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Pakistan privatisation programme - an overview.

This paper is an account of the activities undertaken by the Privatisation Commission which was set up by the Government of Pakistan to implement the country's privatisation programme. It explains how the Commission, learning from experience, has been able to remove some of the weaknesses encountered during the initial stages of the implementation process, how it has gained the confidence of the private sector, and how it has overcome the resistance of labour to a large extent and sold with maximum transparency public property valued in excess of Rs. 9.00 billion.


In August 1947, when the Indian subcontinent was partitioned to create two sovereign states of Pakistan and Hindustan, industrial and business entrepreneurship in the area which constituted Pakistan was conspicuous by its absence. There was, however, a large-scale migration of Muslims belonging to the business community from the business centres of India which initiated the process of industrialisation in the country. The Government also stepped in by creating the Pakistan Industrial Development Corporation (PIDC) in the fifties to set up industrial projects in the public sector with the objective of transferring them to the private sector after demonstrating their viability. The 1960s witnessed unprecedented developments in the growth of industry. This pace of industrialisation received a serious jolt in the early 70s when the then Government decided to nationalise all industrial enterprises along with banking and insurance concerns. A number of laws were enacted by the then Government during 1972-74 under which industrial enterprises including cotton ginning, rice mills and flour mills were nationalised along with financing institutions and infrastructure facilities. The only redeeming feature in this exercise of nationalisation was the enactment of a law which protected foreign investment in the country from nationalisation.

As a result of the known interest problems associated with nationalised sectors, a sharp increase in public sector outlays without the corresponding increase in revenues and a stagnation in exports combined with a rising import bill led to serious balance of payments and budgetary problems at the end of 1977. To retrieve the situation, a beginning was made through a series of measures taken in 1977-78 to restore the legitimate role of private enterprises and raise the level of confidence of the private sector through the denationalisation of cotton ginning, rice milling and flour milling. To stimulate private sector investment, a number of areas which had previously been declared closed for private sector investment were opened up. An Ordinance was promulgated in 1978 in order to amend the Economic Reforms Order of 1972 as an instrument to enable the Government to de-nationalise the manufacturing units which had been taken over. The pace of privatisation from 1977-78 to 1987-88 was very slow and four industrial enterprises were privatised during the entire decade.

The origin of the Pakistani Privatisation program, in a real sense dates back to 1988 when the Government announced the establishment of a national Dis-Investment Authority. Later in the same year, the Government of the then Prime Minister Mrs. Benazir Bhutto, on taking over power, reaffirmed this policy. 10% of the shares of Pakistan International Air Lines were dis-invested and some 14 public sector units, including a bank, were identified for privatisation. In spite of the intention of the Government of Mrs. Benazir Bhutto to privatise on a large scale, the fear of labour unrest prevented it from taking positive and concrete steps towards privatisation.

The present Prime Minister Mian Muhammed Nawaz Sharif has made disinvestment and de-regulation an integral part of his Government policy, which is to replace the mixed economy by a totally free market economy. The agenda of privatisation covers a wide spectrum of fields such as industries, banks, development finance institutions, telecommunication and infrastructure facilities, e.g., electric power. Some revolutionary steps have been taken by the present Government in this direction.

Institutional and Legal Framework

The Prime Minister in his address on the 12th November 1990 to a gathering of leading industrialists in the country, announced the implementation of the commitment made in his "Party's Manifesto" with regard to disinvestment, denationalisation and deregulation. As a consequential step, a Committee was nominated to implement this commitment.

This Dis-investment, Denationalisation and De-regulation Committee in its preliminary report, submitted to the Government in January 1991, recommended the disinvestment of the 115 industrial units which included 45 nationalised units taken over during the period 1972-74. The Government approved this disinvestment plan and announced the creation of a broad-based Privatisation Commission on 22nd January 1991 to implement the disinvestment programme within the shortest possible time.

A Cabinet Committee chaired by the Finance Minister has been constituted to approve the recommendation of the Commission generally of the mode and quantum of disinvestment, the reserve price for the public property to be disinvested, the selection of the winning bid, etc.

