Sidra Naeem 01-122131-026 MBA-2D

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Introduction:

PRIVATISATION is a process of transfer of ownership of property or business from a government to a private entity. Privatization is not a new phenomenon in Pakistan. Since 1990, Pakistan sold off 167 state-owned enterprises (SOEs) at a price of Rs476 billion. The first phase of privatization in 1992-96 included partial privatization of banks; this was followed by the second phase (1997-2000), resulting in the complete denationalization of the banking sector. And the last phase of privatization from 2001 till 2008 selling off non-banking sectors.

Currently, the government has selected sectors for the new phase of privatization policy 2013 are PIA, Pakistan Steel Mills (PSM) and public-sector power projects, including Pakistan Transmission and Dispatch Company (PTDC). Government sources suggest that more than 23 loss-making companies will go under the privatization in order to support a struggling economy.

Establishment of Privatization commission:It is established under ordinance of 2000 by the president of Pakistan. The Commission is governed by a nine (09) member Board with Minister for Privatization as Chairman. The board is independent and is denominated by member of private sector.

The private commission performs following functions;

Recommendation of privatization policy guidelines to the Cabinet;

Preparation of privatization programme;

Planning, managing, implementing and controlling the privatization programme, approved by the Cabinet;

Taking operational decisions on matters, i.e. Restructuring, deregulation and regulatory issues.

Privatization Policy of Pakistan:

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The privatization policy of Pakistan was based on the following principles:

1. Privatization will be conducted to provide benefit to all, not to give advantage to few.

2. Privatization should make local industries and services more efficient and competitive.

3. The whole procedures of privatization should be transparent and it should free from political influence.

4. In case of certain units such as major utilities or banks there will be a process of prequalification.

In to days modern age of internet, policy maker have great benefit ,as they can learn experience , policies of other countries in the field of privatization.

Objectives for Privatization:Normally the state has one or more of the following objectives of privatization

1. Strengthening of private sector. This was the objective behind the first generation of privatization carried out in Pakistan in 1960s when state built factories in strategic and other important sectors and handed them over, at very nominal rates, to the businessmen who were reluctant to invest in these sectors due high risks involved.

2. Improving the efficiency and service delivery. Pakistan privatized a large number of its SOEs in the second generation privatization carried out in the 1980s and a990s, to increase efficiency and effectiveness of state owned enterprises.

3. Reducing the huge state subsidies The state owned enterprises that are going through loss, but 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 privatization in Pakistan in 2000s.

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The major purpose of privatization in Pakistan to a maximize efficiency, investment, production, employment, physical and social infrastructures and debtRetirement.

4. To Encourage foreign investment.

One other objective of privatization is to encourage foreign investors for investment.

Disadvantages of Privatization

1. Increase in Tax Saving.

Private sector generally tries to avoid payment of taxes. Thus privatization of enterprises will result in the decrease of tax income.

2. Concentration of Wealth.

Privatization of large industrial units and services sector such as banks and insurance companies will increase concentration of wealth in private hands. It means only rich people will reap the fruits of industrialization.

3. Against welfare of society.

In privatization the welfare of society in mostly ignored, as main focus is to earn profit, not to work for interest of society.

4. Limitation of services.

Usually private companies like to provide their services in the areas where more customers are available. They may don’t like to have branches in ruler areas.

5. Unemployment.

Privatization causes a lot of worker jobless, which is a negative impact on economy of country in turn.

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Quick Look at the Past:There have been two tides of privatization in Pakistan. The first tide is from1992 to 1994 and the second tide from July 2001 to October 15, 2002. In the firstPeriod assets worth Rs.120 billion were divested and in the second period assetsWorth Rs.65 billion were divested.The Asian bank conducted a thorough study of first period, the following table(given below) sums up their findings of overall privatization process assessment.

Number of Units Privatized in Pakistan

Sector Number Amount(Rs. Billion)

Automobile 7 1.1

Banking 4 6.2

Cement Production 11 7.8

Chemical/Fertilizer 14 2.0

Energy 3 10.6

Engineering 7 0.2

Ghee Production 19 0.7

Roti Plants 15 0.1

Telecome 1 30.6

Textiles 2 0.1

Others 20 1.1

Total 103 60.5

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Source: Privatization Commission’s Annual Report (2000)

SOEs Better Same Worse Total

PMES 9 13 16 38

MISC. 3 10 1 14

GHEE MILLS

2 12 5 19

RICE MILLS

2 - 6 8

BANKS 2 2 - 4

TOTAL 18 37 83

PERCENTAGE

22 44 34 100%

Source: Impact and Analysis of Privatization in Pakistan: ADB Report October 1998.

