PRIVATIZATION IN

PAKISTAN
PRESENTED BY: KHIZER
FAROOQ - 12484

PRIVITIZATION: Selling of state owned enterprises to the private sector.

Also referred to as denationalization.
Its a policy tool for generating growth & opening up the

economy to competition.
It is understood as a change in the objective of owners of

the firm. (A public firm maximizes social welfare & a private

firm maximizes profits).

HISTORY OF PRIVATIZATION
The concept of Privatization is not new to the policy makers of

this country. In 1950s, Pakistan Industrial Development

Corporation (PIDC) was established to boost up the industrial
development in the country.
The corporation established over 50 Industrial undertakings &

after their successful operation & management these units

were transferred from the public to the private sector.
In 1970s, all major private industries were put under the

government ownership in an intensified programme, called

nationalization programme that led to the economic disaster.
Resultantly, the government controlled majority important

industrial enterprises operating in banking, energy,

communication & transport sectors.

 State Owned Enterprises exhibited the following characteristics: 1) Mismanagement & overstaffing
2) Poor quality of services
3) High debt & fiscal loss
4) Increased corruption
5) Political based appointment of decision makers & Sr. Officials.
) The government that came in to power in 1978 recognized the

problem & passed orders to begin the reverse of nationalization

strategy. General Zia Ul Haq handed over Ittefaq Foundry to the
Sharifs Lahore without inviting any bids. Two other nationalised
units, Nowshera Engineering in the NWFP & Hilal Ghee in Multan
were handed over to their original owners.
) Privatization efforts in Pakistan began in 1988 during Benzair

Bhutto regime, with the floatation of 10% shares of PIA however

the pace of privatization picked up after the creation of PC.

 The privatization program was launched on 22 Jan 1991 by

Prime Minister Nawaz Sharif.

Program was visioned to improve the GDP growth of the

national economy of Pakistan & attract foreign investment.

In 2004, a more intensified privatization program was

launched under the presiding leadership of Prime Minister

Shaukat Aziz.
Programme ended effectively at the end of 2007 when 80%

to 90% of the industries were put under the management of

private ownership.

ADVANTAGES:
1) Increase in efficiency and Profitability.

Most Govt. industries and services

are inefficient and running in losses
(Take for Example PIA), when these
will be transferred to private sector,
their administration will improve.

2) Lack Of Political Interference:

Managers in SOEs are motivated by

political pressures rather than sound
economic & business sense. For
Example: employing surplus workers
to avoid negative publicity.

3) Retirement of debt:
The burden of domestic and international
debt can be reduced from the sale of
those very assets for which the debt
was partially created. Privatization will
also obviate the need for raising fresh
debt for the rehabilitation and
development of public sector
industries. A substantial portion of the
funds will be applied for retirement of
4)debt,
Reduction in Fiscal Burden:
The annual allocation for subsidies to public
sector enterprises continues to be a drain on
the nations resources. The reduction in
subsidies will be possible as assets are sold,
which will be a positive contribution in
reducing the budget deficit.

5) Short Term view

A government many think only in terms of
next election. Therefore, they may be
unwilling to invest in infrastructure
improvements which will benefit the
firm in the long term because they are
more concerned about projects that
give a benefit before the election.

6)
Shareholders:

It is argued that a private firm has pressure

from shareholders to perform efficiently. If the
firm is inefficient then the firm could be
subject to a takeover. A state owned firm
doesnt have this pressure and so it is easier
for them to be inefficient

7) Increased Competition:
More firms enter the industry & increase
the competitiveness of the market.
Increased competition leads to
improvement in efficiency. For instance:
Competition in telecom.

DISADVANTAGES:
1) Increase in Tax Evasion:
Private sector generally tries to avoid
payment of taxes. Thus privatization of
enterprises will result in the decrease of tax
income.

2) Exploitation by Private Sector:

Privatization will result in exploitation
by rich people. They may charge more
prices for their goods and services.
They may terminate workers to reduce
cost of production. Thus different types
of exploitation may be started and the
concept of welfare state for Pakistan
will be jeopardized.

3) Concentration of
Wealth: of large industrial units and
Privatization
services sector such as banks and insurance
companies will increase concentration of
wealth in private hands.

4) Unemployment:
In privatization more workers are
declared surplus and thus are fired by
the company. Therefore, there is an
increase in unemployment rate which
will eventually increase crime rate in
the society.

5) Public Interest
There are many industries which perform an
important public service, e.g health care and
public transport. In these industries, the profit
motive shouldnt be the primary objective of
firms and the industry.

Progress to Date:
Although the PC mandate initially restricted to industrial
transactions, by 1993 it had expanded to also include Power,
Oil & Gas, Transport (aviation, railways, ports and shipping),
Telecommunications and Banking and Insurance.

During January 1991 to August 4, 2014

the Commission completed 169
transactions for Rs 529.650 billion.

