Privatisation in PakistanProspects and Challenges

Shahid Hussain Raja

July 26, 2012

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Sequence of Presentation

Privatisation : Concept & Need Modes of Privatisation Privatisation Process Functions of Privatisation Commission Privatisation in Pakistan Prospects & Challenges Way Forward

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Privatisation Defined

“…. a transaction by virtue of which any property, right, interest, concession or management thereof is transferred to any person (entity) from the Federal Government or any enterprise owned or controlled, wholly or partially, directly or indirectly, by the Federal Government”.

(PC Ordinance 2000)

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Need for Privatisationa) Enhancing the role of private sector in the economy

b) Reducing the budgetary deficit by selling the loss making

State Owned Enterprises (SOEs) to the private sector

c) Improving efficiency of SOEs by selling their at least 26 %

shares with management control to the private sector

d) Producing better quality products & services at affordable

prices for the public through Public Private Partnership

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Privatisation Commission

Established as a body corporate by the promulgation of Privatisation Commission Ordinance 2000

The Commission is governed and administered by a nine

(09) member Board with Minister for Privatisation as Chairman

The Board is independent, autonomous and is dominated by the members from Private Sector

Functions of Privatisation Commission

Recommending privatisation policy guidelines to the Cabinet;

Preparing comprehensive privatisation programme;

Planning, managing, implementing and controlling the privatisation programme approved by the Cabinet;

Taking operational decisions on matters pertaining to privatisation, restructuring, deregulation and regulatory issues. 6

Functions of Privatisation Commission (contd)

Proposing regulatory framework, including the establishment and strengthening of regulatory authorities;

Advising the Federal Government in selection and appointment of the head and members of a regulatory authority;

Advising measures to the Federal Government for improvement of public sector units till their privatisation;

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Functions of Privatisation Commission (contd)

Assisting in the implementation of Federal Government policies on deregulation and privatization and advise the Federal Government on deregulation of the economy;

Performing any other function that is incidental or ancillary to carry out the privatisation programme approved by the Cabinet.

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Modes of Privatisation

Outright Sale of assets and business through open auction Sale of shares through public auction or tender Public offering of shares through a stock exchange Management or employee buyouts Award of long term leases Management or concession contracts Global Depositary Receipts (GDRs): Euro Bonds etc Exchangeable / Convertible bonds: Taking loans from

international funds against collateral of shares

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Approval of Council of Common Interest (CCI). Cabinet Committee on Privatisation (CCoP) decision to

privatise an entity Hiring of a Financial Advisor (FA) or Valuer Due diligence by FA and Privatisation Commission Finalization of transaction structure Restructuring and regulatory reforms, if needed Invitation of Expressions of Interest (EOI) Submission of statement of qualifications Prequalification of firms Due diligence by potential buyers

Privatisation Process

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Sharing of Bid Documents/Instructions with pre-qualified bidders

Pre-bid conference Approval of valuation (reference price) by CCOP Bidding process (media invited to observe bidding) Approval of bidding results by PC Board and CCOP Issuance of Letter of Intent to successful bidder Finalization of sale agreement between PC and Buyer Handing over of the entity

Privatisation Process (contd)

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Privatisation in Pakistan

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Privatisation Phases1960s First Generation Privatisation

Objective Create / Strengthen Private Sector

Strategy Build factories and Sell them

1990s Second Generation Privatisation Objective Reduce Government Losses

Strategy Disinvest, Deregulate

2000s Third Generation Privatisation Objective Improve Efficiency & Profitability

Strategy Seek Strategic Investors

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Achievements Most successful privatisation program in South Asia,

Central Asia and the Middle East Over $ 9 billion proceeds (Rs. 476,421 million) 167 transactions completed so far 100% state owned enterprises in the chemical,

textile, nitrogen fertilizer, cement, rice, roti and light engineering while 98% automobile industry, 96% ghee mills and 100% units of Phosphate fertilizer have been privatised

Banking industry privatised substantially due to which 80% of the banking sector is under private ownership.

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Sector No of transactions Proceeds (Rs M)

Banking 7 41,023

Capital market 22 133,124

Energy 14 51,756

Telecom 4 187,360

Automobile 7 1,102

Cement 17 16,178

Chemical and Fertilizer 23 41,922

Engineering 7 183

Ghee Mills 24 843

Rice and Roti Plants 23 324

Textile 4 371

Newspapers 5 271

Tourism 4 1,805

Others 6 159

Total 167 476,421

Sector Wise TransactionsSince its inception in 1991, the Privatisation Commission have conducted

167 transactions with over Rs. 476 billion. Details are as follows:

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Benefits of Privatisation Increased private sector share in GDP Induced investment and transfer of technology Improved management via introduction of international

best practices and quality improvement increased productivity and competitiveness Employment generation leading to poverty alleviation Creation of fiscal space for allocation of funds to social

sectors and infrastructure development Better services, products, higher profits leading to

increased dividends and tax revenues

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Prospects Broad national consensus on need and benefits of

privatisation/ deregulation in the country

Robust private sector to take on even loss making state owned enterprises( SOEs)

Comprehensive legal framework available

Experience of 2 decades of successful privatisation

Support of international organizations

Strong judiciary, civil society and media to ensure transparency

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Challenges Domestic and International financial crisis

Huge losses of State Owned Enterprises

Share values of many likely transactions at all time low

Managing public interest in industries with social

repercussions i.e. power, transportation etc

18th Constitutional Amendment has increased the role of

provinces in privatisation decision making process

Regulatory/ dispute resolution framework needs changes

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Way Forward

Privatisation Strategy1. Loss reduction and efficiency improvement will remain as

basic objectives of privatisation in Pakistan2. Corporatization and Restructuring of State Owned

Enterprises before their privatisation.3. Transparency as a cornerstone of entire process.4. Safeguarding the interest of employees and consumers.5. Strengthening of regulatory framework.6. Strategic sale and Private Public Partnership with

management control continues to be the main strategy7. Sectors chosen for privatisation on priority are

infrastructure, energy and financial institutions 20

Upcoming Transactions

Sr. No. Transaction

1 Oil & Gas Development Company Limited 2 Pakistan Petroleum Limited 3 Heavy Electrical Complex4 National Power Construction Company 5 Peshawar Electric Supply Company (PESCO)6 Quetta Electric Supply Company (QESCO)7 Hyderabad Electric Supply Company (HESCO)8 National Power Construction Corporation (NPCC)

9 Faisalabad Electric supply Company (FESCO)10 Jamshoro Power Company Limited (JPCL)11 Pakistan Mineral Development Corporation (PMDC)

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Thanks