Privatisation In Pakistan

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Explains the history of privatisation in pakistan,the befits accrued,the challenges it faces,present sate of privatisation and the challenges

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  • 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.
  • Poor Performance: PEs do not perform at the optimum level due to the problems mentioned above. In Pakistan the Government has been paying huge amounts in subsidies to keep these entities running. E.g. Pakistan Steel Mills had liabilities of Rs. 17 billion. Huge over-employment with 23,000 employees which were cut to 13,000. 70% duty on steel imports to provide support to PSM. Various reform initiatives failed to bring these PEs out of woods. PIDC was broken up into 11 corporations, which regrouped as 8; some of them clicked, others didn’t. Engineering sector generally made huge losses despite different reform packages. HMC with 55,000 employees is incurring Rs. 3.5 billion losses. PIA, PNSC, Rice Corp, Ghee Corp, State Cement Corp, are other examples. Pakistan has huge infrastructure deficits which do not allow the economy to perform to its potential. We shall need a lot of money to finance these Rising infrastructure needs of the economy. For this we need to save some money from these subsidies and earn money from taxes to be paid by a rejuvenated private sector. In addition direct private sector investment in infrastructure will take us out of the present situation. Government’s plan to create a national trade corridor will be implemented with the help of the private sector. Pakistan has limited financial resources. Financial requirements of loss making PEs create further financial constraints for the Government. Due to this Govt. money is not available for development. Overstaffing, old technology, inefficiency etc. are the bane of the public sector. In comparison the private sector always prefers to work with cutting edge technology and smart and lean management. Privatization has led to the growth (in terms of market capitalization) and deepening (in terms of numbers of shareholders) of financial markets, as well as increasing their liquidity. Share issue privatization was the main driver behind the development of capital markets worldwide. It is noteworthy that privatized firms are the most valuable companies in 7 of the 10 largest non-US stock markets, and in almost all emerging markets possessing stock exchanges. Furthermore, 35 of the 42 largest common stock issues in history are either privatizations or capital increases by recently privatized firms. Finally, privatizations have not only increased the liquidity of stock markets, but they have exponentially increased the number of shareholders around the world. Privatisation has broadened and deepened the base of Pakistan’s capital market and increased its capitalization from Rs. 951.446 billion in 2003 to Rs. 4.329 trillion in 2007. More units have been listed on the stock exchanges due to this initiative. Moreover, new investors have joined the business and volume of the stock exchanges have risen over the years. The current levels of the KSE would have been impossible without this initiative. During 2003 the KSE 100 Index touched the highest level of 4604.02 while in 2007 the highest point was 14,814.85. International investors look towards overall policy environment. The investor prefers a free market economy with all its essential ingredients like liberalization, deregulation and privatisation.
  • Poor Performance: PEs do not perform at the optimum level due to the problems mentioned above. In Pakistan the Government has been paying huge amounts in subsidies to keep these entities running. E.g. Pakistan Steel Mills had liabilities of Rs. 17 billion. Huge over-employment with 23,000 employees which were cut to 13,000. 70% duty on steel imports to provide support to PSM. Various reform initiatives failed to bring these PEs out of woods. PIDC was broken up into 11 corporations, which regrouped as 8; some of them clicked, others didn’t. Engineering sector generally made huge losses despite different reform packages. HMC with 55,000 employees is incurring Rs. 3.5 billion losses. PIA, PNSC, Rice Corp, Ghee Corp, State Cement Corp, are other examples. Pakistan has huge infrastructure deficits which do not allow the economy to perform to its potential. We shall need a lot of money to finance these Rising infrastructure needs of the economy. For this we need to save some money from these subsidies and earn money from taxes to be paid by a rejuvenated private sector. In addition direct private sector investment in infrastructure will take us out of the present situation. Government’s plan to create a national trade corridor will be implemented with the help of the private sector. Pakistan has limited financial resources. Financial requirements of loss making PEs create further financial constraints for the Government. Due to this Govt. money is not available for development. Overstaffing, old technology, inefficiency etc. are the bane of the public sector. In comparison the private sector always prefers to work with cutting edge technology and smart and lean management. Privatization has led to the growth (in terms of market capitalization) and deepening (in terms of numbers of shareholders) of financial markets, as well as increasing their liquidity. Share issue privatization was the main driver behind the development of capital markets worldwide. It is noteworthy that privatized firms are the most valuable companies in 7 of the 10 largest non-US stock markets, and in almost all emerging markets possessing stock exchanges. Furthermore, 35 of the 42 largest common stock issues in history are either privatizations or capital increases by recently privatized firms. Finally, privatizations have not only increased the liquidity of stock markets, but they have exponentially increased the number of shareholders around the world. Privatisation has broadened and deepened the base of Pakistan’s capital market and increased its capitalization from Rs. 951.446 billion in 2003 to Rs. 4.329 trillion in 2007. More units have been listed on the stock exchanges due to this initiative. Moreover, new investors have joined the business and volume of the stock exchanges have risen over the years. The current levels of the KSE would have been impossible without this initiative. During 2003 the KSE 100 Index touched the highest level of 4604.02 while in 2007 the highest point was 14,814.85. International investors look towards overall policy environment. The investor prefers a free market economy with all its essential ingredients like liberalization, deregulation and privatisation.
  • 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.
  • A robust private sector will rejuvenate the economy. The consumers will benefit from price competitiveness. Privatisation proceeds are utilised for debt retirement (90%) and poverty alleviation (10%). Elimination of subsidies and budgetary support for loss-making industries and receipt of increased taxes and dividends from privatised units means more fiscal space for improvement of the infrastructure and social sector expenditures for human development.
  • A robust private sector will rejuvenate the economy. The consumers will benefit from price competitiveness. Privatisation proceeds are utilised for debt retirement (90%) and poverty alleviation (10%). Elimination of subsidies and budgetary support for loss-making industries and receipt of increased taxes and dividends from privatised units means more fiscal space for improvement of the infrastructure and social sector expenditures for human development.
  • Privatisation In Pakistan