Since no formal legal cover is available to the functioning of the Privatisation Commission, the Commission, as part of the Ministry of Finance, functions by virtue of the executive authority vested in the Ministry. Relevant laws under which nationalisation had taken place, however, have all been amended to facilitate privatisation. These include the transfer of Managed Establishment Order of 1978 along with subsequent amendments to confer the right of the first refusal to previous owners to match the highest bid except in cases where the employees have given the highest bid: the Hydrogenated Vegetable Oil Industry (Control and Development) Act of 1973, the Banks Nationalisation Act of 1974 and the Pakistan Maritime and Shipping Act of 1974.

Non-reversal of privatisation has been given a legal cover under the protection of the Economic Reforms Ordinance of 1991. The Government is also planning to amend the Constitution in order to give constitutional cover to the process.

A separate Inter-Ministerial Committee has been set up to deal with the labour employed in State-Owned Enterprises (SOEs). The committee negotiated packages of incentives for labour employed in State-Owned Enterprises with the representative body of labour. The agreement with labour was executed on October 15, 1991.

Implementation: Successes and Failures

The task assigned to the Commission had to be undertaken on a "crash" basis as it was to be started from scratch and completed in the shortest possible time. None of the 115 industrial units nor the nationalised commercial banks and development finance institutions (DFIs) or for that matter telecommunications and other infrastructure facilities had been previously evaluated to enable the commission to put them up for sale to the private sector. The haste to privatise public property provoked criticism both at home and abroad, even from institutions like the World Bank. The pace has not slackened so far and the war critics have come round to applaud the programme, confirming the saying that nothing succeeds like success.

The Commission met for the first time on 29th January 1991 to develop an outline of its working. It was decided to hire local consultants, assessors, surveyors and chartered accountants for undertaking the exercise of valuation on a crash basis. Hiring of foreign consultants was avoided in spite of offers of assistance from international financing institutions in order to save time. In view of the constraint, different valuation methods to determine the optional disinvestment values, including the return on assets and future profit potential, were not undertaken. Instead, wherever possible the break up value of assets is arrived at on the basis of revalued net assets. The valuation reports are reviewed by the three full time members of the Commission (chairman, member/secretary and member technical). After the valuation report is cleared by the Commission, it is placed before the Cabinet Committee for consideration and approval of the mode and quantum of disinvestment along with the reserve price for such disinvestment.

In the initial period, between March and July 1991, the Commission advertised for sale 25 industrial units for which the valuation exercise was completed. The Commission had earlier prepared the requisite documents like instructions to bidders, form for bid bond, etc., prior to offering the units for sale.

Initially, the response to the units advertised for sale was a disappointment. For eleven units, no bids were received and for nine units, single bids were received. Only one industrial unit which manufactures edible oil was sold out of the 25 units advertised. Generally, the reasons for the poor response were:

a) The fear of possible re-nationalisation as propagated by the people opposed to privatisation. Legal cover for non-reversal of the privatisation process was not available during the initial period.

b) The short time allowed-2 to 4 weeks for the submission of bids from the date of advertisement-did not allow the intending bidders sufficient opportunity to carry out a proper and comprehensive evaluation of the submitted investment proposal and to mobilise resources for the offer they intended to make. The short time ruled out the possibility of foreign investment.

c) Stringent bidding conditions which required bidders to deposit Rs. 50,000 non-refundable as processing fee along with Rs. 5 million as earnest money and a performance bond for full value of the bid. The amount of the processing fee and earnest money were determined irrespective of the size and value of the unit advertised.

d) Tough payment schedule which required a 50% down payment on being declared successful and the balance of 50% on transfer of management along with firm arrangements for repayment of loans, if any, owed by the unit to the Government.

e) Lack of proper and wide publicity which the short time available did not allow.

