Celebrating Failures

By Amir Zia
Monday, July 7, 2014
Weekly Money Matters
The News

It is ironic that shares of these profit-making companies are being sold instead of the loss-making institutions such as Pakistan Steel, Pakistan International Airlines or Pakistan Railways.

Prime Minister Nawaz Sharif’s government is basking in the glory of the ‘successful’ capital market transaction of its five percent shares in Pakistan Petroleum Limited (PPL), which brought Rs.15.3 billion to the national treasury.

Indeed, this offloading of 70 million PPL shares proved the country’s biggest domestic market transaction in recent years -- and that, too, at a premium price. Half-page colour newspaper advertisements and a string of statements by the prime minister, the finance minister and chairman Privatization Commission celebrated the deal, declaring it a milestone in the country’s history. The selling of PPL shares came just a few days after the government offloaded 19.8 percent of its stake in United Bank Limited (UBL), generating $387 million through a secondary public offering.  

These two transactions are part of the government’s plan to sell its holdings in two other banks – Habib Bank Limited and Allied Bank Limited – and the state-run Oil & Gas Development Company (OGDCL). These are five of the 60 companies earmarked for divestment of the government shares.

While at one level, the push in the government’s privatization programme – that remained stalled all through the five-year term of the previous Pakistan Peoples’ Party-led government – is a welcome move, many experts are rightly questioning the wisdom behind selling stakes in the blue chip companies first rather than of the loss-making institutions.

“We are not selling shares of blue chip companies to strategic investors, who introduce modern technology and new management concepts,” says a top executive of a state-run company, requesting anonymity. “The government is not even selling its shares to the general public… instead we are offering them to institutional investors and brokerage houses, which will trade them in the short-term or hold them for dividends.”

“In fact, selling shares of Pakistan’s blue chip companies is no feat at all as they are already in high demand,” he added. “The real challenge is to privatize the loss-making companies and bring in FDI (foreign direct investment) in which the government has miserably failed.”

The process of finding strategic investors and luring in FDI takes time and needs structural reforms for which Prime Minister Sharif and his financial managers seem to have little patience and will. The tried and tested feel-good short-cuts are unlikely to help bring any meaningful benefits to the economy even in the mid-term, let alone the long-run.

The bigger question remains: what does the government plan to do with these proceeds? Will they be used to retire debt or narrow the budget deficit? Will this money go into the black hole of the power sector where the circular debt has again hit the staggering figure of Rs350 billion? Or will the money be used to give subsidies to loss-making government institutions which devoured more than Rs.500 billion alone in the last fiscal year?

The old stated policy was that privatization proceeds will be used for debt retirement. But there is a catch in the current scenario. Pakistan's domestic and foreign debt burden has increased by 7.4 percent to Rs15.53 trillion in the first nine months of the last fiscal, according to the latest Economic Survey. 

According to leading economist Dr. Hafiz Pasha’s recent calculations, the Sharif government plans to burden the country with another $52 billion worth of foreign debt.

“This includes $6.6 billion from the IMF; $2 billion through Eurobonds; $12 billion from the World Bank through the recently announced Country Partnership Strategy and funding of $32 billion by the Chinese government, announced after the visit of a high-powered delegation to China,” he said in a recent statement. “All this adds up to $52.6 billion. It is interesting that the stock of external debt stood at $52.6 billion on 30th June of 2013. Therefore, the government is in the process of doubling the external debt,” he said.

This means that whatever money is being generated by selling the government’s shares in blue chip companies, as was done recently in the case of PPL and UBL, will not be able to ease the government’s borrowing appetite, let alone help reduce the debt burden.

In fact, for many experts the government has opted for an easy way out to generate funds by selling stocks of blue chip companies which have zero-liabilities.

Dr. Ashfaque Hassan Khan, a former finance ministry advisor and one of Pakistan’s eminent economists, said that the government should have clarity about the objectives of its privatization programme.

“Usually privatization targets those state-run institutions which are bleeding and remain a burden on the national exchequer, contributing in widening the budget deficit and increasing public debt,” said Dr. Khan, who is currently the dean and professor at NUST Business School, Islamabad.

 “Therefore, these loss-making institutions need to be offloaded so that they do not burden the national exchequer… Money thus saved is used for strengthening social and human capital and developing physical infrastructure. In other words, it is transferring government resources from non-productive to productive channels.”

However, Sharif’s financial managers have opted to sell shares of profit-making, well-managed companies that provide a permanent source of income to the government in the form of dividends. 

For example, PPL’s after-tax profit in fiscal 2012-13 (July-June) was around Rs.42 billion against Rs.41 billion in 2011-13. In the first nine months of fiscal 2013/14, its after-tax profit is hovering at a healthy level of Rs.38 billion.

OGDCL, another company on the chopping block, made Rs91billion after-tax profit in fiscal 2012-13 against Rs96.9 billion the preceding year. The first nine-month after-tax profit of OGDCL is at Rs.90.93 billion.

It is ironic that shares of these profit-making companies are being sold instead of the loss-making institutions such as Pakistan Steel, Pakistan International Airlines or Pakistan Railways.

This reflects the sad reality that the Sharif government is unable to generate the much-needed additional resources through taxation and expanding the tax-net. The government has also proved unable to bring in FDI as foreigners remain reluctant to bet on Pakistan due to its grave security situation and the continued political instability.

This unfriendly investment climate can be overwhelmingly blamed on the government, which delayed the vital operation against Al Qaeda-linked foreign and local terrorists by wasting time in the so-called peace talks and pursuing confrontationist policies on the domestic political front.

As per past practice, Sharif’s team is relying on heavy borrowing from banks, external resources and the equity markets as well as by printing new notes rather than taking difficult decisions to put the economy back on the track. 

One year down the road in power, Sharif’s image as a pro-business leader has taken a hit for the road not taken and treading the tried and tested beaten path. Celebrating failures or grand illusions of success are hardly a recipe for turning around the economy.

Celebrating failures

Celebrating failures

Celebrating failures

ime Minister Nawaz Sharif’s government is basking in the glory of the ‘successful’ capital market transaction of its five percent shares in Pakistan Petroleum Limited (PPL), which brought Rs.15.3 billion to the national treasury. - See more at: http://magazine.thenews.com.pk/mag/moneymatter_detail.asp?id=8366&magId=10&catId=245#sthash.0JC1DPIk.dpuf