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Privatization: feast for vulture capital

In view of the prevailing global investor sentiment, the privatization policy is being reoriented to suit the current situation.

An IMF document says that privatization has been slow, mostly due to limited investor interest and the government regrets that, given the lack of bidders, it may go for a negotiated sale in some cases.

In other cases, sell-off seemed unlikely in the near future and the government is improving transparency and accountability in state enterprises that should help foster support for public sector reform.

The government or the Privatization Commission (PC) has so far made no public announcement on negotiated sales. Apparently, the government is mulling over the issue. But with the international donors always pressing for hurrying up privatization, such a possibility cannot be ruled out.

The IMF document reveals that only one foreign company maintains interest in buying the KESC and it has not yet initiated due diligence. Privatization of the Habib Bank has been delayed because of lack of interest of qualified investors ( which has reportedly, among its ranks, lone serious buyer).

Bidding for PSO privatization is fixed for April. As the current situation indicates, the country's main oil market company with massive profits, may be the first to be sold off to a strategic investor.

If the market does not have the appetite for state units,an ill-timed privatization will most probably be seen as a distress sale by sole individual buyers. Such moves may benefit the foreign vulture capital and may not lead to genuine privatization. The country abounds in examples where privatization was done to strengthen crony capitalism and not on the basis of commercial merit. And this time, it may turn out to be a feast for vulture capital.

After the 1997 east Asia crisis, many companies were sold to corporates outside the region under the IMF and the World Bank goading. These were distress sales.

So far, privatization in Pakistan has not been an unqualified success. A study by consultants of the Asian Development Bank shows that only 22 per cent of the privatization units (first phase of sell-off) were doing better and performance of 34 worsened. On the whole, the objective of privatization has not been achieved.

And in the changing international scenario after 9/11 and specially in the context of threat of war in Iraq, the sale of strategic assets has implications for the economic sovereignty. It took Mrs Margarette Thatcher twelve years to complete Britain's privatization programme and yet, by the time she left, the government spending as ratio of GDP had gone up.

Privatization is inevitable but sound policies are needed for it to succeed. Of course, the governments have a role to play in social and capital spending.

As far as the financial performance goes, some major state enterprises are showing a turnaround. According to a IMF review of the first quarter of the current fiscal, performance of large scale public enterprises was broadly in line with their financial improvement targets. The only exception was Wapda.

Privatization can wait for the investment environment to improve or for that matter, till such time, the domestic strategic investors would have the resources to bid for the major state enterprizes.

On the other hand, it is the right time to divest shares of profitable units through the stock exchanges. There is excess money in the market, as a result of reverse flight of capital and soaring home remittances which could be attracted for selling shares in state-owned companies.

In the absence of listing of new scrips, there is too much money chasing too few scrips, sparking volatility in the market.

Federal Minister Dr Abdul Hafiz has been quoted as saying that the PC has decided to unload shares of major enterprizes through stock exchanges.

These entities include: the Natioal Bank, the Pakistan Telecommunication, the Pakistan International Airlines, the Sui Southern Gas and the initial public offering of the two unlisted companies, Pakistan Petroleum and the Oil and Gas Development Company.

The PC decision would help deepen and broadbase the capital market and tend to curb the speculative business. But the PC's challenging job would be to manage quick execution of its decisions. Good policies often suffer because of weak implementation. It would appear that the IMF's insistence on rapid privatization of state units to strategic investors has lost much of its relevance in the current situation.

All the three major multilateral donors, the IMF, the World Bank and the ADB, are on board and the programmes funded by them are staying on course. Yet there are limits to what IMF or multilateral policies and programmes can deliver. For the past three years, the IMF funded programmes have been sustained by a series of waivers and often delayed execution of its conditionalities.

By granting waivers, the Fund has shown flexibility, has shunned rigidity and accepted ground realities. And despite the lapses all along the way, the country has achieved macro-economic stability and to quote the IMF reports, the economic recovery is gaining momentum.

The grant of waivers raises a basic question: whether the IMF should concern itself with broad macro-economic policies and targets or unneccesarily retain in its domain over micro-economic management that stifles local intitiatives.

If the Fund's programme and waivers go together, the micro-economic management should be left to the national governments. It would help to promote a wider acceptability of its programme and create more room for independent decision-making.

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