Economic reforms: Part - XIII

The third PML-N government (2013 - to date) had extraordinary clarity in implementing a home-grown agenda of economic reforms to restore an ailing economy.

This agenda was soon translated into a three-year IMF programme which was successfully implemented. This was the first time a Fund programme was completed, and that too by a democratic government. The key accomplishments include (a) major fiscal adjustment through a combination of enhanced tax receipts and expenditure cuts; (b) improved energy supplies of power and gas and resumption of investment in the energy sector; (c) revival of privatisation programme; (d) auction of spectrum licences; (e) recapitalisation of problem banks; (f) strengthened autonomy of key regulators, the SBP (monetary policy committee) and the SECP (new SECP Act and Securities Act); and (g) strong financial sector reforms after enactment of laws for corporate restructuring, corporate rehabilitation, deposit protection and credit information bureaus. With a drop in oil prices and arrival of CPEC, the economic growth is rising, inflation is low, investments are surging and consumer spending is strong.

Unfortunately, the government’s focus was irretrievably deflected after the publication of the Panama Papers and subsequent events. Since then, the momentum generated by sound policies waned. Presently, the economy is facing the risk of slipping back into the same state from where the government inherited it.

It is significant to note that since 1988, when the first IMF adjustment programme was undertaken, there has been regularity in economic management and vulnerability. Governments indulge in fiscal indiscipline (high fiscal deficit) that leads to external account imbalance (balance of payment deficit), which cannot be cured without an appeal to the IMF.

The privatisation programme initially received resolute attention as the portfolio was assigned to a finance minister who saw its success as a critical precondition for the successful conclusion of the Fund programme. A list of 65 entities, for which the previous government had obtained the Council of Common Interest’s approval, was adopted as candidates for privatisation. As in the past, a combination of capital market transactions and strategic sales was to be adopted for the disposal of assets. In the first two years, all the capital market transactions – comprising residual shares of UBL, HBL, ABL and some shares of PPL – were completed with considerable success. UBL and HBL transactions were offered internationally and high-quality global investors purchased shares that contributed to the build-up of reserves. Even ABL and its transactions were significantly oversubscribed. These transactions brought a sum of Rs170.335 billion, more than 80 percent of which was in foreign exchange.

Unfortunately, this drive came to an abrupt end as privatisation moved to the more challenging phase of the strategic sale of key infrastructure units like the Pakistan Steel Mills (PSM), PIA and a number of corporatised units of the erstwhile Wapda. Only one company, the National Power Construction Company (NPCC), which kept dodging privatisation efforts through many regimes, could finally be sold (88 percent of GOP shares) to a Saudi investor at a price of Rs2.52 billion. Regarding other transactions, it would be instructive to analyse the reasons for their failure.

There is no doubt that the PSM transaction was a hopeless proposition. There was a negative, or at best zero, net-worth of the mills when the excess land was excluded from the equation. In October 2015, the Financial Advisor (FAs) suggested, and the Privatisation Commission Board approved, that the government should assume the loans and unpaid gas liabilities worth Rs142 billion, which would be offset against the excess land valued at Rs150 billion (14,574 acres out of 19,017 acres) to be retained. The value of the remaining operating assets and liabilities were comparable but regular employees had to be retained by the buyer.

For the government to assume a huge debt liability against a non-remunerating asset (land) was an untenable proposal. When the Cabinet Committee considered the proposal, it was not inclined to accept it as it would have been difficult to defend in public. However, an idea was floated during the meeting that since the Sindh government would face no difficulty in disposing off the land, the federal government would give them the first right of refusal to buy it on an as-is-where-is basis, free of cost.

The Sindh government was in no hurry to take a decision and by the time it declined the offer, the environment had changed as many other failures on the privatisation front had taken place. To this day, the asset remains with the government with no resolution in sight.

The story of the power sector is more painful. The easiest of the assets was the Kot Addu Power Plant. Even though it was privatised in 1996 to a strategic investor (National Power (NP) – a renowned British utility), about 40 percent of its shares remained in the government’s hand through Wapda. Subsequently, the NP sold its shares to banks and other bodies and left the country. While off-loading the 40 percent, the government had yet another chance to induct a strategic investor (preferably a utility) to run the plant and raise the prospects of future investments. Since Kot Addu is also a listed company, there was the possibility of off-loading its shares in the stock market. Undoubtedly, a higher value would only accrue in the first option.

The PC initially prepared the transaction for a strategic sale and solicited expressions of interest. Road shows were also held and some quality investors expressed interest in the transaction. Sadly, at the crucial stage of soliciting bids, the transaction was opposed by the officials of Wapda and the Ministry of Water and Power, who refused to provide assurance for the continuation of the power purchase agreement (PPA) beyond the current term that was expiring in a couple of years. Wapda opposed it for fear of losing a regular income through dividends. The assurance to Wapda that it would receive the proceeds of sale was not enough.

To be continued

The writer is a former finance secretary. Email: waqarmkn@gmail.com