Privatisation: Answer to government’s prayer
Striking a balance between public, private entities is the way to growth
According to rough estimates, Pakistan loses around Rs500 billion annually through state owned entities. PHOTO: REUTERS
ISLAMABAD:
We’ve all heard of it, we come across it if not daily then weekly, it’s also a process that has given us K-Electric and Pakistan Telecommunication Limited, It’s called privatisation.
As a nation, we are adept at the concept, however, the question remains how viable and effective is this system?
Pakistan and Saudi Arabia-based Mansour Al Mosaid Group recently signed a share purchase agreement for 1.760 million shares, or 88% of National Power Construction Corporation (Pvt) Ltd (NPCC), for Rs.2.5 billion or Rs1,420 per share.
The new owner intends to retain all Pakistani employees and expects to add more with a planned, major expansion of its Pakistan operations. The government has already received payment of $752,500 from the company to fully fund the ‘golden handshake’ and voluntary separation schemes for those employees opting to leave.
Read: Warning to workers: ‘Privatisation will result in unemployment’
Mansour Al Mosaid has 30 working days after the letter of acceptance, issued by the Privatisation Commission (PC) on August 11, 2015, to meet the terms of payment.
With its acquisition of a major regional competitor, Mansour Al Mosaid adds to the large-scale engineering and construction capability comparable to its own and, as well, NPCC’s accounts and projects to its business base, arguably improving its market position, both factors – one would suspect – contributing to its high bid.
The NPCC transaction will formally conclude after the government receives payment, other ‘conditions precedent’ are met, and finally, announcement of the transaction is published in The Gazette of Pakistan. PC estimates that, when concluded, the NPCC transaction will add $24.5 million to Pakistan’s foreign exchange reserves. Mansour Al Mosaid, of course, remains liable for tax on revenues earned in Pakistan.
Why privatisation is the right step ahead
Not all future transactions will be, nor can they be as successful as NPCC, but this should not deter Pakistan from continuing to divest stakes in state-owned enterprises — whether loss-making, marginal, or even profit-making like NPCC.
According to rough estimates, Pakistan loses around Rs500 billion annually through state owned entities. Imagine if Pakistan had no need to borrow from the International Monetary Fund (IMF) to meet the budgetary needs of these state owned enterprises? This amount could certainly be better spent on improving health care, education, infrastructure and housing.
We also need to look at the effects of privatisation on the welfare of the growing population in Pakistan, which is increasing at 1.96% per year. Unless the GDP growth increases to a level of 6-7%, we would not be in a position to provide additional jobs to the people coming to the labour market every year.
How do we push the GDP growth rate? Among other factors, one important factor is privatisation of state-owned enterprises, which can help in the overall GDP growth.
Read: Reforms : ‘Govt has no intentions of privatising PEDO’
Why profit-making entities
So why privatise profit-making entities such as NPCC? Consider the $24.5 million NPCC will add to Pakistan’s foreign exchange reserves. But also consider the long-term scenario had NPCC not been privatised? If NPCC profits and taxes paid last year continued ‘as is’, Pakistan could expect to wait many years for an amount equivalent to the proceeds it should receive by September 22nd or before. This result is the basic calculation using the discounted cash flow analysis model – a way to calculate currency appreciation or depreciation over time to accurately project a return on investment.
So, can Pakistan put $24.5 million to better use now? Of course it can, and it should. NPCC is just one example of why privatisation has both short and long-term benefits.
Do we really want to continue to mortgage our future when we have an exit strategy – privatisation – that has already been demonstrated to work? Do we really want to settle for ‘profitable’ state owned entities that underperform private competitors in the marketplace? Or, should we refocus government resources on the ‘business of government’ and leave the ‘business of business’ to private enterprise while still holding all actors to account and fostering investment.
Strike that balance, we progress. Failing to do so, we simply continue the status quo.
We have already seen a lot of progress. The now privatised telecommunications sector delivers better service to the consumer and returned Rs245 billion in taxes to the national exchequer in fiscal year 2013-2014. Similarly, four recently privatised banks collectively returned Rs36 billion in taxes.
We should also realise that Pakistan is following the successful examples of Turkey, Malaysia, Indonesia, England and other countries who are reaping significant economic and social benefits from their completed privatisation programmes while enjoying better services. It takes bold decisions to move away from the status quo and bring about positive results and change.
