• Warns sale of SOEs to foreign states under G2G contracts may lead to litigation
• Claims PTI govt’s Sarmaya-i-Pakistan model delayed reforms

ISLAMABAD: The World Bank has raised concerns over Pakistan’s approach to privatising its state-owned entities (SOEs) and highlighted the adverse impacts of judicial activism, political nuisance, sale of K-Electric and what it called the botched Sarmaya-i-Pakistan model.

The financial institution cautioned the government of looming litigation in divestments to foreign states under government-to-government contracts and instead advised public offerings through stock exchanges followed by privatisation under the transparent oversight of a special joint committee of the parliament.

In its Public Expenditure Review 2023, the bank specifically addressed the Inter-Governmental Commercial Transactions Act 2022, which allows the government to offer SOE shares to foreign governments. Such a move, the bank warned, could lead to litigation, raise questions about transparency and full disclosure and may slow down the privatisation process further.

The bank pointed out that the profitability of SOEs in Pakistan had been declining and turning into losses for about a decade. Things have come to a stage that now “the profitability of Pakistan’s federal SOEs is the lowest in the South Asian Region” as their aggregate profit at 0.8pc of GDP in 2014 turned into losses worth 0.4pc of GDP in 2020 and growing, thus becoming a major driver of fiscal deficit and source of substantial fiscal risk.

The World Bank identified “key factors leading to unsuccessful privatisation efforts as economic volatility, judicial activism, litigation, weak political commitment and perceptions of corruption cost post-2007”.

It said that the ideologue in some of the mainstream political parties opposed privatisation regardless of the performance of individual SOEs and preferred offering 12pc SOE shares to employees through the Benazir Employees Stock Option Scheme (Besos), and the general perception of privatisation remained highly contentious triggering negative sentiment because of elite capture, resultant unemployment and social unrest.

Also, “judicial decisions in the Pakistan Steel Mills privatisation and Reko Diq mining contract cases badly hurt Pakistan’s image as an untrustworthy country where international contracts are not honoured, and business always run the risk of falling victim”, the bank said.

Also, Pakistan’s failure in international arbitrations in critical cases deterred key decision-makers of the government from further privatisation or seeking foreign direct investment on top of generous international treaties involving neo-liberal investment forums without consideration of the state’s exposure.

On top of that, the incorporation of Sarmaya-i-Pakistan Limited (SPL) by the PTI government in 2019 with the mandate to take management control of all SOEs and revamp or privatise them further delayed the process, but the SPL actually never took off.

With particular reference to the power sector, the World Bank said privatisation could not take off because of resistance from trade unions and vested interests, fear of private sector monopoly and previous experience of privatising a distribution company, circular debt and management issues.

It said the “unsatisfactory performance [of K-Electric] even after privatisation, despite tariff hikes, because of weak financial management, governance structure, operational and commercial inefficiencies, and unscheduled load-shedding resulted in public demonstrations against K-Electric” and raised serious questions about the benefits of further privatisation of other distribution companies (Discos).

The bank advised that in order to get rid of continuous bleeding and proceed with the privatisation successfully, Pakis­tan should take necessary measures for political and macroeconomic stability, signal a strong political commitment to the privatisation agenda and build a broad-based coalition of change underlining structural challenges in the economy and the need for privatisation.

Simultaneously, the privatisation commission should be revamped “with able professionals who can prepare a financial model for each entity to be privatised” and ensure that privatisation would promote efficiency and competition in the relevant sub-sector of the economy rather than leading to private-sector monopolies and cartelisation that would require strengthening the regulatory bodies to protect the general public.

In this direction, the Competition Commission of Pakistan will need to be equipped with powers so that an appeal against its decisions will only be entertained by the courts after depositing the penalty amount.

Also, the government should ensure necessary safeguards to make the entire privatisation process more transparent to avoid a repeat of the observations made by the Supreme Court of Pakistan, besides further strengthening parliamentary oversight of privatisation by forming a Special Joint Committee of the Parliament reviewing the process.

In doing so, the government should guarantee the necessary safeguards to mitigate the social impact and costs of privatisation — such as displacement of workers adding to the already high unemployment rate — as done in cases of successful privatisation.

The World Bank advised Pakistan to “make public offering of SOEs shares”, which is the easiest way to gradually move towards divestment and ultimately privatisation or awarding management concessionaire, a model that worked successfully in the banking and telecommunication sector.

The government has also been asked to restructure Discos, especially those making losses, in terms of financial health and rationalising human resources and to award a management concessionaire to the private sector while ensuring that it did not lead to the concentration of assets in few hands, thus creating private sector monopolies.

It advised gradual divestment of government shares by the public offering of shares of Discos while safeguarding procedural and process transparency and finally, phasing out government shares.

But this will require an effective regulatory framework to promote efficiency, investment to improve service delivery and competition.

Published in Dawn, October 9th, 2023