EDITORIAL: Caretaker Federal Minister for Privatisation Fawad Hassan Fawad has been tasked to expedite the privatisation process of state-owned entities (SOEs) with two over-arching objectives. First, to plug the annual drain from the treasury of around 800 billion rupees into SOEs – an objective that requires the unit to be incurring losses and/or a cash injection from the Centre.
Pakistan International Airlines and Pakistan Railways are two long-term white elephants due to appallingly poor management spanning across administrations that need urgent attention as they have cost the taxpayers trillions of rupees to-date.
Pakistan Steel Mills has not been in operation since 2015 while the taxpayers have been paying salaries of those still employed by the Mills – a fact that is inexplicable, given that the Centre was administered by two major national political parties fully supportive of the policy of privatisation; notably, Pakistan Muslim League-Nawaz and Pakistan Tehreek-e-Insaf (plus two caretaker set ups – both times with the incumbent finance minister appointed).
The impediment has been well organised trade unions operating in these entities who have time and again formed a nexus with the then political party in opposition, to disrupt any government plan to privatise. It is therefore vital to initiate the process by first negotiating a settlement with employees and only then to engage in the bidding process for an adviser and/or for sale of the entity.
Secondly, the objective of privatisation is to generate revenue to create fiscal space for the government by either retiring existing debt and/or be able to meet its budgeted expenditure targets that would reduce the pressure on the Federal Board of Revenue (FBR) to propose a mini-budget with the aim of raising its target for the year that, it is legitimately feared, would negatively impact on the poor more than rich as there is overwhelming reliance by the Board on indirect taxes whose incidence on the poor is greater than on the rich.
This objective presupposes (i) a business climate in the country that is conducive to investment (foreign and local) and sadly the writing on the wall at present does not indicate such an environment with government data acknowledging 0.3 percent growth rate for last fiscal year with a poorly performing private sector due to a high discount rate (at present 22 percent) and a massive rise in government borrowing that crowded out private sector credit (accounting for a 178.6 percent decline in credit to the private sector last fiscal year and achieving large-scale manufacturing growth of negative 10.3 percent for the year past – a decline that continued into July 2023 for which data is available); and (ii) the continuing economic impasse necessitates that the sale be at a price that is not perceived by the general public as selling the family silver at throwaway prices by a government that is not representative of the people of this country.
Analysts may argue that the selection of the caretaker privatisation minister is appropriate as the general perception is that his long association with the PML-N (Pakistan Muslim League-Nawaz) coupled with the PML-N considered to be the most likely to form the next government at the Centre would imply no challenge to a decision during the caretaker setup yet it must be borne in mind that legal challenges in the past have usually come from the judiciary or the opposition.
Thirdly and, more importantly, to plug the dollar 4.5 billion shortfall in external financing plan stated in the budget and agreed with the Fund.
The budget estimates of over dollar 20 billion external financing, it has now become clear that because of the low credit rating of the country and the high interest rate global environment commercial loans from non-Chinese sources may not materialise.
The possibility to raise external borrowing through issuance of bonds is also not possible for the same reasons. Under the circumstances, plugging this gap through foreign direct investment (FDI) by sale of SOEs through the privatization process is now the aim. To complicate matters further, interest payments stated in the budget have been understated by a trillion rupees.
Be that as it may, there is a need for the caretaker government to not only price all entities destined for sale appropriately, not only the sum of its assets but also the sum of its future stream of income, if any, but also to ensure that there are no politically exposed persons or their families or dummy companies in the bidding process.
Privatisation as a source of revenue and/or to end the hemorrhaging on the treasury are salutary objectives under the dire circumstances; however, we would hope that the process would start with a settlement with existing labour unions prior to engaging with the bidders in earnest.
Copyright Business Recorder, 2023
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