The writer is Minister of State and Privatisation Commission chairman
Published in The Express Tribune, September 7th, 2015.
We’ve all heard of it, we come across it if not daily then weekly, it’s also a process that has given us K-Electric and Pakistan Telecommunication Limited, It’s called privatisation.
As a nation, we are adept at the concept, however, the question remains how viable and effective is this system?
Pakistan and Saudi Arabia-based Mansour Al Mosaid Group recently signed a share purchase agreement for 1.760 million shares, or 88% of National Power Construction Corporation (Pvt) Ltd (NPCC), for Rs.2.5 billion or Rs1,420 per share.
The new owner intends to retain all Pakistani employees and expects to add more with a planned, major expansion of its Pakistan operations. The government has already received payment of $752,500 from the company to fully fund the ‘golden handshake’ and voluntary separation schemes for those employees opting to leave.
Read: Warning to workers: ‘Privatisation will result in unemployment’
Mansour Al Mosaid has 30 working days after the letter of acceptance, issued by the Privatisation Commission (PC) on August 11, 2015, to meet the terms of payment.
With its acquisition of a major regional competitor, Mansour Al Mosaid adds to the large-scale engineering and construction capability comparable to its own and, as well, NPCC’s accounts and projects to its business base, arguably improving its market position, both factors – one would suspect – contributing to its high bid.
The NPCC transaction will formally conclude after the government receives payment, other ‘conditions precedent’ are met, and finally, announcement of the transaction is published in The Gazette of Pakistan. PC estimates that, when concluded, the NPCC transaction will add $24.5 million to Pakistan’s foreign exchange reserves. Mansour Al Mosaid, of course, remains liable for tax on revenues earned in Pakistan.
Why privatisation is the right step ahead
Not all future transactions will be, nor can they be as successful as NPCC, but this should not deter Pakistan from continuing to divest stakes in state-owned enterprises — whether loss-making, marginal, or even profit-making like NPCC.
According to rough estimates, Pakistan loses around Rs500 billion annually through state owned entities. Imagine if Pakistan had no need to borrow from the International Monetary Fund (IMF) to meet the budgetary needs of these state owned enterprises? This amount could certainly be better spent on improving health care, education, infrastructure and housing.
We also need to look at the effects of privatisation on the welfare of the growing population in Pakistan, which is increasing at 1.96% per year. Unless the GDP growth increases to a level of 6-7%, we would not be in a position to provide additional jobs to the people coming to the labour market every year.
How do we push the GDP growth rate? Among other factors, one important factor is privatisation of state-owned enterprises, which can help in the overall GDP growth.
Read: Reforms : ‘Govt has no intentions of privatising PEDO’
Why profit-making entities
So why privatise profit-making entities such as NPCC? Consider the $24.5 million NPCC will add to Pakistan’s foreign exchange reserves. But also consider the long-term scenario had NPCC not been privatised? If NPCC profits and taxes paid last year continued ‘as is’, Pakistan could expect to wait many years for an amount equivalent to the proceeds it should receive by September 22nd or before. This result is the basic calculation using the discounted cash flow analysis model – a way to calculate currency appreciation or depreciation over time to accurately project a return on investment.
So, can Pakistan put $24.5 million to better use now? Of course it can, and it should. NPCC is just one example of why privatisation has both short and long-term benefits.
Do we really want to continue to mortgage our future when we have an exit strategy – privatisation – that has already been demonstrated to work? Do we really want to settle for ‘profitable’ state owned entities that underperform private competitors in the marketplace? Or, should we refocus government resources on the ‘business of government’ and leave the ‘business of business’ to private enterprise while still holding all actors to account and fostering investment.
Strike that balance, we progress. Failing to do so, we simply continue the status quo.
We have already seen a lot of progress. The now privatised telecommunications sector delivers better service to the consumer and returned Rs245 billion in taxes to the national exchequer in fiscal year 2013-2014. Similarly, four recently privatised banks collectively returned Rs36 billion in taxes.
We should also realise that Pakistan is following the successful examples of Turkey, Malaysia, Indonesia, England and other countries who are reaping significant economic and social benefits from their completed privatisation programmes while enjoying better services. It takes bold decisions to move away from the status quo and bring about positive results and change.
The writer is Minister of State and Privatisation Commission chairman
Published in The Express Tribune, September 7th, 2015.