By this time, it appeared that the desired speed was lacking. It was decided at the level of the Prime Minister that the buyers should be given wider choice and in August 1991, 100 industrial enterprises were advertised for sale without indicating the reserve price. The advertisement excluded the Rs. 30 billion steel plant at Karachi, a major national oil refinery, a big engineering complex, a machine tool factory and some joint venture projects in fertilizer and auto-making. Although the list of units was long and impressive in terms and turnover, the units offered for sale contribute less than 1/3 of the total turnover of industries under only two Ministries, viz., Industries and Production. The value of the units varied from Rs. 4 million to Rs. 4 billion and included 15 cement plants, 12 chemical and ceramic units, 22 ghee (edible oil) units, 16 roti (bread) plants, 9 engineering plants, 5 fertilizer factories, 7 automobile/tractor units, 8 rice mills and 6 miscellaneous units with total aggregate value of Rs. 14 billion. A vigorous advertising campaign was launched through the press and the electronic media as the success and failure of the entire programme now hinged on the response from the private sector to this massive offer for sale. In order encourage the response, the Government decided:

a) not to disclose the reserve price;

b) to extend the time allowed for bidding;

c) to soften the bidding requirements; and

d) to make the terms of payment easier.

The Commission completed the preparatory work for launching the big sale in three days. The time allowed for bidding this time was increased to 8 weeks. The bidding requirements were softened by doing away altogether with the bid bond and by reducing the amount for earnest money from Rs. 5 million to Rs. 1.00 million, irrespective of the size and value of the unit offered for sale. The payment schedule from successful bidders was made easy - 26% on being declared successful, 14% at the time of signing the agreement and the balance, 60%, in three equal annual instalments; the outstanding amount was to carry an interest rate 1% above the bank rate and was later fixed at 14%. A firm arrangement for the payment of the balance of 60% in the form of a bank guarantee along with a guarantee for payment of loans, if any, due to the Government are pre-requisite for the transfer of shares and management.

As a result of the steps taken, a large number of entrepreneurs showed interest in the "big sale" from within and outside the country and some 735 bidding documents were sold. Prospective bidders abroad were furnished the company profiles on request. Actual bids received were 235 for 81 units. No bids were received for 19 units and for 25 units only single bids were received. For 56 units, more than one bid was received. A total of 21 bids were received from the employees of the unit for employees buyout.

Preliminary scrutiny of the bids revealed that, for at least 30 units, the prices quoted were above 90% of the reserve price and in the case of the roti plants they were above 80% of the reference price. Some units fetched prices as much as 300% higher than the reserve price. Few bids turned out to be spurious. Thirty-two letters of intent were issued to the highest bidders which include units where the ex-owner has refused to match the highest bid. In respect of units where the bids are lower than the reference price, the highest bidders were given an opportunity in 18 cases to raise their bids up to 90% of the reserve price. In three instances, the employees of the units filed cases in the courts against the Commission for issuing letters of intent to third parties being the highest bidders which they believe is in violation of the agreement reached by the Government with the All Pakistan State Enterprises Workers Action Committee (APSEWAC). There have also been constitutional petitions filed by bidders who, after making the highest bids, failed to perform. The ex-owners also filed petitions against the decisions of the Commission. So far, all the decisions taken by the Commission have been upheld by the highest court in the country and the Commission has not lost a single case.

Given a little more time, the Commission perhaps could have planned the exercise in a proper and more methodical manner which could have yielded even better results. While withholding the reserve prices from the prospective bidders and easing the terms of payment were positive moves which prompted an enhanced response, the softening of the bidding requirements particularly fixing the amount of earnest money uniformly at Rs. 1.00 million for all units resulted in the receipt of spurious bids and other malpractices in the bidding process of large units. For SOEs valued at Rs. 1.00 billion, the stake of the bidder was .01% in terms of earnest money which could tempt sister companies bidding for the same unit to withdraw in favour of each other at a cost of Rs. 1.00 million to save hundreds of millions between them. Fixation of the amount of earnest money at a uniform level for 100 units, small, medium and large at the same level, may not have been the correct thing to do. Keeping it as a percentage of the reserve price, however, was not possible as the reserve price was decided to be withheld from bidders. In respect of spurious bids when the highest bidder failed to perform, the Commission overcame the problem by offering the unit to the second highest bidder at the highest price received and to follow this procedure down the line. In respect of a large cement plant, the fourth highest bidder matched the highest bid and completed the transaction. In future exercises, the earnest money has been fixed in relation to the size of the unit.

