PRIVATISATION
Amidst the controversies and speculations about privatisation of the Pakistan International Airlines (PIA) and in the wake of the recent failed effort to divest the Heavy Electrical Complex (HEC), the government has revised the list of upcoming transactions, according to the latest reports.
In all, 28 State Owned Enterprises (SOEs) are to be privatised now, whereas ten capital market transactions are included in the programme for ‘early implementation’, while State Life Insurance Corporation of Pakistan is scheduled for divestment by June, and Pakistan Steel Mills and SME Bank Ltd by December this year. Given the conditions of the slow pace of privatisation and the current political issues, it appears to be an ambitious programme.
Pursuant to the announcement of the “Privatisation Policy and its Implementation” in January 1992, a total of 172 transactions of the SOEs with cumulative sale price of about Rs649 billion have been completed till date. However, major transactions ie 167 transactions, at a gross cumulative sale price of Rs476 billion were made by 1997, of which Rs86.3 billion is still outstanding against the buyers who remained defaulters in as many as 21 transactions.
Reportedly, successive governments have failed to secure and realise the outstanding amounts. In reality, none of the cherished objectives of privatisation could be achieved effectively, as only 22 percent of privatised units performed better, 44 percent remained the same and 34 percent performed worse compared to the pre-privatisation period, according to the October 1998 report of the Asian Development Bank (ADB).
Privatisation impact has been very harmful insofar as divestment of 38 manufacturing enterprises are concerned, since as many as 16 units performed worse in post-privatisation period and only 9 performed better. Among these entities, the engineering industrial units suffered most.
A total of seven SOEs were privatised at a throw-away price of Rs183 million (not billion) during January 1992-July 1997. These are Karachi Pipe Mills Ltd (KPM) located in SITE Karachi, Pioneer Steel Mills Ltd (Pioneer) Muridke in District Sheikhupura, Metropolitan Steel Corporation Ltd (MSC) in Karachi, Pakistan Switchgear Ltd (PSL) in Lahore, Quality Steel Works Ltd (QSW) in Karachi, Textile Machinery Co Ltd (TMC) in Korangi Industrial Area of Karachi, and Indus Steel Pipes Ltd (Indus) in Kotri, District Jamshoro. All these units were operational at the time of privatisation; and highly profitable, with the exception of two companies that incurred losses, but four units, namely KPM, QSW, TMC and PSL remained non-operational since takeover by the private sector.
The performance of these six units (Indus not included) witnessed a sharp and steep decline of production, sales, and profitability in the years of takeover by the private sector. The patterns of pre-tax profit/loss of these SOEs showed profit of about Rs45 million in the year 1987-88, Rs21 million in 1988-89 and Rs22 million in 1989-90. Cumulative production (in terms of value at constant prices of financial year 1987-88) of these units was over Rs1,000 million in the pre-privatisation period, whereas after privatisation the production was recorded at the level of Rs300-600 million.
The same trend was visible related to cumulative sales which reduced during the year 1998-99 to Rs238 million from Rs1,898 million achieved in 1989-90. Thus, on the whole, operational efficiency deteriorated after privatisation, and resultantly their profitability declined drastically.
Having incurred losses in the post-privatisation period, five out of these six units, which were mostly listed companies, suffered final closure within a few years. PSL, the only manufacturer of switchgear in the country, sold at paltry Rs9 million, could not remain operative from day-one of takeover.
Pioneer Steel was handed over to its owner of pre-nationalisation period only at Rs4 million. KPM, the only manufacturers of API-approved steel pipes, closed its factory in 1995, and subsequently the company was liquidated in 2002.
Likewise, order for winding up of QSW, producers of deformed bars and electricity transmission towers, was finally passed by the Securities and Exchange Commission of Pakistan (SECP) in August 2010. QSW was sold at Rs13 million. MSC, another steel rolling mill with diversified products, after having changed different hands, was made partially operational in 1998, but suffered net loss of Rs65.72 million in 2010. Later, its operations were closed down due to accumulated losses and heavy debt, and trading suspended effective December 2013.
It is ironical that the liabilities of MSC, QSW and Pioneer Steel to public sector banks/international donor organisations were Rs1,128 million, Rs295 million and Rs915 million, respectively, that have not been paid by the buyers in violation of sale/purchase agreement, and remains government’s repayment obligation.
Auditor General of Pakistan (AGP), who had conducted special audit on privatisation in July 2002, reported irregularities in the privatisation of nine industrial units (including TMC and Indus) which cost the government over Rs4 billion. Divestment of these units has resulted in loss of output, loss of revenue, industrial slowdown and economic regression. Also, divestment of these SOEs resulted in massive unemployment, particularly of technicians and industrial workers, as about 3,000 engineers, other professionals, and workers were laid off.
Nonetheless, the government has not learned any lesson from privatisation, in particular, of engineering units in the 1990s. Heavy Electrical Complex (HEC) and Pakistan Machine Tool Factory (PMTF) are on sale, once again, though both hi-tech industries are of great strategic importance the world over. With the on-going privatisation of PMTF and HEC, these industrial units will further deteriorate in coming times.
Unfortunately, nothing concrete has been done by the government, despite repeated claims, to reform and restructure strategic units like PMTF and Pakistan Steel Mills. Unfortunately, the privatisation policy lacks a strategic vision, and feasibility, and effectiveness of divestment programme is not in sight.
There are no measures being taken to attract foreign direct investment (FDI), whereas local capital market has, apparently, no capacity, and on top of that a regulatory environment is missing. Engineering industry is complex, highly capital intensive, involving long return-on-investment period, and there are high costs of technology. It is therefore not one of the choicest sectors for the private sector to invest in.
The writer is ex-Chairman of the State Engineering Corporation