Progress to Date:
About 58% of the proceeds received were transferred to the
Federal Government, 31% was returned to legal entities
whose shares were sold, 5% was used for restructuring
expenses associated largely with golden handshakes and
rehabilitation, and 2% was used for PCs privatisation-related
expenditures

90% of the proceeds are being used for

debt retirement & 10% for poverty
alleviation.

Number of privatized transactions:

SUCCESS STORIES:

1) MCB:
It was incorporated by the Adamjee Group on July 09, 1947.

Nationalized in 1974.

First bank to be privatized in 1991, with the issuance of 26%

shares to National Group at a price of Rs. 56 per share .

Ranked 4th among the largest national banks with an asset

base of US$ 7 Billion as at quarter 1, 2012. Largest by
market capitalization recorded at $1.2 billion at year end
2011. In 2011, reported a profit of PKR 19.4 billion.

Compared to 1991, in 1995 bank deposits had increased by

184%.

Took new initiatives & marketed new products & services to

cater the varying requirements of its diverse customer.

Some of them include: Mahana Monthly Kushali Scheme,

FAILURE:

1) K-ELECTRIC:
Incorporated on 13th Sept 1913.

Nationalized in 1952.

In 2005, Govt. privatized K-Electric.

The Utility was sold to Siemens AG who had no previous

experience of running a similar business.

It was expected that the consortium would turn KESC into a

profitable entity but as of June 30th 2008, the company
continued to suffer losses amounting to PKR. 35.5 billion.

It was also expected that distribution, transmission,

generation will be improved but unfortunately it did not
happen

In 2009, The Abraaj Capital a firm based in Dubai bought the

power utility.

As of May 14 2014, K-electric is not only defaulter to the

government but is also a major defaulter of Sui Southern Gas
Company limited and Sales tax department of billions of
rupees.

The utility purchased power of 230 billion from NTDC in

September 2009 out of which government has paid 180
billion in form of subsidies given to KESC.

Karachi Electric experience as a private utility cannot be

termed as successful as it still depends on subsidies
provided by the government

SPONTANEOUS PHASE: (1989 1993)

A large scale privatization program was launched on 22 January
1991 as the primary economic policy by Prime Minister Nawaz
Sharif who came to national power after securing a flight-winning
victory in the 1990 general elections.

The Program was in direct response to Bhuttos

nationalization.

denationalization of banking sector and industries to private

sector, starting first with MCB limited

Sharif termed his privatization program as:

"turning Pakistan into (South) Korea by encouraging greater
private saving and investment to accelerate economic growth".

This phase was promulgated by Sartaj Aziz with the goal to

transform the enterprises into profit-seeking businesses, not
depended to the government subsidies for their survival.

The mega-energy corporations such as WAPDA , KESC and PTCL

were set off to private sector.
From 1990-93, around 115 industrial units were hastily
privatized, including the privatization of two major banks, 68
industrial units and 10% Shares of Sui Northern Gas Pipelines
Limited.
In 1992, the Leader of the Opposition Benazir Bhutto,
vehemently criticized the whole policy measure program at the
public circles while Commerce minister Faisal Hyatt and Finance
Minister Sartaj Aziz enthusiastically projected the privatization as
a "success phase

SECOND PHASE: (1993 - 1999)

The second phase of the privatization program began in 1993
under the "disciplined macroeconomics policy" of PM Benazir
Bhutto.
It involves the privatization of financial institutions, telecom,
thermal power plants, oil and gas sectors.
Benazir's government did not privatize all state corporations,
especially those who were collecting large revenues abroad; only
certain industries were privatized which were at the brink of
financial collapse.
The first attempt was made to privatize the UBL but the
proposal met with great hostility by the workers union and
opposition.
Proposals were also made to put the private-ownership to
Pakistan Railway but it was rebuffed by Prime minister Benazir
Bhutto who quoted:

By the end of 1996, 20 industrial units, one financial institution,

one electric power plant and 12% shares of Pakistan
Telecommunications Ltd. were privatized by Benazir Bhutto.
The second phase remained continued until 1998 when it was
abruptly ended by Prime Minister Nawaz Sharif after imposing
economic emergency after ordering to perform capability of
nuclear deterrence in response to Indian nuclear aggression.
All stock exchanges, stock markets and the second phase of the
privatization program were immediately halted by Prime Minister
Nawaz Sharif until his government was ended in 1999.

INTENSIFED PHASE: (1999

2008)

Pervez Musharraf invited Shaukat Aziz to take the control of

declining economy of Pakistan
The GDP rate had declined from 10.0% in the 1980s to 3.6% in
1999, with foreign debt increased to 44% up as compared to
1986.
Major economic reforms were introduced by Shaukat Aziz who
first consolidated the industries under one platform and
restructured them before selling them to privatization market.
Starting from 2003 until 2007, Aziz successfully privatized 80%
of the banking industry into private-ownership enterprises, while
privatizing the numbers of shares of Pakistan International
Airlines and other mega-corporations into the public circles.

