privatised substantially due to which 80% of the banking sector is under private ownership.  Convenient availability of better goods and services at affordable prices to the general public  Increased tax revenue to the state exchequer in the form of corporate taxes  Dividend yields to the public as well as the state which still holds substantial share holding in these entities 19
    20. 20.  Emergence of robust private sector  Induced investment and transfer of technology  Improved management/productivity by introduction of international best practices  Fiscal space for social sectors and infrastructure development resulting in employment generation and poverty reduction 20
    21. 21. Sector No of transactions Proceeds/Billion Rs. Banking 7 41.02 Capital markets 22 133.12 Energy 14 51.76 Telecoms 4 187.36 Automobiles 7 1.10 Cements 17 16.18 Chemical/fertilizer 23 41.92 Engineering 7 0.18 Ghee mills 24 0.84 Rice and roti plants 23 0.32 Textiles 4 0.37 Newspapers 5 0.27 Tourism 4 1.81 Others 6 0.16 Total 167 476.42 21
    22. 22.  Coming into power of a private sector friendly regime  IMF conditionality in case of bailout  Broad spectrum consensus on need and benefit of privatisation/ deregulation  Robust private sector to take on big SOEs  Comprehensive legal framework available  Experience of 2 decades of successful privatisation  Support of international organizations  Strong judiciary, civil society, and media to ensure transparenc y 22
    23. 23.  Domestic and International financial crisis  Huge losses of SOEs-how to attract investors  Share values of many likely transactions at all time low  Managing public interest in industries with social repercussions such as power, transportation etc  Repercussions of 18th Amendment-seeking of provincial concurrence in each transaction  Regulatory dispute resolution framework needs further improvement 23
    24. 24. 24
    25. 25.  Strong elite commitment for privaisation at the political and bureaucratic level in the form of policy formulation  Translation of this commitment into vision and mission-what, why, how and when to privatise i.e. loss reduction and efficiency improvement as basic objectives of privatisation  Scientific structuring of the privatisation deals by looking at the cash-flow statements rather than assets of the concern  Strategic sale and PPP with management control should be the main course of action while safeguarding the interest of employees and the consumers 25
    26. 26.  Awareness campaign to inform the public about the entity to be privatised-why we are doing it  Sale of certain percentage of shares to the general public to create ownership  Corporatisation of the components of the large entities to generate maximum competition  Transparency to be the cornerstone of the privatisation process by strengthening the regulatory framework. 26
    27. 27. Financial Institutions- Banks, Insurance companies Energy-Electricity Distribution Companies (DISCOs), Electricity Generation Companies (GENCOs), Oil & Gas Development Company (OGDCL), Pakistan Petroleum Limited (PPL), Pakistan State Oil (PSO) Infrastructure-Pakistan Railways, Port Qasim Authority (PQA),Karachi Port Trust (KPT),Pakistan Steel Mills (PSMC) 27
    28. 28. Sr. No. Transaction 1 Oil & Gas Development Company Limited 2 Pakistan Petroleum Limited 3 Heavy Electrical Complex 4 National Power Construction Company 5 Peshawar Electric Supply Company (PESCO) 6 Quetta Electric Supply Company (QESCO) 7 Hyderabad Electric Supply Company (HESCO) 8 National Power Construction Corporation (NPCC) 9 Faisalabad Electric supply Company (FESCO) 10 Jamshoro Power Company Limited (JPCL) Pakistan Mineral Development Corporation 11 (PMDC) 28
    29. 29.  Thank you for viewing the presentation  Its article version with updated information is available at my website www.shahidhussainraja.com  I will also be writing a series of posts on this issue in my blog pakistanperespectives.blogspot.com  Kindly do leave your comments there 29
    30. 30. Thanks 30

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