Subsequent to the "grand sale" the Commission has held two open auctions with remarkable success in April and July 1992. On both occasions the floor prices were advertised beforehand. Due to the difficulties faced by the bidders in obtaining guarantees from scheduled banks after the introduction of the prudential regulations by the State Bank, the Commission has allowed the bidders to furnish guarantees from Investment Banks acceptable to the Commission besides DFIs or banks in which the provincial governments have majority shares. So far, some 57 SOEs have been sold, the management of about 44 units of which has been transferred.


Transparency, which is considered a vital element in any privatisation programme, was questioned on account of withholding the reserve price in the October 1991 exercise. Every effort was made nonetheless by the Commission and the Cabinet Committee on Privatisation to achieve maximum transparency in each and every step of the process. The SOEs being privatised were given wide publicity. Reasonable time was allowed to the prospective bidders to evaluate the units and file their bids. The bid opening was in the presence of the bidders or their authorised representatives. Any condition indicated by the bidders was recorded in their presence and in front of the Press. The Cabinet Committee authorised the Commission to issue letters of intent only to those successful bidders which had given bids equal to or more than 90% of the reserve price for industrial units and 80% for roti plants and the list was released to the Press. The Cabinet Committee allowed the Commission to entertain and consider only those bidders who were prepared to improve their bids to meet the criterion for winning bids, viz., 90% of the reserve price in case of industrial units and 80% for the roti plants, leaving no scope for negotiation. Only those who accepted the offer were issued letters of intent.

Financial Sector

This paper will remain incomplete without mentioning the privatisation of the financial institutions. The privatisation of the first nationalised commercial bank (Muslim Commercial) was initiated before the creation of the Privatisation Commission and was handled by an Evaluation Committee headed by the Governor of the State Bank of Pakistan. The bids for the bank were invited in December 1990. The Evaluation Committee did not pre-qualify the highest and the second highest bidders. It therefore invited the third highest bidder to match the highest bid. The Bank was transferred to the private sector on payment of 26% of the shares of the bank at the highest bid price received, along with a committee from the Group to underwrite the issue of a further 25% of the shares of the bank to the general public.

The de-nationalisation of the Allied Bank was handled by the Privatisation Commission which invited bids for pre-qualification in the first instance with the view of inviting financial bids only from pre-qualified bidders. Eleven groups, including a management group formed by the workers of the bank, participated in the bidding. Pre-qualification was to be carried out before inviting financial bids to avoid legal complications. While the bids were being evaluated, the management group which was led by the Chief Executive of the bank, who was armed with the proxies from 7321 workers out of approximately 7500 workers, offered to purchase 26% of the shares of the bank at twice its break-up value under the Employees Stock Ownership Plan (ESOP). The employees were offering to buy out a commercial bank perhaps for the first time anywhere in the world. The Commission evaluated the merits and demerits of the proposal. There was no doubt that the sale proceeds would be much higher if the bank was sold to a party other than the employees, but because of the favourable political fall-outs of a sale to employees, the Commission recommended acceptance of the offer, subject to appropriate allocation of shares to all categories of staff members. The Cabinet Committed approved the recommendation and an agreement for the transfer of the management of the bank was executed on 9th September 1991.

Visible improvement has been reported in the performance of the bank after its take-over by the employees.

The Commission is currently engaged in the privatisation of the two remaining nationalised commercial banks and two DFIs. The closing date for receipt of applications for pre-qualification to bid for United Bank Ltd. has been fixed for 15th October 1992.

