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Privatizing engineering industrial units-

The government plans to privatise, fully or partially, through different modes, 68 state-owned enterprises (SOEs), and has selected 32 units and assets to be divested on priority, for which necessary approval from the Cabinet Committee on Privatisation has also been obtained.

Among these, 12 SOEs are to be privatised possibly within 12-15 months. The list includes Pakistan Steel Mills (PSM) at Karachi, which is reportedly being leased out to private sector, as a first step. Meanwhile, process to appoint financial advisors has been initiated by the Privatization Commission. The government initially offers 26% shares with the management control to strategic partner for which bids will be invited from domestic as well as foreign investors. It is envisaged to off-load 100% government shares of the integrated steel mills, eventually.

Despite repeated claims nothing concrete has been done by the government to reform and restructure strategic units like PSM. Other engineering industrial units to be divested, the privatization of which was stalled for many years, include Heavy Electrical Complex (HEC) Hattar, Pakistan Machine Tool Factory (PMTF) Karachi, Pakistan Engineering Company (PECO) Lahore and Sindh Engineering Limited Karachi. According to plans, HEC and PMTF are to be divested fully, whereas in case of PECO remaining 25% government shares will also be transferred to private sector on retirement of the government’s liabilities.

Privatisation of the SOEs was initiated in March-July 1991, though “Privatization Policy and its Implementation” was announced in January 1992. Since then 167 transactions at a gross cumulative sale price of Rs 476 billion have been completed. An amount of Rs 86.3 billion however is still outstanding against the buyers who remained defaulted in 21 transactions and the government has failed to realise so far. In short, none of cherished objectives of the privatization could be achieved effectively as only 22% of privatized units performed better, 44% remained same and 34% performed worse compared to pre-privatization period, according to 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-privatization period and only 9 performed better. Among these entities, the engineering industrial units suffered most. In all, six valuable assets of State Engineering Corporation were privatized at a throw-away price of Rs 140 million during 1992-1995. All were operational at the time of privatization; and highly profitable except one. But, four units, namely Karachi Pipe Mills Ltd, Quality Steel Works Ltd, Textile Machinery Co (all located in Karachi) and Pakistan Switchgear Ltd Lahore remained non-operational since take-over by the private sector.

On the whole, operational efficiency deteriorated after privatization. Quality Steel, which had accumulated losses of Rs 214 million against its paid-up capital of Rs 17.72 million as of June 30, 1998, and Karachi Pipe, both were in liquidation/winding process in 2002 onwards. On the other hand, performance of other two units (Metropolitan Steel Corp Ltd Karachi and Pioneer Steel Mills Lahore) has been dismally low. Metropolitan Steel was made operational only in recent years, hardly having achieved 15% of its installed capacity. According to financial statements, the company suffered a net loss of Rs 65.67 million in 2009 and Rs 65.72 million in 2010.

Liabilities of Metropolitan Steel, Quality Steel and Pioneer Steel to public sector banks/international donor organisations were Rs 1,128 million, Rs 295 million and Rs 915 million, respectively, that have not been paid in violation of sale/purchase agreement, and remains government’s repayment obligation. Divestment of these units has resulted in a loss of output, loss of revenue, unemployment, industrial slowdown and economic regression, and thus, the government was unable to achieve intended objectives of privatisation.

The government has not learned a lesson from privatisation, in particular, of engineering units in 1990s. PMTF and HEC are on sale, though both hi-tech industries are of great strategic importance the world over. PMTF is the only industrial unit of its kind, which produces precision machine tools, automobile transmission components, die-cast parts and armaments. Established in collaboration with the world renowned Oerlikon-Buhrle of Switzerland, the company is well-reputed in export market too. The last government’s efforts to privatize it under the public-private partnership mode did not yield any results. Consequently, restructuring of the company was on cards since February 2010 but there has been no progress on its implementation. Prospective buyers will now only be interested in its assets of real estate-226-acre prime industrial and commercial land of which 60 acres is vacant.

Again, HEC is of great attraction only to real estate investors as earlier efforts of divesting it as operating unit failed. Factory, located in frontline Hattar industrial estate, has an area of 81 acres of which 31 acres is free land that can immediately be utilised for commercial purposes by the buyer. HEC has an installed capacity for manufacturing Power Transformers of cumulative capacity 3,000 MVA annually. With the on-going privatization of PMTF and HEC, the nation is likely to witness closure of yet other valuable engineering units. PECO, once an industrial empire, has already been divested without going through the process of privatization. A private group has acquired majority shares of the company, limiting government’s shareholding only to about 25% at present. Over 3,300 engineers, other professionals, technicians and workers were laid-off under the Voluntary Separation Scheme introduced in PECO in 1995 and 2002.

Alas, the significance of engineering industry has somehow not been recognised by the successive governments of Prime Minister Nawaz Sharif whose family has industrial background. Engineering industry is fundamental for the industrial growth in any country as it provides principal industrial equipment base and technology foundation for manufacturing sector. 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 private sector to invest in.

Unfortunately, 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) either, whereas local capital market has, apparently, no capacity, and regulatory environment is missing. But, in the process of privatisation, these industrial units will further deteriorate in coming times.

(The writer is former Chairman of State Engineering Corporation, Ministry of Industries and Production, is Chairman of the Institution of Engineers, Pakistan, RIC)

Engineer Hussain Ahmad Siddiqui, "Privatizing engineering industrial units-," Business recorder. 2013-12-29.
Keywords: Social sciences , Social issues , Social needs , Social crisis , Political issues , Industries , Privatization , Engineering , Pakistan