Shahid Hussain RajaIndependent consultant-public policy

www.sanoconsultants.co.ukwww.shahidhussainraja.com

Introduction Privatisation : Concept & Need Modes of Privatisation Privatisation Process Functions of Privatisation Commission Privatisation in Pakistan Prospects & Challenges Way Forward Q&A

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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

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“…. 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)

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.

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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.

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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

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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.

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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;

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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.

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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

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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

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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

Sharing of Bid Documents/Instructions with pre-qualified bidders and pre-bid conference

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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

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Privatisation in Pakistan

1960s First Generation Privatisation

Objective Create / Strengthen Private Sector

Strategy Build factories and Sell them

1990s Second Generation Privatisation

Objective Reduce Government Losses

Strategy Disinvest, Deregulate

2000s Third Generation Privatisation

Objective Improve Efficiency & Profitability

Strategy Seek Strategic Investors

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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

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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

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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

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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 167 476.4221

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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 transparency

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

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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

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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.

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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)

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Sr. No. Transaction1 Oil & Gas Development Company Limited 2 Pakistan Petroleum Limited 3 Heavy Electrical Complex4 National Power Construction Company 5 Peshawar Electric Supply Company (PESCO)6 Quetta Electric Supply Company (QESCO)

7Hyderabad Electric Supply Company (HESCO)

8National Power Construction Corporation (NPCC)

9 Faisalabad Electric supply Company (FESCO)10 Jamshoro Power Company Limited (JPCL)

11Pakistan Mineral Development Corporation (PMDC) 28

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