Privatisation

EDITORIAL: The government's expectation of raising Rs 100 billion from privatisation is a bit of a surprise considering that privatisation of RLNG power plants already in the process of being sold prior to Covid-19 pandemic alone would fetch more than this figure. Is one to assume that the sale process of these power plants is to begin afresh and the process that was almost complete now stands abandoned? No wonder then that the programme seems set to start with a bump in the road in that it expects Rs100 billion in revenue from the process in the 2020-21 fiscal year and admits that the schedule is 'contingent upon resumption of economic activities and improvement in market conditions'. All sorts of foreign and local investment has after all, been badly disrupted by the coronavirus pandemic. A similar concern was expressed by members representing PML-N (Pakistan Muslim League-Nawaz) in the National Assembly the other day when they agreed with the government's plan to put sick SOEs (state-owned enterprises) on the market, disagreeing with the PPP (Pakistan People's Party), but felt the time was not right for it just yet. It is understandable why PTI has not privatised anything so far. It was definitely not a priority on the campaign trail or in the party manifesto. And the declared mode was about creating a holding company to be called Sarmaya Pakistan Limited (SPL) under which SOEs would be placed, protected from political influence, turned around and retained very much as government-owned entities. It was only after the former finance minister, Asad Umar, was replaced with the present advisor for finance, and the IMF programme began to take concrete shape, that the narrative changed and SPL abandoned.

And now, with the halfway mark of the present electoral cycle approaching, it is understandable why the government wants to get the ball rolling as quickly as possible. However, as nice as the hundred-billion would look on its books, luck is just not on its side and there's no escaping the reality that this is a pretty suppressed market. So the chances of anything fetching top dollar are not very high. But if the time isn't right, and there's still no way of knowing when the coronavirus will loosen its grip on the global economy, then the question naturally arises as to the way forward. The matter has assumed something of an urgency since it's no longer possible to keep the economy functioning and at the same time let SOEs haemorrhage hundreds of billions of rupees every year. Perhaps the best way to proceed would be for the government to do a test, of sorts, by putting a small percentage of the equity on the stock exchange and see what kind of values they get. That could set a benchmark and based on the response the government could then look for strategic investors since the price to be received from them would surely be much higher than listing on the stock exchange.

However, if the option to go to the equity market is to be taken to determine a benchmark then the government will have to proceed with profit-making entities only for very obvious reasons. Yet the idea is to get rid of loss-making enterprises first, which will require the strategic investor route. That, of course, brings us right back to the depressed state of the market where widespread volatility and risk aversion have made cash king, which means the government is not going to have much leverage in negotiations with investors. Already, according to the recently published World Investment Report 2020 by UNCTAD (United Nations Conference on Trade and Development), global FDI (Foreign Direct Investment) flows are expected to drop by 40 percent this year, going below $1 trillion for the first time since 2005.

All this means the government really has its work cut out to do some justice to its expectations of Rs100 billion from privatisation proceeds this fiscal. And even when, or if, these complexities are sorted out it will still have to handle the usual fallout like resistance from labour unions opposition pressure and court cases that always accompany privatisation initiatives in Pakistan. Regrettably, this straight forward, common-sense financial exercise has always been controversial here. One reason is that few administrations have really clearly understood how urgently our economy needs to move from demand-side orthodoxy to supply-side realism. And just like most government actions the privatisation deals too land in courts. Yet the situation is so untenable now that the state simply cannot continue to throw taxpayers' money, precious little as it is, into the SOE black hole. These white elephants have confounded governments for decades and whether or not PTI will be able to do any better will be clear very soon.

Copyright Business Recorder, 2020