How to go about pri­vati­sa­tion?

The Pak Banker - - 4editorial - Nasir Ja­mal

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.

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