How to go about privatisation?
PRESIDENT Asif Zardari has advised the government to privatise the state-owned enterprises by selling bulk of their shares to small investors through the stock market. This, according to him, would help attract small investors to the country's lacklustre bourses, deepen the market and protect the interests of stakeholders - consumers, workers, and investors.
Moreover, it would also optimise the use (efficiency?) of the national assets, a press release issued by the presidency said. It should also discourage concentration of wealth thus created in a few hands.
One objective of the government, it appears, is to kick-start the process of privatisation that was stalled by a Supreme Court decision annulling the sale of the Pakistan Steel Mill in 2006. The authorities must be looking for a "safer" way of disinvesting the state-run companies, which cannot easily be challenged in the courts. The president came up with his suggestion at a meeting held last week to deliberate different proposals for reviving the state-run businesses and to push ahead the government's economic reforms agenda through privatisation.
How the incumbent government intends to move on this front remains unclear.
This is not a new proposal. Successive governments have tried this method of privatising the state-run businesses to raise cash with varying degrees of success (or failure?) since late 1980s. The slain Prime Minister Benazir Bhutto was the first leader to travel this road when she tried to disinvest a small percentage of shares of the PIA through public offering. The maiden attempt met an insipid public response and the nationalised banks were forced to rescue the government.
The previous government used this route to disinvest its shareholdings in major, profitable (and restructured) companies and banks like Oil and Gas Development Company Limited, Pakistan Petroleum Limited and the National Bank of Pakistan. At that time the stock market was experiencing an unprecedented bull-run and both local and foreign investors were flush with liquidity.
"In theory, it is a correct and sound strategy to raise money. The government has done it before not only to raise cash for itself but also to woo foreign investment when it sold part of its shareholdings in some banks and companies like the OGDCL," says Mohammad Sohail, a Karachi-based capital market analyst.
"There is ample liquidity outside Pakistan right now. The government can sell the stocks of some profitable companies to the foreign investors, which should create depth in the market and lure foreign portfolio and direct investment in the country," he says.
He however cautions that the strategy would be successful only in case of offloading of shares of the profitable SOEs. "Nobody will buy shares of the loss-making companies like the Pakistan Railways or PIA or Pepco," he adds.
Asim Zafar, a leading stockbroker from Lahore, cannot agree less with him. "The lossmaking companies do not attract investors," he says. "In case the government wants to sell the loss-making enterprises, it must clean up their mess and restructure them to make them profitable and attractive for the investors who make their decisions on the basis of a company's current earning ratio rather than on the basis of projections of future cash flow."
The government has already announced its intention to restructure the SOEs, which are marred by political interference, overstaffing and poor management and cause the public exchequer a huge loss of Rs250 billion every year, and sell them to the private investors.
"If the government thinks that it can convert the inefficient and loss-making entities into efficient and profitable concerns by disinvesting part of its shareholding on the stock market, it is hugely mistaken," cautions Dr Salman Shah, former finance minister. Sohail is of the view that the government could begin implementing the presidential suggestion by offering the shares of its blue chip companies.
"The restructuring of the loss-making enterprises is a long-term proposition. The government will be required to bring in professional management, resolve the issues of overstaffing and inject fresh liquidity to reorganise them and make them efficient. The privatisation of these entities can wait till the completion of their restructuring. In the meanwhile, the government should proceed with the disinvestment of its holdings in the better managed and profitable companies," he stresses.