Money Matters

Mere disinvestments

Money Matters
By Hussain Ahmad Siddiqui
Mon, 05, 19

In October last year the Board of the Privatization Commission (PC) had approved a short-term and medium-term program for the privatization and divestment of various State-Owned Enterprises (SOEs). However, it was decided to exclude 19 industrial units from the privatization list, which included State Engineering Corporation’s organizations namely Heavy Electrical Complex (HEC), Pakistan Machine Tool Factory (PMTF), Pakistan Engineering Company (PECO) and others, operating under the Ministry of Industries and Production.

In October last year the Board of the Privatization Commission (PC) had approved a short-term and medium-term program for the privatization and divestment of various State-Owned Enterprises (SOEs). However, it was decided to exclude 19 industrial units from the privatization list, which included State Engineering Corporation’s organizations namely Heavy Electrical Complex (HEC), Pakistan Machine Tool Factory (PMTF), Pakistan Engineering Company (PECO) and others, operating under the Ministry of Industries and Production.

The rationale for retaining these units with the public sector was that these are important strategic industries contributing largely towards industrialization and import substitution, whereas private sector has not demonstrated significant investment in engineering industry in the past. Earlier, many attempts were made to privatize these three major industrial units but without any success. It was therefore expected that these industrial units, which have underperformed primarily due to poor governance and management failures, would be restructured and made economically viable. The government was said to have taken a fresh approach to the rehabilitation of all loss-incurring SOEs in order to prepare for phased, selective and prioritized privatization. For the purpose a holding company “Sarmaya-e-Pakistan Limited” was incorporated on February 13 with an authorized capital of Rs500 billion.

But, in a subsequent development, the government took a full U-turn and decided on March 6 to privatize the delisted industrial units including State Engineering Corporation, its industrial units and subsidiaries. These are HEC, PMTF, PECO and Enar Petrotech Services, a design & engineering consultancy firm, all planned to be privatized in the second phase to be implemented within the next few years. Ironically, the privatization process of the eight SOEs in banking, power and services sectors identified for sell-off in the first phase has not yet been initiated that was to be completed within one-and-a-half years.

Since 1991-92 the government of Pakistan is effectively pursuing the policy of privatization and deregulation with the broad objectives of creating a liberal economic environment, improving national productivity and thus efficiency and profitability, and aiming to achieve rapid industrialization. For the purpose of transferring the ownership of the SOEs to private sector along with control over its management, the PC was established on January 22, 1991. In all, as many as 61 industrial units under various sectors of industry, namely automobiles, chemicals and fertilizers, ghee, engineering, petroleum and others, have been privatized so far, mainly during early and mid-1990s. Out of these, 93% were operational at the time of privatization, whereas about 50% were either closed down or liquidated on handing over to the private sector.

The picture is more dismal in case of privatized engineering SOEs that were managed by State Engineering Corporation. Here it may be worthwhile to briefly discuss significance of the engineering industry. All over the world engineering goods industry is termed as prime mover for the economic growth. More so in case of Pakistan which does not have abundant oil resources, and has to achieve, strategically, an optimal import substitution, and export promotion through industrialization. Thus, the engineering industry capability has to serve as a vehicle for attaining the goal of self-reliance. Indeed the development of engineering goods industry creates large-scale employment opportunities mainly for educated and highly skilled persons, and resultantly achieving socio-economic progress at the national level.

That the growth of engineering industry in Pakistan was very slow until the 1970s when the planners executed heavy engineering projects like Heavy Mechanical Complex (HMC), Heavy Foundry & Forge (HFF), both at Taxila, and Pakistan Steel Mills (PSM) at Karachi. A number of light engineering units were operative in the private sector, which were nationalized during 1972-73. Thus the engineering industry flourished onward, as a result of various policy measures adopted by the government. A number of automobile and tractor manufacturing-cum-assembly units were established as well as the auxiliary and ancillary industries. A large number of sugar mills and cement plants were established using locally manufactured machinery and equipment.

Privatization of the six engineering industrial units in the 1990s, which were under the management of the State Engineering Corporation, however stalled the growth of engineering industry. A couple of these units were never put into operation after takeover by the private sector and remained closed after their privatization, though a few of these units were profitable and managed efficiently prior to privatization. Again, the government, before handing over management to private sector, had picked up all government and other liabilities, and employees were relieved under golden handshake/voluntary separation schemes at the cost of PC in all these cases.

These six industrial units were disinvested at a total sales price of paltry Rs 140 million. In most of the cases the revised sale price of the SOE was not only less than reserve value determined by the PC, but even less than the bid value. For example, the reserve or reference value of Metropolitan Steel Corporation was Rs200.92 million, whereas it was sold at Rs67 million (revised sale price). Similarly, the bid value of Pioneer Steel was Rs 16.9 million but its revised sale price was Rs4 million. The then Experts' Advisory Cell of the Ministry of Industries and Production had prepared a report during the year 2000-2001 on the performance of privatized 61 industrial units in comparison to their performance during pre- privatization period.

