Privatisation: how green are the green signals

According to media reports, the Privatisation Commission has identified ten public sector entities (PSEs) for privatization as per the directives of Cabinet Committee on Privatisation (CCoP). While the official communiqué hasn’t been released, media reports a list of nine entities (see table), which looks like a mixed bag of goodies for the stock market with some positive impact on the government’s fiscal affairs.

One of the items on the list so far is downright a loss producing company: Sindh Engineering Limited that produced a loss of Rs19 billion in FY17 (FY16 loss: Rs26 bn) as per SOE’s performance report published by the Finance Ministry. However, most other items on the list aren’t exactly the poster child of SOEs.

Other items on the list are producing profits – some even huge such as PPL and OGDC. In fact, the transactions that will likely help the government raise biggest amount of money will be essentially divestment of shares at the stock market. These are PPL, OGDC and Kapco (of which Wapda owns about 40 percent stake). In the case of first two, PPL and OGDC, the government is unlikely to offer stakes with management control, whereas in the case of Kapco the management control already lies with the private sector.

These three companies generally give decent size of dividends to the government; in FY17 the combined dividend received from these three entities was Rs29 billion. Now, at a time when the stock market is doing poorly with price-to-earnings ratio as low as 4x to 6x and is likely to stay flat over the next six months when these share divestment transactions are finalized, the potential revenue stream for the government won’t be too lucrative. So really the trade-off seems questionable, and the government would do well to share their perspective with the public before going ahead with the transaction.

The question is what it is really that the government wants to achieve with privatization. Does it want to earn non-tax revenues to lower its fiscal gap? Or does it want to minimize losses emanating from sick SOEs. Does it want to do away with doing business? These are some of the questions, the answer to which will dictate privatisation policy.

Given the choice of transactions approved this week, it seems the biggest driver of privatisation policy is the need to plug the fiscal gap. This is understandable given breathing constraints at the Q-block. But that should not stop the government to kick start the process of analyzing sector efficiency and competition assessments along with blueprints for revised market structures with separation of regulatory and operational roles before it undertakes difficult privatisation transactions.