1. 2013
Should Pakistan
Privatize its State
Owned Enterprises??
Sidra Naeem
01-122131-026
MBA-2D
Sidra Naeem
Hewlett-Packard
11/25/2013
1

2. Introduction:
PRIVATISATION is a process of transfer of ownership of property or business
from a government to a private entity. Privatization is not a new phenomenon in
Pakistan. Since 1990, Pakistan sold off 167 state-owned enterprises (SOEs) at a
price of Rs476 billion. The first phase of privatization in 1992-96 included partial
privatization of banks; this was followed by the second phase (1997-2000),
resulting in the complete denationalization of the banking sector. And the last
phase of privatization from 2001 till 2008 selling off non-banking sectors.
Currently, the government has selected sectors for the new phase of privatization
policy 2013 are PIA, Pakistan Steel Mills (PSM) and public-sector power projects,
including Pakistan Transmission and Dispatch Company (PTDC). Government
sources suggest that more than 23 loss-making companies will go under the
privatization in order to support a struggling economy.
Establishment of Privatization commission:
It is established under ordinance of 2000 by the president of Pakistan. The
Commission is governed by a nine (09) member Board with Minister for
Privatization as Chairman. The board is independent and is denominated by
member of private sector.
The private commission performs following functions;
 Recommendation of privatization policy guidelines to the Cabinet;
 Preparation of privatization programme;
 Planning, managing, implementing and controlling the privatization
programme, approved by the Cabinet;
 Taking operational decisions on matters, i.e. Restructuring, deregulation
and regulatory issues.
Privatization Policy of Pakistan:
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3. The privatization policy of Pakistan was based on the following principles:
 1. Privatization will be conducted to provide benefit to all, not to give
advantage to few.
 2. Privatization should make local industries and services more efficient and
competitive.
 3. The whole procedures of privatization should be transparent and it should
free from political influence.
 4. In case of certain units such as major utilities or banks there will be a
process of prequalification.
In to days modern age of internet, policy maker have great benefit ,as they can
learn experience , policies of other countries in the field of privatization.
Objectives for Privatization:
Normally the state has one or more of the following objectives of privatization
1. Strengthening of private sector. This was the objective behind the first
generation of privatization carried out in Pakistan in 1960s when state built
factories in strategic and other important sectors and handed them over, at very
nominal rates, to the businessmen who were reluctant to invest in these sectors due
high risks involved.
2. Improving the efficiency and service delivery. Pakistan privatized a
large number of its SOEs in the second generation privatization carried out in the
1980s and a990s, to increase efficiency and effectiveness of state owned
enterprises.
3. Reducing the huge state subsidies The state owned enterprises that are
going through loss, but cannot be closed because of social welfare considerations
or their strategic nature even though better alternatives are now available in the
private sector. This is the philosophy behind the third generation of privatization in
Pakistan in 2000s.
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4. The major purpose of privatization in Pakistan to a maximize efficiency,
investment, production, employment, physical and social infrastructures and debt
Retirement.
4. To Encourage foreign investment.
One other objective of privatization is to encourage foreign investors for
investment.
Disadvantages of Privatization
1. Increase in Tax Saving.
Private sector generally tries to avoid payment of taxes. Thus privatization of
enterprises will result in the decrease of tax income.
2. Concentration of Wealth.
Privatization of large industrial units and services sector such as banks and
insurance companies will increase concentration of wealth in private hands. It
means only rich people will reap the fruits of industrialization.
3. Against welfare of society.
In privatization the welfare of society in mostly ignored, as main focus is to earn
profit, not to work for interest of society.
4. Limitation of services.
Usually private companies like to provide their services in the areas where more
customers are available. They may don’t like to have branches in ruler areas.
5. Unemployment.
Privatization causes a lot of worker jobless, which is a negative impact on
economy of country in turn.
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5. Quick Look at the Past:
There have been two tides of privatization in Pakistan. The first tide is from
1992 to 1994 and the second tide from July 2001 to October 15, 2002. In the first
Period assets worth Rs.120 billion were divested and in the second period assets
Worth Rs.65 billion were divested.
The Asian bank conducted a thorough study of first period, the following
table(given below) sums up their findings of overall privatization process
assessment.
Number of Units Privatized in Pakistan
Sector
Number
Amount(Rs.
Billion)
Automobile
7
1.1
Banking
4
6.2
Cement Production
11
7.8
Chemical/Fertilizer
14
2.0
Energy
3
10.6
Engineering
7
0.2
Ghee Production
19
0.7
Roti Plants
15
0.1
Telecome
1
30.6
Textiles
2
0.1
Others
20
1.1
Total
103
60.5
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6. Source: Privatization Commission’s Annual Report (2000)
SOEs
Better
Same
Worse
Total
PMES
9
13
16
38
MISC.
3
10
1
14
GHEE
MILLS
2
12
5
19
RICE
MILLS
2
-
6
8
BANKS
2
2
-
4
TOTAL
18
37
PERCENTAGE 22
44
83
34
100%
Source: Impact and Analysis of Privatization in Pakistan: ADB Report October
1998.