The above table clearly indicates that only 22% of the privatized units werePerforming better, while 44% approximately the same and about the third i.e. 34% worse than before. The main reason of privatization that is improving efficiency of units, was only attained by about 1/5 of the units, whereas the rest were working with the same efficiency or worse than before.

Number of Units failed after Privatization

Moreover few other units also got close as consequence of Privatization. Which are listed below.

1) Naya Daur Motors 2) Dandot Cement 3) Zeal Pak Cement 4) National Cement

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5) General Refractoriness 6) Pak PVC 7) Swat Elutriation 8) Nowshera PVC 9) Nowshera Chemicals10) Pak China Fertilizer11) Karachi Pipe Mills12) Metropolitan Steel13) Pak Switchgear14) Quality Steel15) Indus Steel Pipe16) Fazal Veg. Ghee17) Haripur Veg. Oil18) Khyber Veg.19) Suraj Ghee Indus.20) Hydari Veg. Ghee

The closure of these units has played havoc to the national economy and the first phase of privatization has contributed to the lower rate of industrial and Economic growth. The GDP growth which was above 6% in the 1980s declined to around 4% in the post privatization period.The reasons for the failure of these units are many. The main reason is, that these units are sold out without checking the creditworthiness of the respective parties. Three units were given to Schon Group, whose reputation was very horrible and known to everyone in Pakistan. All given three units, National Fiber, Pak China and Quaidabad Woolen Mills were closed suddenly after their privatization.

Another unit which is of Zeal Pak Cement also closed after privatization, because the buyer is not interested in running it. But in stripping the assets. Engineering sector which already had weak basis was badly affected by Privatization. The other privatized unit form cartel, a cartel was formed between D.G. Khan Cement and Maple Leaf Cement to exploit the consumer. The other important rule of effective privatization is also ignored, that is not to give more than one unit to a party. Therefore government without thinking even a single time had given two big units i.e. MCB and DG Khan Cementto Mian Mansha and three units to the scandalous Schon Group Thus results shows that first tide of privatization failed to achieve the actual goal of Privatization. Because procedure was not transparent, it is badly affected by corruption

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The second tide of privatization was from July 2001 to October 15, 2002. The major privatization which took place during this period included;

(1) sale of GOP “Working Interest” in six oil concessions(2) sale of 51% GOP stake in UBL

(3) sale of Pak Saudi Fertilizer Ltd.

This privatization tide was pushed by IMF as the privatization of all programmed public assets was part of the undertaking given to the Fund for its latest financing facility under the name of Poverty Reduction and Growth Facility (PRGF). The gross proceeds from privatization during the second period amounted to Rs34.7 billion In the second phase the government has sold public assets which were highly profitable for a trivial net amount of Rs4.7 billion.

Is Privatization in Pakistan is effective??

A economic historian, Gerschenkron’s argument is that in those states which start late in the race of development, the public sector has to play a vital role in accelerating the economic growth. As is in developing countries, the private sector is shy, inexperienced and not equipped to embark on rapid industrialization. Pakistan along with other developing countries followed the activist role for the state in industrialization and the rate of industrial growth Normally it is considered that private sectors are more efficient than public sectors. But according to recent research made by Dr. Akhtar Hassan Khan on comparison of public and private sector producing similar goods, he draw conclusion that ownership of industry from public to private is neither a necessary nor a sufficientCondition for more efficient operation of specific industrial enterprises. But some time the efficiency of public sector is affected due to over staffing, politically influence.The second reason for privatization is its fiscal affect or impact. It helps to retire the public units that are going in loss and required a large support from budget. The opposite view is that the public enterprises after nationalization in 1973 doubled the payment of their taxes. If public sector organizations are going through profit it would yield greater return on earning which is more than the amount at which it is barrowing money from the market. The privatization of a profit oriented public enterprise would have a negative impact on budget.

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The third reason of privatization is that it speedup the competition and make capital market more strong. If all working unit of same sector such as cement are owned by government and are sold to different business parties, then there would be a positive competition. But if there is both public and private units working for provision of same commodity, then there is no healthy competition. Capital market is not strengthened at all, if one public sector unit is handed over to the private party without some of its shares being offered to the public, so for strengthening of capital structure it is important to offer some of its share to public sector through stock exchange. Privatization in Pakistan has not met its objectives, for the reasons noted above; Moreover, IMF’s next demand will be to privatize Mangla and Tarbela dams, which would bring an utter ruin to the economy. There has been massive corruption during privatization process in Pakistan from 1985 until 2008. It is very clear that the privatization process has not been proved as a key to economic development as was claimed by the different government from 1988 to 2008, but instead a total disaster for the economy of Pakistan. The valuable public assets was sold at throw away prices and caused a huge loss to the national assets

Should Pakistan privatize its state owned enterprises?