The report, titled "Dis-investment of Manufacturing Enterprises in Pakistan (Performance Review)", observes that there was "significant decline in manufacturing activity at the national level" when comparing operating results of these 61 units during pre- and post- privatization periods. Performance of operating units after privatization (period: 1991-99) is compared with the performance during the period 1987-91 on the basis of audited accounts of the companies, taking into consideration major performance indicators. The analysis is revealing and shocking insofar as the performance of the above-mentioned engineering units is concerned. The performance of these engineering units witnessed a sharp and steep decline of production, sales and profitability in the years of takeover by the private sector.

Production (in terms of value at constant prices of financial year 1987-88) of these units was over one billion rupees in the pre-privatization period, whereas after privatization production was recorded at the level of Rs300 to Rs600 million. It has been observed that performance of the companies, and resultantly their profitability, declined drastically during the interim period of privatization process. These units after takeover by private sector incurred losses to the extent of Rs(72) million, Rs(632) million and Rs(21) million in the years 1996-97, 1997-98 and 1998-99 respectively. After incurring losses in the post-privatization period, 5 out of the 6 units suffered final closure within few years, some achieving partial operations in subsequent years, whereas two units still remain closed.

It may be of interest to look at the activities and performance of each of these industrial units before and after their privatization and divestment. The Hye-Sons Group at SITE Karachi established Karachi Pipe Mills Ltd in 1955. Its products were GI and MS pipes and poles for the general public, private industry and gas companies. At the time the company was nationalized in 1972, there were very few pipe-making enterprises in the country. It was the only API (American Petroleum Institute) approved manufacturing facility, and its products enjoyed a high reputation in the market. Offers were first invited for the sale of the company in 1985-86, but the divestment did not materialize, and was again placed on the 1989 privatization list. During the period 1985-86 to 1987-88 its production and sales was in the range of 11,000 to 14,000 tons of finished goods.

The company earned pretax profit of Rs3 million in 1985-86 and Rs4.8 million in 1987-88, but suffered losses in subsequent years as a result of on-going privatization process, though during the year 1990-91 the company was again in profit. Karachi Pipe was dis-invested in January 1992, and during the next two years of its operation it incurred pretax loss of Rs(9) million and Rs(7) million in the years 1992-93 and 1993-94, respectively. The company was bought by the owners of Jamal Pipe Industries, who as its competitors were perhaps the most qualified to run this unit more efficiently and profitability. But, it appears they decided to discontinue production at this facility, to promote only Jamal Pipe in the market. The factory, which had closed its operations in 1995, is now in production again but no operational details are available.

Nationalized in 1972, the Pioneer Steel Mills was established in private sector in 1962, with a share capital of Rs7.5 million, to produce GI and MS pipes and poles. The company, under the government control, remained in losses during pre-privatization period, mainly due to high financial cost, as it was asked, in 1976, to help Trading Corporation of Pakistan. Its production and sales during the year 1987-88 was in the range of 4,000 tons of finished goods, with manpower strength of 210. The company was handed over to its owner of pre-nationalization period, at a revised sale price of Rs4 million. The government even extended loan/advance to Pioneer Steel amounting to Rs55.4 million. The present management has, reportedly, repaid nothing so far against this loan that had swelled to billions of rupees. The company is in operation, but no data with regard to its production, sales, profit/loss, etc. during the post-privatization period is available either with the PC or the Ministry of Industries and Production.

Metropolitan Steel was established in 1965 at Landhi, Karachi with share capital of Rs41 million, as a public limited company. It produced steel rolled products such as ribbed TOR bars, deformed bars, mild steel wires, special steel wires, wire rods and baling hoops. It was one of the major designers, producers and suppliers of steel towers for electricity transmission and distribution, 11kv, 66kv, 132kv and 220kv lines, according to international standards. The company had supplied thousands of tons of towers and structures to WAPDA, competing in against international tenders too. During the late 1980s its production and sales was in the range of 80,000 tons of finished goods, with a pre-tax profit of Rs20 million to Rs45 million, with total manpower of over 1,200 personnel. The performance during succeeding years declined however, mainly due to the announcement of privatization policy by the government in 1989, and the company being on the initial privatization list. The company was finally privatized in May 1992.

After take-over by the private sector its management changed a number of hands, but could not put the company back on rails. The company could not maintain its operational level by any standards. The production dropped to Rs480 million in 1992-93 as compared to Rs731 million during the year 1990-91. The production continued to decline every year, and recorded Rs 256 million in 1998 before closure of the company in subsequent year. Correspondingly, net sales declined from Rs1,146 million in 1990-91 to Rs44 million in 1997-98. The company was in profits during the pre-privatization period, but incurred heavy losses in post privatization years. The company was put on sale again in 2003, this time by the consortium of banks that later owned controlling shares. During the half-year period July-December 2018 the company recorded sales valuing Rs10.17 million and its operating loss was Rs17.38 million. Currently, its employees number fourteen only.