The above table clearly indicates that only 22% of the privatized units were
Performing better, while 44% approximately the same and about the third i.e. 34%
worse than before. The main reason of privatization that is improving efficiency of
units, was only attained by about 1/5 of the units, whereas the rest were working
with the same efficiency or worse than before.
Number of Units failed after Privatization
Moreover few other units also got close as consequence of Privatization. Which are
listed below.
1)
2)
3)
4)
5)
Naya Daur Motors
Dandot Cement
Zeal Pak Cement
National Cement
General Refractoriness
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7. 6)
7)
8)
9)
10)
11)
12)
13)
14)
15)
16)
17)
18)
19)
20)
Pak PVC
Swat Elutriation
Nowshera PVC
Nowshera Chemicals
Pak China Fertilizer
Karachi Pipe Mills
Metropolitan Steel
Pak Switchgear
Quality Steel
Indus Steel Pipe
Fazal Veg. Ghee
Haripur Veg. Oil
Khyber Veg.
Suraj Ghee Indus.
Hydari Veg. Ghee
The closure of these units has played havoc to the national economy and the first
phase of privatization has contributed to the lower rate of industrial and Economic
growth. The GDP growth which was above 6% in the 1980s declined to around
4% in the post privatization period.
The reasons for the failure of these units are many. The main reason is, that these
units are sold out without checking the creditworthiness of the respective parties.
Three units were given to Schon Group, whose reputation was very horrible and
known to everyone in Pakistan. All given three units, National Fiber, Pak
China and Quaidabad Woolen Mills were closed suddenly after their
privatization.
Another unit which is of Zeal Pak Cement also closed after privatization, because
the buyer is not interested in running it. But in stripping the assets. Engineering
sector which already had weak basis was badly affected by Privatization. The other
privatized unit form cartel, a cartel was formed between D.G. Khan Cement and
Maple Leaf Cement to exploit the consumer. The other important rule of effective
privatization is also ignored, that is not to give more than one unit to a party.
Therefore government without thinking even a single time had given two big units
i.e. MCB and DG Khan Cementto Mian Mansha and three units to the scandalous
Schon Group Thus results shows that first tide of privatization failed to achieve the
actual goal of Privatization. Because procedure was not transparent, it is badly
affected by corruption
The second tide of privatization was from July 2001 to October 15, 2002. The
major privatization which took place during this period included;
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8. (1) sale of GOP “Working Interest” in six oil concessions
(2) sale of 51% GOP stake in UBL
(3) sale of Pak Saudi Fertilizer Ltd.
This privatization tide was pushed by IMF as the privatization of all programmed
public assets was part of the undertaking given to the Fund for its latest financing
facility under the name of Poverty Reduction and Growth Facility (PRGF). The
gross proceeds from privatization during the second period amounted to Rs34.7
billion In the second phase the government has sold public assets which were
highly profitable for a trivial net amount of Rs4.7 billion.
Is Privatization in Pakistan is effective??
A economic historian, Gerschenkron’s argument is that in those states which start
late in the race of development, the public sector has to play a vital role in
accelerating the economic growth. As is in developing countries, the private sector
is shy, inexperienced and not equipped to embark on rapid industrialization.
Pakistan along with other developing countries followed the activist role for the
state in industrialization and the rate of industrial growth
Normally it is considered that private sectors are more efficient than public sectors.
But according to recent research made by Dr. Akhtar Hassan Khan on comparison
of public and private sector producing similar goods, he draw conclusion that
ownership of industry from public to private is neither a necessary nor a sufficient
Condition for more efficient operation of specific industrial enterprises. But some
time the efficiency of public sector is affected due to over staffing, politically
influence.
The second reason for privatization is its fiscal affect or impact. It helps to retire
the public units that are going in loss and required a large support from budget.
The opposite view is that the public enterprises after nationalization in 1973
doubled the payment of their taxes. If public sector organizations are going through
profit it would yield greater return on earning which is more than the amount at
which it is barrowing money from the market. The privatization of a profit oriented
public enterprise would have a negative impact on budget.
The third reason of privatization is that it speedup the competition and make
capital market more strong. If all working unit of same sector such as cement are
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9. owned by government and are sold to different business parties, then there would
be a positive competition. But if there is both public and private units working for
provision of same commodity, then there is no healthy competition. Capital market
is not strengthened at all, if one public sector unit is handed over to the private
party without some of its shares being offered to the public, so for strengthening of
capital structure it is important to offer some of its share to public sector through
stock exchange. Privatization in Pakistan has not met its objectives, for the reasons
noted above; Moreover, IMF’s next demand will be to privatize Mangla and
Tarbela dams, which would bring an utter ruin to the economy. There has been
massive corruption during privatization process in Pakistan from 1985 until 2008.
It is very clear that the privatization process has not been proved as a key to
economic development as was claimed by the different government from 1988 to
2008, but instead a total disaster for the economy of Pakistan. The valuable public
assets was sold at throw away prices and caused a huge loss to the national assets
Should Pakistan privatize its state owned
enterprises?
