Pakistan seeks to privatize state-owned companies

Pakistan seeks to privatize state-owned companies

Pakistan has begun work to privatize many of its state-owned industries, both to raise revenue and to secure loans from the IMF. Although opposition exists domestically, the government hopes privatization coupled with new foreign energy investments will save its struggling economy.

Pakistan has yet another force competing to shape its future: privatization. The government sees the sell-offs of 68 public companies as a potential lifesaver for Pakistan’s $225 billion economy, crippled by corruption, militant violence and power shortages.

Prime Minister Nawaz Sharif has made privatization his top political and economic goal and hopes Pakistan can raise up to $5 billion over the next two years to ease growing pressure on public finances. “Every day a file lands on a bureaucrat’s desk and he has to make a decision he isn’t qualified to. This can’t go on, no matter what,” said Mohammed Zubair, the head of Pakistan’s Privatisation Commission.

Several foreign investors have shown interest in purchasing some of Pakistan’s loss-making enterprises, including the US financial services corporation Fidelity Investments and the World Bank’s private sector wing, the International Finance Corporation. Among the assets being sold are Pakistan Steel Mills and Pakistan International Airlines, which have collectively accumulated losses of more than $3.5 billion.

While some of the planned sell-offs would free up funds the government desperately needs to secure its territories from insurgencies and transform its power grid, unions and opposition parties strongly oppose the privatization initiative. Asad Umar, an opposition lawmaker and former chief executive of one of Pakistan’s largest conglomerates, said the criteria for identifying sell-offs are completely inconsistent. On the list with the struggling Pakistani airline is Pakistan Petroleum Ltd, which has zero debt and made profits of 42 billion rupees in 2013.

Loans are key to short-term Pakistani stability

So why the large push to sell off so many state-owned enterprises, when some are still finding relative success? Last September, the IMF saved Pakistan from a possible default by agreeing to lend it $6.7 billion over three years. In return, however, Pakistan must fulfill a longstanding promise to privatize many of its state-owned enterprises.

The IMF recently indicated that Pakistan is on track to receive a third loan tranche worth $550 million, due to the progress it has made to strengthen its macroeconomic stability and revive economic growth. With electricity shortages declining and the electricity sector seeming to bear fruit, the IMF raised Pakistan’s GDP forecast to 3.1% for fiscal year 2013/14, up from its previous prediction of 2.8%.

Not all Pakistani officials are quite as optimistic, however. Zubair Khan, a former Pakistani finance minister, says the current IMF loan program is based on “unjustified optimism.” Pakistan’s tax revenues are still less than 9% of GDP, and less than 1 million of its 180 million citizens paid income taxes last year.

Security concerns, too, continue to be paramount as far as Pakistan’s ambitious economic plans go. While the current administration’s push to privatize state-owned enterprises is seen as business-friendly, investors will likely remain bearish in the face of almost daily attacks by militants. The government recently launched a crackdown by security forces in Karachi, the country’s economic hub, aimed at cutting down on kidnappings and extortion demands on local and foreign-owned businesses.

Trade and energy security will shape Pakistan’s future

While there may be a divide in public opinion regarding privatization domestically, foreign governments see a unique opportunity to bolster trade and give Pakistan much-needed energy security.

Energy costs in Pakistan are among the highest in Asia, as government gas allocation policies force manufacturers to import fuel by sea, increasing production costs, draining foreign exchanges and increasing the inflation rate. Pakistani industries also suffer from interruptions to the country’s gas supply, which lead to closures of industrial plants and slow the pace of economic activity.

To address its energy concerns, Pakistan is currently in talks with China to acquire three large nuclear power plants worth close to $13 billion. These three plants, which would come as an addition to two plants provided by China in late 2013, would help to triple Pakistan’s annual nuclear power output to 8,800 megawatts by 2030.

Pakistan is also working with Iran to construct the Iran-Pakistan (IP) Pipeline, helping to secure its short-term gas supply. The 2,700-kilometer-long pipeline would directly connect Pakistan with Iran’s South Pars gas field. While this new source of energy would be imported from abroad, assessments have found that a land-based gas pipeline is four times cheaper than other available options.

Coupled with its plans to secure both its short- and long-term energy supply, Pakistan’s privatization quest will help to convince businesses and foreign governments to invest in Pakistani industries. If the government can continue to address security concerns and stabilize its energy access, buyers and investors for its many public enterprises will not be hard to find.

About Author

Rami Ayyub

Rami is an analyst with a US Defense and Space firm, where he works in strategic planning and finance for Civil and Defense programs. He holds Bachelor degrees in Finance and Classical Music from the University of Maryland, College Park.