Social and Political Aspects

In SOEs labour traditionally had been supportive of the Pakistan People Party (PPP). Most of the labour unions are controlled by the PPP which, after going into opposition openly, started to oppose the Government policy of de-nationalisation and dis-investment. The labour unions consequently were in arms against the Government policy staging demonstrations in major towns/cities of the country. In some units, the surveyors who were deputed by the Commission to carry out the valuation of the units were prevented from entering the premises, and later, the prospective bidders also faced difficulties in the inspection of the units.

From day one the Government was anxious to cultivate support of the employees who are a major stake-holder in the privatisation process. There was a genuine desire on the part of the Government to safeguard the rights and interests of the workers and to minimize their hardships during the process of privatisation. It would not be out of place to mention here that from the very start of the programme, in the bid form itself, commitment is obtained from all prospective bidders that there will be no lay-offs during the first year after privatisation.

Labour was not satisfied with this provision alone and demanded the provision of a "golden handshake" for financial security at the rate of four months salary for each year of service rendered, in addition to the mandatory one month salary for each completed year of service. They also wanted concessions to purchase any unit if they make a competitive bid. After prolonged negotiation by an Inter-Ministerial Committee headed by the Labour Minister, the agreement was signed with the State Enterprises Workers Action Committee on 15th October 1991.

The agreement reflects a policy package which contains employment safeguards under Package "A", a generous "golden handshake" in Package "B" and incentives for employees buy-outs in Package "C". All sale agreements entered into with the buyers of the SOEs faithfully reflect the main features of the packages. For instance, all the buyers have made a commitment in the sale agreement not to terminate or retrench the employees of the privatised units for one year from the date of transfer. Instances have come to the notice of the Commission that some buyers in separate agreements with the labour have committed themselves not to retrench any employee for periods exceeding one year.

In Package "B" of the agreement, the "golden handshake" is generous enough to allow the employees sufficient resources for becoming self-employed. In one tractor manufacturing unit, 230 employees out of 850 opted for the "golden handshake" and received a sum of Rs. 54 million as a "golden handshake". 48 of them pooled their resources and are currently in the process of setting up a transport company with a capital outlay of Rs. 15 million. They have purchased 8 air-conditioned HinoPak buses and are planning to hire 52 additional persons as drivers, conductors, etc. In this particular case, the "golden handshake" scheme has not only served as a vehicle for self-employment but also as a means for generating additional employment. In the payment of the "golden handshake", the buyers and the Commission share equally the liability.

Recently, in quite a few units, particularly in the province of Sind, 100% of the workers (as against 10-30%) have given their option for the "golden handshake" which has created a serious problem as the amounts to be paid in the form of a "golden handshake" would exceed the sale proceeds. Government has not allowed the payment of its share of the "golden handshake" to exceed 20% of the sale proceeds in any one case. Wherever such payments exceed 20% of the sale proceeds, approval has to be obtained from the Cabinet Committee on Privatisation giving justification for exceeding this limit. In smaller units, like the Rice Mills, where sale proceeds were much higher than expected, this liability was met even 100% of the workers opted for the "golden handshake" without exceeding the limit imposed by the Government. The problem is in respect of larger units like Metropolitan Steel, Karachi Mills, Pakistan PVC Gharo, National Motor Karachi, etc., in which 80-100% of the workers have opted for the "golden handshake". In all these cases, neither the Commission nor the buyers are in a position to fulfil their commitments. Every effort is being made by the Commission to avoid confrontation with the labour and to settle their claim amicably.

The Commission, learning from the experience accumulated over the past twenty months, has been able to remove some of the weaknesses encountered during the implementation process, has gained the confidence of the private sector, overcome the resistance from the labour to a large extent and sold with maximum transparency public property valued in excess of Rs. 9.00 billion. Part of the sale proceeds has already been released by the Government for its social action and rural uplift programmes.
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Title Annotation:Special Section: Industrial Policy and Planning
Author:Masihuddin, M.
Publication:Economic Review
Date:Jun 1, 1993
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