In the light of above mention facts my answer is No. In my point of view we
should follow china policies of investment, instead of following the tide of
privatization blindly. The Washington Consensus and international financial
Institutions have been putting pressure on China to privatize its public enterprises,
which are passing through loss. But china is paying no attention toward there
pressure and they don’t stop investing money in their public sectors. We should
open ways for private as well as foreign investor to make investment in new
sectors.
Government is looking for privatization of some industries in other sectors such as
PIA (Pakistan Airlines), Pakistan Railway, Pso (Pakistan State Oil) and Pakistan
steel mill
Privatization of PIA
Privatizing PIA is not a good solution, state had invested a lot of money in PIA,it is
right that PIA fails to generate profit due to political involvement, overstaffing,
poor management ,lack of efficiency, But it can be valuable asset to state, instead
of privatizing it 100% state only sold out 26% of its share to private investor and
kept remaining 74% under its own control, but in spite of this all PIA is still under
loss. State should focus on limiting poor performance and improving public sector
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10. resource allocation. Country defense and other significant matters are also attached
with PIA which could be affected by privatizing of PIA.
Privatization of Pakistan Railway
Pakistan railway is also passing through loss, from last few years. According to
government Pakistan Railways fails due to shortage of equipment, poor maintance,
corruption and as well as overstaffing. So by the end of March 2014, the
government is planning to privatize it. But privatization is not the solution, as if
railway privatizes the companies who owned it, would just think of profits and
keep only the lines connecting major cities active. While on the other side
government would make sure that railway reach everywhere. Moreover railway if
get privatize would became expensive and it may be difficult for common man to
travel through rail even. Railway requires long term investment to maintain its
infrastructure again, and only the government can provide with unlimited or large
source of finance for it. Pakistan Railway is a state owned enterprise with 60
locomotives out of 500 total running with -ve income balance but having
85,000 workers, and requires 10,000 workers only. Number of employee
should be according to requirement Government should try to get rid of this
overstaffing, by cutting the expenses it can invest in building its infrastructure once
again. One option can be, public private partnership, state can encourage private
investor to invest in railway. So, Pakistan should not privatize its railway but it
needs restructuring.
Privatization of Pakistan State oil
PSO is Pakistan’s largest corporate unit and the only corporate unit which is
included in Asia’s 500 leading enterprises. The other two oil distributors are
Foreign companies Shell and Caltex. If we sell PSO, foreign companies can
control oil supply to different points in time of emergency. Hence both economic
and strategic consideration demand that PSO should not be privatized. Government
can ask china’s for help as they have make wonderful progress in railway industry.
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11. Conclusion:
The above mention facts shows that privatization in Pakistan is not as effective as
it should be.
 Privatization has failed to prove the hypothesis that public enterprises are
inefficient while private enterprises are efficient. Many of the privatized
units are in deep financial trouble; some have failed to pay the full purchase
price to the privatization commission.
 The Government only criteria is to sell out any unit to the party offering
highest bidding amount, instead of their ability to run out that unit in a
successful way. Many of them either don’t have capacity or they don’t have
any intention to operate the unit.
 State owned enterprises that are public monopolies, but when they get
privatized they become private monopolies, which can affect the overall
economy system of the country.
 The fresh wave of privatization will render several thousands of workers
jobless and create massive unemployment in the country. The main
opposition party of PPP has already warned the government of mass protests
across the country if it pushes ahead with the privatization plans. Parties
opposed to the privatization agenda argue that basic rights of labor are
trampled upon after the process of denationalization.
 Privatization proves government is not serious about solving issues and
rather wants an easy solution like selling government organizations to
private companies, it is true that government is facing huge losses in PIA
and railways but they must find a better way to manage them. government is
looking for short term goals
 In most of the responses to privatization union leadership failed to protect
the genuine rights of the workers. They fell to opportunism, and succumbed
to pressure of state, generating a great deal of disappointment among the
workers and the general public. But the resistance of PTCL workers in 2005
was by no means a minute task. The 10-day strike was a great success.
Though the spirit of this resistance, however, has not yet donned the cloak of
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12. a movement. But it definitely shows the decisive role of workers in the
economy and the society
References:
Fatima.M (1996). Privatization in Pakistan-I. Pakistan & Gulf Economist. 15(5):
35-37
GOP Pakistan Labor Gazette (1995). Report of July 1994 to June 1995, Ministry of
Labor, Government of Pakistan.
ILO (1996). Pakistan Privatization, Employment, Retraining and Social Protection.
A Report Prepared by ILO Seat under UNDP Technical Support, ILO Geneva.
Annual Reports Privatization Commission of Pakistan 2000, 2001, 2002.
Asian Development Bank, Impact Analysis of Privatization in Pakistan, October,
1998.
Economic Survey 2001-02, Government of Pakistan, Islamabad.
Annual Report of the State Bank of Pakistan, 2002.
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