Despite two years into its privatisation efforts, the current administration has yet to offer a convincing plan, let alone complete any transactions.
While the current administration seems to be committed to the process – no small feat for a left-leaning coalition – there seems to be a lack of coordination between the several ministries and government departments that must work together to ensure a successful round of privatisation.
There are at least some positive developments such as the near-evaporation of ideological opposition to privatisation across the political spectrum, as well as some interest expressed by foreign investors.
These steps forward, however, have been hampered by bureaucratic infighting and conflicting jurisdictions. To understand the way forward, it is necessary to examine both what has gone right and what has yet to get off the ground.
“The government is determined to restrict itself to policymaking and not running businesses.” These words were spoken by Senator Waqar Ahmed Khan, the minister for privatisation. While the statement would be unremarkable in advanced economies, for a Pakistani minister to say this is quite extraordinary: less than 40 years back the country went through nothing short of a disastrous experiment in nationalisation.
Even before Zulfikar Ali Bhutto’s decision to bring private property under government control, the domestic economy under the Ayub Khan administration had been a largely state-directed one where the government made several major interventions through the Planning Commission and entities such as the Pakistan Industrial Development Corporation.
So to have the political heirs of Bhutto make such bold statements in support of private, free enterprise is a welcome development. And it’s not just the privatisation minister, support for free market capitalism stretches as high as the presidency itself.
President Asif Ali Zardari seems to have accepted the idea that the country’s capital markets can be utilised to help generate wealth for ordinary citizens. On November 22, he proposed that at least part of the privatisation process be undertaken through listings on the Karachi Stock Exchange, so that the benefits of what are often lucrative initial public offerings are made available not just to well-connected insiders, but the public at large.
Yet, it is not just the ideological volte face of the Pakistan Peoples Party (PPP) that is the most positive development. Senator Waqar Khan has been going around the globe trying to drum up interest in the privatisation process from foreign investors.
The minister has had some, limited success in his efforts. The London Stock Exchange hosted the Pakistan Capital Markets Day earlier this month. International investment banks such as Morgan Stanley and Nomura Securities are lining up their support to underwrite any privatisation transactions.
So it seems that ministry of privatisation is well poised to begin what may well be an even larger round of privatisation than the one undertaken by the Musharraf administration. What, then, stands in its way?
One of the biggest problems confronting the ministry is that, while it has the authority to manage the privatisation process, it does not have any control over the companies it is putting up for sale. That control tends to fall under other federal ministries that are reluctant to give up their say over state-owned enterprises, even though most of them are not profitable.
The drawback of this lack of jurisdiction of the Privatisation Commission is that it cannot undertake any restructuring of state-owned enterprises being put up for sale. Restructuring involves reducing the often-bloated workforce of the company, installing a new management team and in general, preparing it for takeover as a profit-making entity.
The process is difficult, and often expensive, but the advantage is that the price the government can command for the company when it finally does sell is several times higher, almost always compensating for any extra costs it may incur.
Determining which government department will manage the restructuring process also seems to be a challenge. For instance, the State Bank of Pakistan (SBP) was recently asked to prepare a plan for the restructuring and turnaround of Pakistan Railways.
While it is true that the State Bank has some of the most competent economic policy managers in the government, the SBP is the central bank, responsible for monetary policy and regulating the banking sector. It is not equipped, nor should it be, to manage the restructuring of state-owned enterprises.
This seeming unwillingness to let the one entity designed to manage privatisation do its job is the single biggest impediment to a successful round of privatisation.
The ugliness of populism
Then there is the wild card: the seemingly endless supply of simple-minded populists who will sue the government every time it tries to sell any asset. The frustrating aspect of these lawsuits is not that they allege fraud, a serious charge worthy of investigation. It is that they almost invariably question the valuations at which these enterprises are sold and usually in a highly uninformed manner.
Journalists and commentators are frequently heard citing “Company X has so many billions of rupees in assets and is being sold for so much less.” Here is why such statements are incorrect: a company’s balance sheet has two sides, assets and liabilities.
A company’s book value is determined by subtracting the value of its liabilities from that of its assets, something most commentators conveniently fail to take into account. It is also worth mentioning that the price at which a company is sold takes into account many more factors than just book value, including earnings, cash flows, revenue growth rates and so on.
For instance, Pakistan Steel Mills may well have billions of dollars in assets. Its liabilities, however, are worth far more, meaning that the company is worth less than nothing. Selling the company for zero would actually be a profitable transaction as the government can stop spending Rs25 billion every year to bail out a highly corrupt and incompetently managed company.
One hopes that the next time such a lawsuit is brought up, as is almost inevitable in an increasingly litigious environment, that the courts will limit their scope of inquiry to allegations of fraud and leave the valuations to the investment bankers.
The writer is a financial and management consultant based in Karachi and can be contacted at [email protected]
Published in The Express Tribune, December 27th, 2010.