By Shaukat Masood Zafar

The silent drain conduits of Pakistan Economy?

Ideal situation is that the public corporations whose risk assets ratio has exceeded its total assets ratio and qualify for liquidation should be privatized instantly but in a very transparent manner. In case of the public sector enterprises making profit and giving the government return higher than the rate at which it is borrowing from the market, the privatization of profitable enterprises would have an adverse impact on the budget. Privatization of loss sustaining public entities is the logical solution which obviously has several benefits such as

  • reduce Government bureaucracy,
  • reduce state monopolies and ensure level playing fields,
  • reduce bad management, correct defective capital and financial structures,
  • increase competitiveness,
  • increase the quality of goods and services,
  • reduce corruption and control by Government,
  • increase staff quality and supervision,
  • improve market analysis,
  • free up Government funds for more pressing problems,
  • create employment, re-invigorate the local economy, expand local businesses,
  • attract direct foreign investments, expand capital markets,
  • redistribute wealth,
  • improve technological transfer,
  • enhance trade control regulations etc.

But there is general consensus among masses that privatization exercise in Pakistan is riddled with high level corruption. The capitalists and IMF and World Bank are also using the privatization as a political weapon. It is not just an economic attack but a political attack as well from said groups. Privatization of only dynamic and profit earning public entities has stopped the growth of social, political and class based consciousness and has reduced the social capital by increasing the private capital and big cartels ultimately leading to unnatural high escalation in prices.

The forms of corruption are also now ever dynamic and all conquering. Concealment of assets of the firms put in privatization by distorting their balance sheet figures is very common here. The core investors “selected” by the privatization commission, at times suddenly become incapable of paying for firms after being certified as technically and financially sound. The full concept of privatization involves deregulation of public sector monopolies, involvement of private enterprises, then encouraging free competition within a regulated framework to improve quality and quantity of services at reduced prices, which has been never ensured by the privatization commission.

The people of Pakistan have generally expressed their reservations about the level of transparency in the entire exercise of privatization. The general perception that privatization result is higher level of efficiency is not true in case of Pakistan. Privatization has caused social development slow down. In fact it has given birth to notorious ‘Cartel Culture.’

Two major objectives of privatization in Pakistan; debt-servicing and poverty alleviation have not been achieved. Corruption has remained the omnipresent obstacle that has eroded the very essence of the exercise. There has been massive corruption during privatization process in Pakistan from 1985 onward. It is very clear that the privatization process has not been proved as a key to economic development as was claimed by the different governments, but instead a total disaster for the economy of Pakistan.

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Despite privatization in Pakistan has been engulfed with complex problems. These problems include private firms concentrate on profit making to the detriment of essential public service, private firms render more expensive services, private firms fail to invest in infrastructure, reduction of public workforce and experience, private companies are interested in short term benefits, privatization replaces state monopolies with private monopolies, private firms find it very difficult to render public services such as water, public health and transportation services, the exercise usually creates wealth for the rich while making the poor poorer, it reduces public accountability, it is subject to abuse by the regulators and private enterprises, private firms encounter problems of new government regulations, private companies replace state corruption with private corruption etc.

There are examples of KESC, PTCL, Electric Supply Companies where the people are paying the cost of privatization in shape of inflated bills, poor customer services, and retrenchment of skilled staff. The direct foreign investment in profitable public units is not likely to be beneficial for the economy in this sense also that as against the benefit of an initial purchase price; one has to calculate the recurring remittance of profit in foreign exchange for years and decades to come.

Looking at the privatization of financial institutions alone, two things are quite evident; firstly the highly profitable organization only were privatized on throwaway price and secondly a record looting of Rs700 billion ($10.76 billion) took place. When 51 per cent of Habib Bank Limited (HBL) shares were sold to the Aga Khan Fund for Economic Development in December 2004 for only Rs22 billion, its total assets were worth more than Rs570 billion. (HBL had 1437 branches and another 40 in 26 countries; the company owned the branch buildings as well.) Another large bank, United Bank Limited (UBL), was sold for only Rs13 billion.