    1. 1. Privatisation in PakistanProspects and Challenges Shahid Hussain Raja July 26, 2012
    2. 2. Sequence of Presentation Privatisation : Concept & Need Modes of Privatisation Privatisation Process Functions of Privatisation Commission Privatisation in Pakistan Prospects & Challenges Way Forward 2
    3. 3. Privatisation Defined“…. a transaction by virtue of which any property,right, interest, concession or management thereofis transferred to any person (entity) from theFederal Government or any enterprise owned orcontrolled, wholly or partially, directly or indirectly,by the Federal Government”.(PC Ordinance 2000) 3
    4. 4. Need for Privatisationa) Enhancing the role of private sector in the economyb) Reducing the budgetary deficit by selling the loss making State Owned Enterprises (SOEs) to the private sectorc) Improving efficiency of SOEs by selling their at least 26 % shares with management control to the private sectord) Producing better quality products & services at affordable prices for the public through Public Private Partnership 4
    5. 5. Privatisation Commission Established as a body corporate by the promulgation of Privatisation Commission Ordinance 2000 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 5
    6. 6. Functions of Privatisation Commission Recommending privatisation policy guidelines to the Cabinet; 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. 6
    7. 7. Functions of Privatisation Commission (contd) Proposing regulatory framework, including the establishment and strengthening of regulatory authorities; 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; 7
    8. 8. Functions of Privatisation Commission (contd) 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. 8
    9. 9. Modes of Privatisation Outright Sale of assets and business through open auction Sale of shares through public auction or tender Public offering of shares through a stock exchange Management or employee buyouts 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 9
    10. 10. Privatisation Process 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 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 10
    11. 11. Privatisation Process (contd) Sharing of Bid Documents/Instructions with pre- qualified bidders Pre-bid conference 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 11
    12. 12. Privatisation in Pakistan 12
    13. 13. Privatisation Phases1960s First Generation Privatisation Objective Create / Strengthen Private Sector Strategy Build factories and Sell them1990s Second Generation Privatisation Objective Reduce Government Losses Strategy Disinvest, Deregulate2000s Third Generation Privatisation Objective Improve Efficiency & Profitability Strategy Seek Strategic Investors 13
    14. 14. Achievements Most successful privatisation program in South Asia, Central Asia and the Middle East Over $ 9 billion proceeds (Rs. 476,421 million) 167 transactions completed so far 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. 14
    15. 15. Sector Wise TransactionsSince its inception in 1991, the Privatisation Commission have conducted 167 transactions with over Rs. 476 billion. Details are as follows: Sector No of transactions Proceeds (Rs M) Banking 7 41,023 Capital market 22 133,124 Energy 14 51,756 Telecom 4 187,360 Automobile 7 1,102 Cement 17 16,178 Chemical and Fertilizer 23 41,922 Engineering 7 183 Ghee Mills 24 843 Rice and Roti Plants 23 324 Textile 4 371 Newspapers 5 271 Tourism 4 1,805 Others 6 159 15 Total 167 476,421
    16. 16. Benefits of Privatisation Increased private sector share in GDP Induced investment and transfer of technology Improved management via introduction of international best practices and quality improvement increased productivity and competitiveness Employment generation leading to poverty alleviation Creation of fiscal space for allocation of funds to social sectors and infrastructure development Better services, products, higher profits leading to increased dividends and tax revenues 16
    17. 17. Prospects Broad national consensus on need and benefits of privatisation/ deregulation in the country Robust private sector to take on even loss making state owned enterprises( SOEs) Comprehensive legal framework available Experience of 2 decades of successful privatisation Support of international organizations Strong judiciary, civil society and media to ensure transparency 17
    18. 18. Challenges Domestic and International financial crisis Huge losses of State Owned Enterprises Share values of many likely transactions at all time low Managing public interest in industries with social repercussions i.e. power, transportation etc 18th Constitutional Amendment has increased the role of provinces in privatisation decision making process Regulatory/ dispute resolution framework needs changes 18
    19. 19. Way Forward 19
    20. 20. Privatisation Strategy1. Loss reduction and efficiency improvement will remain as basic objectives of privatisation in Pakistan2. Corporatization and Restructuring of State Owned Enterprises before their privatisation.3. Transparency as a cornerstone of entire process.4. Safeguarding the interest of employees and consumers.5. Strengthening of regulatory framework.6. Strategic sale and Private Public Partnership with management control continues to be the main strategy7. Sectors chosen for privatisation on priority are infrastructure, energy and financial institutions 20
    21. 21. Upcoming TransactionsSr. 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) 11 Pakistan Mineral Development Corporation (PMDC) 21
    22. 22. Thanks 22

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