The Sharif-led government has launched its much-touted privatization drive in Pakistan. Government-owned shares in blue-chip companies of United Bank Ltd. (UBL) and Pakistan Petroleum Ltd. (PPL) were first ones to go under the hammer under this new program.
The UBL sell-off resulted in proceedings of about $387 million, while PPL added an additional $155 million to the government kitty. Foreign investors showed keen interest in the two offerings, which reflected their optimism in the country’s banking and exploration sectors. Sale of these government assets is of significant importance as it marked Pakistan’s reentry to global capital markets after a gap of seven years. Further, strong investor response underlines faith in long-term economic success of Pakistan despite its numerous security and other political challenges.
After these success stories, the government intends to offer other lucrative privatization deals as well. Divestment of government holding in these companies, mainly in banking, oil and gas sectors, is expected to yield about $4 billion and support the country’s sluggish economy. These deals have not been about management transfers, but mainly aimed at attracting investors to Pakistan. By luring investors to the country, the government hopes to close complex and strategic sell-off in sick companies such as Pakistan International Airlines (PIA) and Pakistan Steel Mills (PSM). For several decades, these organizations have been termed a white elephant that suck up government resources. Government efforts to turn them around have failed miserably as they remain marred by corruption, political interference and operational inefficiencies.
The big question is whether the government will be able to find suitable buyers for sale of these other bankrupt national entities at a desirable price. If the government gets a lukewarm response to the proposal, it may be forced to sell its stake at a throwaway price, making the transaction politically controversial. In case the government fails to attract enough buyers for these entities, the divestment of government shares in profitable companies may raise eyebrows. While these sick assets are of strategic nature, investors are expected to remain rational and consider the significant challenges in returning these businesses to profitability. Any new owners may be forced to make tough decisions, including massive layoffs, to make these companies viable. Such steps are likely to result in political backlash and result in further unemployment across Pakistan. Therefore, while sale of these sick companies may ease financial concerns in the short-term, they will lead to a greater social burden in the long run.
Going by classical capitalism argument, the government should not be in the business of running steel mills and airlines — it cannot operate or revive these industries without the required expertise. The authorities should focus on the execution of its privatization program for these sick national businesses so that there are no concerns regarding transparency of the deals and workers’ rights are also protected. Some often well-cited, bitter privatization experiences point out fingers at the government rather than failure of private investors in managing the entities. By developing a strong regulatory and policy framework, the government can ensure success of its privatization program even after transition of companies to new owners.