The sale of these banks at throwaway prices was considered the largest financial scandal in the history of Pakistan. The sale of UBL to Abu Dhabi and Best Way Group is altogether inexplicable. First GOP poured Rs30 billion into UBL to cover its nonperformance loans and make it privatizable. After pouring such a huge amount of Pakistani tax payers money it has been sold to foreigners for Rs12.35 billion. In the first bidding Mian Mansha was shown to be the highest bidder but bidding was held again and Abu Dhabi and Best Way Group were on the top in the second round. Government of Pakistan lost Rs17.65 billion in its privatization exercise.

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GOP has not explained as to why Rs30 billion of tax payer’s money was poured in UBL for privatization and what was the hurry in handing over this entity just a week before the national elections. Amounted to Rs34.7 billion but if we deduct Rs30 billion poured in UBL Then the net receipts are only Rs4.7 billion. Similarly Kot Adu was major privatization during Benazir’s second term as Prime Minister. Kot Adu is WAPDA’s biggest generating unit with the following capacity combined cycle capacity till 1997 was 1684 MW.

There was no need to privatize an already existing big power unit which was running efficiently. Its units were either gas turbine or combined cycles which can use either oil or gas. The government decided to sell 26% stake in it at a price of US$215 million. Subsequently 10% shares were sold for US$76 million so the government realized only US$291 million from the sale of 36% shares. The most interesting feature of this privatization was that the government handed over the management of the unit to minority shareholders, which perhaps has never been done in the corporate history of the world. These are few examples of plundering the country while there are numerous others.  The money usurped from this privatization process was sufficient enough to discharge the entire debt liability of the country.

Transparent privatization of loss sustaining public corporations, firms, companies and services is the most viable economic solution. However, it seems that public sector is going to remain in Pakistan for a pretty long time despite efforts of privatization. Hence the need of some innovation in respect of corporate governance is absolutely necessary. The essential services providing entities must remain in state control. However we all have seen that in Pakistan, the supremacy of the CEOs in public sector entities has brought in many problems of recklessness and lack of transparency giving rise to financial crashes in public sector departments which needs to be properly regulated.

Public appointments require the highest standards of propriety, involving impartiality, integrity and objectivity, in relation to the stewardship of public funds and the oversight and management of all related activities. The appointment process provides a clear signal to the public about an institution’s independence. Before entering into the process of restructuring of public entities, to properly regulate the appointments process of CEOs and board members of these entities, an Independent Appointments Commission, delegated with statutory responsibility for making these appointments, be established to provide an independent and transparent appointment process for public appointments, based on the principle of selection on merit.

Members of the commission having honest and unquestionable track record should be granted guaranteed, fixed term appointments with duration of at least five years. Shorter term can hamper the effectiveness of the Commission. Powers of dismissal are closely related to the independence of a national institution. To avoid compromising independence, the founding legislation should specify, in as much detail as possible, the circumstances under which a member may be dismissed. These circumstances should relate to ascertainable wrong doing of a serious nature.


Commission members should not be removed except for reasons specified in the enabling law. These reasons, and the method of removal, should for example parallel those applicable to members of the judiciary. Members of the Commission should be required to be politically impartial in their role, they will declare any party political activity they undertake whilst serving on the Commission. Such activity will be made public. Chief Executive Officers of the public entities and Members of the boards of these entities may be selected by the Commission in an open and transparent manner by considering the criteria of education, interest, diversity of background and professions, relevant experience and expertise, and geographic balance, and strictly keeping in view the values of fairness, transparency, access, and representativeness,  for the term and for the compensation, if any, and in the manner as is prescribed by the law.

When a vacancy exists either of CEO of any entity or on any board the Commission should make recommendation within 30 days. The commission may recommend two or three people for each open position and the Prime Minister should choose one from the list submitted to him by the Commission and appoint him on the vacancy.

These public entities would be further strengthened if two board systems like Germany are introduced. The Board of Directors of any entity may be subordinate to a Board of Supervisors which would bring broader risk management, more transparency and accountability. Bad governance is in fact the root cause of evil within our society. There needs to be checks and balances and consensus decision making in these entities. Governance issues include size and composition of their Board of Directors, general approach to consensus building of the board and decision-making practices. Good governance begins and ends with the Board. Good corporate governance and transparency are fundamental to achieving the highest standards goals. It will be advisable if new CEOs and powerful Boards of Directors comprising of all the stakeholders are appointed in all the entities before entering into the process of restructuring. Any attempt of restructuring these public entities made without establishment of an independent Appointments Commission and then new CEOs and Boards is not likely to bring any positive change.

The End.

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