Privatisation and Disinvestment

The Chairman of the Privatisation Commission (PC) insists that proceeds of disinvesting state equity in UBL and ABL in markets abroad were used to repay the external debt (not fund the fiscal deficit) as required by the law. But the fact is that external debt is rising and current account deficit has come down marginally courtesy high inward remittances. This conveys the impression that he is being ‘economical’ with the truth.

One view is that, if pressed hard to explain this quandary, he may resort to the logic that disinvesting minority holding in an entity doesn’t amount to ‘privatising’ it because the entity is ‘privately-owned’, and using the proceeds of such disinvestment for plugging the fiscal deficit doesn’t violate the law. What remains to be seen is how he reacts as the debate on this subject heats up.In legal terms, this stance may be defendable, but realistically speaking it would justify a contradiction. Reason: the currently applicable law on privatisation permits ‘retiring’ debt, not ‘servicing’ it. Debt servicing implies payment of the accrued mark-up or interest, which is a part of the current expenditure, and so not payable out of disinvestment proceeds.

Macroeconomics promoted many theories but the fact that, over time, Applied Economics evolved as a new discipline proves that economic principles can’t be applied to every economy as per their precise definitions; contours of an economy determine the extent of their applicability. Also, that social impact is the overriding consideration in economic decision-making.

Responsible state conduct demands going beyond the ambit of these definitions and legal justifications; it demands that proceeds of the sale of capital assets be used either to acquire other equally profitable capital assets or to retire medium or long-term debt. Meeting current expenditure from such proceeds is their gross misuse, even if legally defendable.

For a state like Pakistan, privatization or disinvestment proceeds must be invested in its physical infrastructure. That, however, is nowhere in sight; the aim right now is fulfilling IMF’s conditions to sustain its funding backup for sustaining the Rupee’s exchange rate. However, the fact is that, given the current loose monetary policy, the Rupee is sliding, though slowly.

What enabled Pakistan to ‘show’ a deficit of 2.2 percent during July-December 2015, was a mix comprising fresh borrowing of Rs 199 billion from the banking sector, Rs 296 billion from non-bank sources, and the provinces ‘showing’ a fiscal surplus of Rs 143 billion, which together plugged the bulk of the fiscal deficit. But the burden of debt servicing is rising significantly.

Besides the ongoing resource waste and frauds in state offices, one big reason for rising indebtedness is the burden of footing the losses being suffered by state-owned entities. Although one of the promises made to the IMF for obtaining its $6.4 billion Extended Fund Facility was to restructure these sick entities for privatization, nothing of the sort has been done.

In a scenario of Pakistan’s worsening risk perception the priority should have been the measures to retain domestic resources. But the revelation that in the last two years Pakistanis invested over Dh 16.1 billion in real estate in UAE alone proves otherwise. At the average exchange rate of Rs 27.5/Dh this outflow implies unchecked flight of Rs 443 billion from Pakistan.

That this capital flight took place despite supposedly ‘tough’ exchange controls governing outward foreign remittances, is a failure that must be explained by the financial services sector and its regulator because no corrective steps were initiated either by SBP or by NAB, despite the fact that this trend was pointed out to both by the worried market analysts.

This is a huge outflow of domestic investment that Pakistan cannot afford at a time when its risk perception has significantly reduced foreign investment inflows. The huge discounts at which Pakistan floated its latest issues of Euro and Sukuk bonds, and the steady pace at which foreign investors are pulling out of Pakistan, are indications of a slide in real investment.

These trends imply increased reliance on domestic resources for the badly-needed expansion of the industrial and service sectors to sustain growth matching the rise in population – a burden made twice heavy because the rising debt repayment and servicing burden is preventing badly-needed repairs to the physical infrastructure, especially of the power sector (let alone its expansion).

As of now, the option being exercised by the government is selling its minority holdings in profitable entities, which implies that while the loss-making state-owned entities will continue to consume scarce resources, the non-tax revenue provided by profitable state investments will disappear. The obvious outcome of this short-sighted strategy will be even higher fiscal deficit.

The reason why the government will find it easy to disinvest its holding in HBL’s equity is that HBL is managed by the private sector, has performed well since its privatization (especially in 2014), and these facts are verifiable from its financials that are audited by reliable entities – attributes that state-owned entities lack because of cronyism and pervasive malgovernance.

Of the over 50 loss-making state-owned entities the ongoing losses of PSML, PIA and Pakistan Railways account for hundreds of billions of rupees of current state expenditure. Revamping and restructuring these entities should have been the priority because cutting their losses could significantly reduce current expenditure but, sadly, the priority is metro bus services and motorways.

Discos are another huge category whose losses inflate the fiscal deficit. But you rarely hear about steps to check corruption therein that allows power theft, and cutting distribution losses by repairing/replacing generation plants, grid stations, feeders, transformers, transmission cables and connecting devices, etc. This is despite the fact that these flaws keep triggering massive public protests.

Blatant neglect of remedying the shortcomings that cripple the state-owned entities is the real reason for not privatising them. Besides, courtesy Pakistan’s current ranking on the ‘ease of doing business’ and ‘global competitiveness’ yardsticks, government’s privatization plans cannot create result-oriented interest in Pakistan or abroad unless efforts are made to remove these stigmas.

Yet, despite ignoring these challenges, our parliamentarians don’t lose any opportunity to claim the ‘supremacy’ of the parliament, and their being the ultimate deciders of the fate of the country and the nation. Nor do any of them realise that delaying the privatization of state-owned entities (bleeding wounds) manifests their gross incompetence as ‘managers’ of the state.

None realises the criticality of the fact that privatisation/disinvestment proceeds must be deployed in ventures that generate real value in the longer-term, which implies restructuring of the loss-making state-owned entities, or repair and expansion of the country’s physical infrastructure. This irresponsible, short-sighted mindset of its parliamentarians is Pakistan’s biggest ongoing tragedy.