Aziz defended his privatization program as

these institutions viable while they were on the verge of
collapse".
Aziz's privatization program subsequently improved the
countrys growth rate by 6.4%8.6% a year. Inflation rate
dropped to 3.5% as against 11-12% in 1990.
However in the end of 2007, Aziz's privatization program
suffered a major setback which initially halted the privatization
program in the country.
The Supreme Court halted the privatization of Pakistan Steel
Mills after transferring the inquiry from FIA to NAB, while issued
standing orders to keep the Steel Mills under the nationalization
program.
The proceedings and Supreme Court's decision initially halted
Aziz's intensified and aggressive privatization program at the
end days of his tenure.

EVALUATION OF PRIVATIZATION PROCESS:

Although the program produced a relatively efficient

way of promoting competition & enhancing growth,
on the other hand it resulted in increased
unemployment.

Privatization has received significant support from

media. In an editorial written at the Dawn, it argues
the programme has been a constituent of structural
reform programs.

Overall, the GDP rate grows smoothly as opposed to

nationalization programme that dropped the GDP
growth rate, Dawn maintained.

The Express Tribune, argued that the national

railways condition has gotten from bad to worse
under the government ownership, & only privatization
can save the railways.

EVALUATION OF PRIVATIZATION PROCESS:

Privatization Commission Ordinance 2000 has two primary

objectives payment of foreign debt & poverty alleviation. In
1991, the debt was $23 Billion & today the external debt
stands at 60 Billion Dollar & approx. 43% of population lives
below the poverty line.

Sale of assets at throw away prices, HBL was sold out to Agha
Khan Fund for only 22 Billion rupees while its total assets
exceeded more than 570 billion rupees. KESC was sold out
for only 16 billion rupees & it failed to increase electric
supply.

The govt. handed over MCB to Mian Muhammad Mansha at

19 Billion, ignoring the highest bidder (Tawakal Group). The
single transaction involved a corruption of about 60 Billion.

In 1988, the suger mills of Pakistan Industrial Board were

privatized at a throw away price of Nawaz Sharif.

The scandalous Schon Group & Tawakkal bought assets worth

more than 120 Billion rupees at a throw away price including
MCB, 5 Cement plants, Pak China Fertilizer, National Fiber and
Balochistan Wheels. This clearly shows the first tide of
privatization failed to achieve the actual goal of privatization,
because it was not transparent & badly affected by corruption.

Crises in agricultural sector due to the privatization of fertilizer

public companies. Pak Arab Fertilizer was handed over to Arif
Habib Group for only 13 billion rupees though the price of the
land of the factory was over 40 billion rupees.

The Price of a pack of fertilizer has gone up from Rs. 1300 to

Rs. 3700 after privatization.

PTCL after privatization lost its base as its subscription declined

from 5.12 million to 4.40 million in 2008. Their financial
statement shows a continuous growth till 2006 while after
privatization the company is facing severe financial short
comings.

The labor & workers in public sectors remained hostile

towards the privatization programme. In 2005, during the
privatization of PTCL, workers revolted took place in ISB.
Despite the resistance, the SOE was privatized by Shaukat
Aziz.

26% shares privatization of PTCL to Dubai based Aitsalat for

only 157 billions rupees. At the time of privatization in 2005,
they announced none of the 70,000 workers would lose their
jobs however in 2007, 30,000 workers were laid off.

Privatisation programme was severely affected due to war on

terrorism which adversely affected investment climate in the
country.

The trend of monopolizations have increased & the multinational companies have further monopolized the economy.

Lack of transparency & openness has been observed during

In the name of privatization, a corruption of Rs. 3000 billion

has taken place since 1947 & as a result good deal of the
national wealth fell into the hands of relatively small group of
so-called business oligarchs (tycoons), and the wealth gap
increased dramatically (According to Media Report).

Since 1990, over 160 institutes have been privatized and

many of them have been shut down.

The privatization program came with great surrounding

controversies with lacked competition as the program was
largely controlled by favored insider.

CONCLUSION/MY OWN ANALYSIS:

The perception that a change in the ownership is the only

solution to turn around loss making enterprises is not always
true & it seems irrational that instead of tackling corruption
the state should sell public assets to the private sector.

Privatization in an attempt to eliminate corruption is not

appropriate in the sense that same corruption problem
emerges during the privation process.

Selling of SOE is an unwise decision.

Another view that corporations should first be restructured &

reformed to make them profit-oriented & then privatized also
seems rubbish because there is no need to sell them.

There are examples all over all the world where public
utilities are running successfully under state control. Indian
Railways is the largest SOEs in the world, if that can be
profitable, so can Pakistan railways with better management
& good governance.

REFERENCES:
http://www.slideshare.net/sidranaeem90/should-pakistan-privatized-its-state

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http://merlin.fae.ua.es/fauli/privatization.pdf.
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