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Streamlining SOE privatization

In my previous piece in the pages (‘Privatize SOEs, please’, April 1), I had endeavoured to establish the need to aggressively and urgently privatize SOEs to save over a trillion rupees annually, besides unlocking their potential, to help an economy on the ventilator. This article suggests ways to do that – and do it better.

Let me begin by sharing my experience of how international investors view Pakistan. On multiple roadshows at major global financial centers, one was always asked the following question right at the beginning: ‘why should we invest in Pakistan and not in any of the more stable economies of the region?’ This was followed by a discussion on the IMF’s latest review, since we were in an IMF programme then. It was only afterwards that they would discuss the transaction we were offering.

Now that the economy is really struggling, and we are not in an IMF programme, it will be an even bigger challenge to attract long-term, quality investors, perhaps even domestic ones. Assuming the government would increasingly find it difficult to sustain the losses of the SOEs, there is perhaps no other realistic option but to think of privatization. But to do that, we need to examine the privatization ecosystem and fix the weaknesses quickly.

Lets first look at the legal framework provided by the Privatisation Commission (PC) Ordinance, 2000 as the biggest impediment starts from not following the dictat of this law. The Privatisation Commission is the sole federal government body designated to privatize government assets. It is empowered to plan, manage, implement and control the privatization programme. Any transaction by virtue of which any property, right, interest, concession or management thereof is transferred to any person from the federal government or any enterprise owned or controlled, wholly or partially, directly or indirectly, by the federal government, is called ‘privatization’, and is to be carried out by the Privatisation Commission. However, one regularly notices various ministries undertaking such activities. In some cases, an SOE is on the privatization programme approved by the cabinet and yet this goes on. And this is despite the fact that the requisite expertise may not be available within the ministries. This is not just legally inappropriate but also usually results in suboptimal outcomes.

The Privatisation Commission is often blamed, unfairly, for a long and tedious process. However, it is often forgotten that a privatization transaction is often a culmination of several prior actions. It may include advising the federal government to ensure monopolies are not created in the process of privatization; preparing the sectoral ecosystem for a deregulated market, through changes in the policy and regulatory environment, including licensing and tariff rules; proposing and setting up sector regulators, like Nepra, Ogra and the PTA, and advising the federal government in the selection and appointment of the head and members of regulatory authorities; corporate restructuring of the SOEs, which in many cases has to be done through legislation; approve and decide and perform all acts to implement pre-privatization restructuring; and advise the federal government on how to improve public-sector units till their privatization. To enable the Privatisation Commission to play an effective role, the Privatisation Commission Ordinance lays down that the commission’s directions to any enterprise or management of an SOE on the list of privatization are legally binding on the SOEs.

It is easy to fathom that the commission is mandated to take all operational decisions on matters pertaining to privatization. However, it is seldom allowed to exercise these powers as the ministries usually endeavor to stall privatization efforts. SOEs are treated as ministerial fiefdoms to extract personal benefits, therefore, it is difficult to let go of them. To change this environment, I suggest initiating the following three steps in earnest.

First, to enable the Privatisation Commission to effectively play its legally mandated role, it is essential to build the commission’s capacity to perform the role envisioned for it. It is unfortunate that in its present shape it is not able to do so. Though the commission has one of the better boards in the public sector, it is shackled by posting of regular government officers in it, usually with hardly any sectoral expertise or corporate skills. More importantly, there are very few senior consultants hired to perform the expected role. They are being used only as transaction managers (or mere coordinators). Moreover, the Privatisation Commission has to be led by a minister and secretary who have at least a strong background of finance or economics, preferably with strong corporate experience. It is imperative that the minister is a strong and senior person, who can cut through the anti-privatization bias and develop strong political will to support the privatization programme.

Second, the commission is currently only coordinating the hiring of Financial Advisory Consultants, who do the due diligence on an SOE and recommend options of the privatization transaction structure, and market the sale, while the concerned ministries keep taking all the operational decisions. They retain the files and carry the stick and the carrot for SOE management. This results in the SOEs complying with the ministries’ directions rather than of the Privatisation Commission. It is recommended that once an SOE is placed on the privatization programme, all related files and personnel in the ministry should be placed at the disposal of the commission. Only then will it be able to play any meaningful role.

Third, while one is all for transparency and accountability, investors as well as the commission’s staff and board are all very wary of subsequent reprisals in the garb of accountability by the investigation agencies and the parliamentary committees. Investors and commission staff have to be ensured the comfort provided by the Privatisation Commission Ordinance, which clearly states that: “The federal government or any of its agencies authorized by it, may…., scrutinize or investigate any privatisation transaction within one year of the completion of the privatisation. (2) After the expiry of this period, the Federal Government or any of its agencies shall not be empowered to carry out any such scrutiny or investigation.”

However, instead of employing provisions of the ordinance for dealing with the alarming issues of SOEs, the government first set up a public-private authority, by enacting the Public Private Partnership Authority (Amendment) Act, 2021 “to create an enabling environment for public private partnership by streamlining the project approval process and providing an effective framework for policy guidelines”. It then recently enacted an Inter-Governmental Transactions Act, 2022 “to provide for a mechanism to carry out a commercial transaction under an inter-governmental framework agreement to promote, attract and encourage foreign states to have economic and business relations with Pakistan”.

The PPP Act is an understandable initiative as it basically aims at facilitating green-field projects, while the Privatisation Commission basically deals with brown-field projects. It is less understandable why the need for the Inter-Governmental Transactions Act was felt. It has been alleged to have been done to facilitate quick sales of assets like the RLNG plants. It is yet to be seen how this Act will enable individual ministries to conduct these sales with foreign governments, when in actual effect it’s commercial entities of foreign governments, which actually are the potential buyers. Additionally, one wonders why enabling provisions weren’t added into the Privatisation Commission Ordinance to conduct such transactions, given the comprehensive legal framework provided by it.

However, one is surprised to see the PPP Act being used to outsource the airports. Even if one ignores the institutional resistance of the air force for this, as it also uses these for defence purposes, it would be worth seeing how the Aviation Division manages these transactions. But one is certainly surprised that the Privatisation Commission, which had strong institutional memory on this issue, has been kept aside.

Privatization is a time-bound strategy, and should not be an option in perpetuity. Many SOEs have been on the privatization list for three decades, like the DISCOs. This indecisiveness has seen most of our SOEs go from profitable enterprises to an in-distress state, where they can’t continue operations without heavy subsidies. One can think of PIA, PSM and Roosevelt Hotels as examples. How long can the government continue with this? Will potential investors, or even quality financial advisers continue to be interested?

To end, in the words of Dr Atif Mian, “Pakistan’s ‘nervous system’ is fundamentally broken – that combination of administrative and political structures that guarantee a certain level of confidence in the economy. The country must begin to build a functioning nervous system… somehow”!

Email: ansukhera23@gmail.com

Sardar Ahmad Nawaz Sukhera, "Streamlining SOE privatization," The News. 2023-04-09.
Keywords: Economics , Stable economies , Business relations , Privatization , Investors , Dr Atif Mian , Pakistan , SOEs , IMF