Pakistan Switchgear Ltd was originally a fuse-gear manufacturing factory of the then English Electric Co. of UK. The government purchased it from Wazir Ali Group in 1975. Pakistan Switchgear Ltd was thus established in 1976 with 100 percent government ownership, with share capital of Rs11 million. Its products included low-tension fuse-gear and switch gear, control and protection panels, medium- and high- voltage switch gear, and electrical equipment for sugar, cement and textile industry. It had supplied control and relay panels for 66kv and 132kv substations valued at $6.5 million, and circuit breakers 132kv at $4 million, to WAPDA. The company was sold in June 1992, at Rs9 million (revised sale price) against bid of Rs22.21 million, under the so-called employees- management buy -out scheme. The factory has remained closed ever since.

Established in 1954 with a share capital of Rs14 million, the Quality Steel Works used to produce steel rolled products, TOR steel bars, bright shafting and electricity transmission and distribution towers. In 1987-88 the company's output was 28,000 tons of finished goods, with a total strength of 549 employees, and it earned pre-tax profit of Rs13.8 million during the same year. The company remained in profits until the year 1990-91 when it was offered for sale. Quality Steel was privatized in April 1993. This company too failed to continue profitable operations after take-over by the private sector in spite of growing market demand for its products. Production declined to the level of Rs152 million, and sales to Rs181 million during the year 1996-97 as compared to Rs277 million and Rs264 million, respectively, in the year 1989-90. It was closed in 1998. Later, the company was put on sale by the bank from which it had borrowed the working capital and could not repay. During these years the assets of the company have changed hands again and again. Reportedly, the company operates nominally, incurring heavy losses.

During early 1970s the government had decided to undertake indigenous production of textile machinery, and for the purpose set up a Textile Machinery Corporation having production facilities at Karachi and Lahore, to manufacture ring spinning frames, cone winders etc. The factory at Karachi, later known as Textile Machinery Company (TMC), was completed in 1975 at a cost of Rs18 million. Its products included auto and manual cone winders, high drafting system, and textile spares. The company earned pre-tax profit of Rs7 million, Rs6 million and Rs3 million, during the financial years 1985-86, 1986-87 and 1987-88, respectively, though it hardly operated at 50% capacity utilization. The company was privatized in October 1995. Since its transfer to the private sector the operations are at standstill. The buyers reported sold individual items of plant machinery in the market. The other unit, Spinning Machinery Company of Pakistan (SMC), Lahore, which was manufacturing ring spinning frames and spares for textile industry and a variety of other engineering goods, remained on privatization list for more than a decade, was finally shut down in 2004 and transferred to the PSM for setting up an institute.

As reflected from the above scenario, objectives of privatization could not be achieved in case of the engineering industrial units divested during the period 1992-1995, whereas the remaining units like HMC, HEC, PECO and PMTF failed to attract private sector for their privatization repeatedly announced by PC in subsequent years. These six/seven units provided a strong engineering industrial base that has been eroded due to closure of these companies. The huge investment remains idle, and the technical and managerial expertise developed over the years has gone down the drain. The poor performance of the companies in the post-privatization period has cost the nation not only a serious loss of production and productivity, there has been significant loss of tax revenue to the government too. The duties and taxes paid by these companies in the year 1990-91 amounted to Rs 143 million. It is difficult to gauge, but easy to understand, the net cost to the economy on account of closure of these engineering units. Also, the social cost of dis-investment has been very high.

These SOEs were providing employment to about 3,000 engineers, technicians, skilled workers and other staff. The privatization of units not only deprived these persons of employment but was also unable to generate additional employment opportunities as was envisaged. These industrial units had also served in the past as training ground for highly skilled technical manpower. It is observed from the above analysis that the privatization of engineering industrial units seems to be a failure based on all standards of performance, and the nation has paid a high cost for it. The private sector was simply interested, in some cases, only to purchase assets, particularly the real estate, of these companies and never intended to operate as industry. Sadly, there has been a multiplier adverse effect on the development of engineering industry in the country, as other units too suffered badly.

Learning from the past experience of privatization of engineering industrial units, the government would be well advised not to undertake privatization of the remaining units under the State Engineering Corporation, and instead, to adopt alternative strategy for restructuring and strengthening of these SOEs. This will be in the best national interest at a time when industrial revival is proverbial need of the hour. Otherwise, history will repeat itself, confirming Georg Hegel’s famous quote: “We learn from history that we do not learn from history”.

The writer is former chairman of the State Engineering Corporation