In the light of above mention facts my answer is No. In my point of view we should follow china policies of investment, instead of following the tide of privatization blindly. The Washington Consensus and international financialInstitutions have been putting pressure on China to privatize its public enterprises, which are passing through loss. But china is paying no attention toward there pressure and they don’t stop investing money in their public sectors. We should open ways for private as well as foreign investor to make investment in new sectors.Government is looking for privatization of some industries in other sectors such as PIA (Pakistan Airlines), Pakistan Railway, Pso (Pakistan State Oil) and Pakistan steel mill

Privatization of PIA

Privatizing PIA is not a good solution, state had invested a lot of money in PIA,it is right that PIA fails to generate profit due to political involvement, overstaffing, poor management ,lack of efficiency, But it can be valuable asset to state, instead of privatizing it 100% state only sold out 26% of its share to private investor and kept remaining 74% under its own control, but in spite of this all PIA is still under

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loss. State should focus on limiting poor performance and improving public sector resource allocation. Country defense and other significant matters are also attached with PIA which could be affected by privatizing of PIA.

Privatization of Pakistan Railway

Pakistan railway is also passing through loss, from last few years. According to government Pakistan Railways fails due to shortage of equipment, poor maintance, corruption and as well as overstaffing. So by the end of March 2014, the government is planning to privatize it. But privatization is not the solution, as if railway privatizes the companies who owned it, would just think of profits and keep only the lines connecting major cities active. While on the other side government would make sure that railway reach everywhere. Moreover railway if get privatize would became expensive and it may be difficult for common man to travel through rail even. Railway requires long term investment to maintain its infrastructure again, and only the government can provide with unlimited or large source of finance for it. Pakistan Railway is a state owned enterprise with 60 locomotives out of 500 total running with -ve income balance but having 85,000 workers, and requires 10,000 workers only. Number of employee should be according to requirement Government should try to get rid of this overstaffing, by cutting the expenses it can invest in building its infrastructure once again. One option can be, public private partnership, state can encourage private investor to invest in railway. So, Pakistan should not privatize its railway but it needs restructuring.

Privatization of Pakistan State oil

PSO is Pakistan’s largest corporate unit and the only corporate unit which is included in Asia’s 500 leading enterprises. The other two oil distributors areForeign companies Shell and Caltex. If we sell PSO, foreign companies can control oil supply to different points in time of emergency. Hence both economicand strategic consideration demand that PSO should not be privatized. Government can ask china’s for help as they have make wonderful progress in railway industry.

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Conclusion:

The above mention facts shows that privatization in Pakistan is not as effective as it should be.

Privatization has failed to prove the hypothesis that public enterprises are inefficient while private enterprises are efficient. Many of the privatized units are in deep financial trouble; some have failed to pay the full purchase price to the privatization commission.

The Government only criteria is to sell out any unit to the party offering highest bidding amount, instead of their ability to run out that unit in a successful way. Many of them either don’t have capacity or they don’t have any intention to operate the unit.

State owned enterprises that are public monopolies, but when they get privatized they become private monopolies, which can affect the overall economy system of the country.

The fresh wave of privatization will render several thousands of workers jobless and create massive unemployment in the country. The main opposition party of PPP has already warned the government of mass protests across the country if it pushes ahead with the privatization plans. Parties opposed to the privatization agenda argue that basic rights of labor are trampled upon after the process of denationalization.

Privatization proves government is not serious about solving issues and rather wants an easy solution like selling government organizations to private companies, it is true that government is facing huge losses in PIA and railways but they must find a better way to manage them. government is looking for short term goals

In most of the responses to privatization union leadership failed to protect the genuine rights of the workers. They fell to opportunism, and succumbed to pressure of state, generating a great deal of disappointment among the workers and the general public. But the resistance of PTCL workers in 2005 was by no means a minute task. The 10-day strike was a great success.

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Though the spirit of this resistance, however, has not yet donned the cloak of a movement. But it definitely shows the decisive role of workers in the economy and the society

References:

Fatima.M (1996). Privatization in Pakistan-I. Pakistan & Gulf Economist. 15(5): 35-37

GOP Pakistan Labor Gazette (1995). Report of July 1994 to June 1995, Ministry of Labor, Government of Pakistan.

ILO (1996). Pakistan Privatization, Employment, Retraining and Social Protection. A Report Prepared by ILO Seat under UNDP Technical Support, ILO Geneva.

Annual Reports Privatization Commission of Pakistan 2000, 2001, 2002.

Asian Development Bank, Impact Analysis of Privatization in Pakistan, October, 1998.

Economic Survey 2001-02, Government of Pakistan, Islamabad.

Annual Report of the State Bank of Pakistan, 2002.

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