FeaturedNationalVOLUME 18 ISSUE # 45

Pakistan’s privatisation challenges

The appointment of Fawad Hassan Fawad as the Caretaker Federal Minister for Privatization in Pakistan has sparked discussions and debates among analysts. His association with the Pakistan Muslim League-Nawaz (PML-N) and the party’s potential return to power in the next government have raised questions about the decision’s appropriateness. It is imperative to explore the complexities surrounding this appointment and the multifaceted objectives of privatization in the current economic landscape.

The caretaker minister for privatisation has been given the crucial responsibility of expediting the privatization process for state-owned entities (SOEs) with two primary objectives in mind. The aim is to halt the yearly drain of approximately 800 billion rupees from the national treasury into these SOEs. This objective necessitates addressing entities that are currently running at a loss or requiring financial injections from the central government. Notably, the Pakistan International Airlines and the Pakistan Railways stand out as long-standing financial burdens, suffering from prolonged mismanagement across various administrations. These issues demand immediate attention, as they have already cost taxpayers trillions of rupees.

Furthermore, the Pakistan Steel Mills has remained non-operational since 2015, yet taxpayers continue to bear the burden of paying salaries to its employees. This situation is perplexing, especially considering that two major national political parties, Pakistan Muslim League-Nawaz and Pakistan Tehreek-e-Insaf, both supported the policy of privatisation during their respective tenures, even when caretaker governments were in place.

One significant obstacle to privatisation has been the well-organised trade unions within these entities. These unions have repeatedly formed alliances with opposition political parties to obstruct government privatisation plans. Therefore, it is crucial to initiate the process by first negotiating settlements with employees before proceeding with the selection of advisers or the sale of the entity.

The objective of privatisation is to generate revenue that can create fiscal breathing room for the government. This revenue can be used to retire existing debts or meet budgeted expenditure targets, reducing the pressure on the Federal Board of Revenue (FBR) to propose a mid-year budget adjustment. Such adjustments often burden the poor more than the wealthy, as the FBR heavily relies on indirect taxes that have a greater impact on lower-income individuals.

This objective assumes two key conditions. It requires a business-friendly climate in the country that encourages both foreign and domestic investment. Unfortunately, the current economic landscape does not reflect such an environment, with government data indicating a meager 0.3 percent growth rate in the last fiscal year. This is exacerbated by a high discount rate of 22 percent and substantial government borrowing, which has crowded out private sector credit. As a result, private sector credit plummeted by 178.6 percent in the last fiscal year, and large-scale manufacturing experienced a negative growth rate of 10.3 percent.

The ongoing economic deadlock necessitates that the sale of SOEs should not be perceived by the public as a disposal of national assets at rock-bottom prices. This would erode public trust, especially when the government may not fully represent the interests of the country’s citizens.

Some analysts may argue that the choice of the caretaker privatisation minister is fitting due to his longstanding association with the Pakistan Muslim League-Nawaz. Additionally, given that the PML-N is perceived as the most likely party to form the next government at the Center, it may imply minimal challenges to decisions made during the caretaker period. However, it is important to note that historical legal challenges have typically arisen from the judiciary or the opposition.

And of greater significance is the need to address the $4.5 billion shortfall in the external financing plan outlined in the budget and agreed upon with international financial institutions. While the budget initially estimated external financing to exceed $20 billion, it has become evident that due to the country’s low credit rating and the prevailing high-interest rate global environment, securing commercial loans from non-Chinese sources may not materialize. The possibility of raising external funds through bond issuance is also hindered by these same factors. Given these circumstances, the objective now is to bridge this financing gap through foreign direct investment (FDI) by selling SOEs through the privatization process.

To further complicate matters, the budget has understated interest payments by a trillion rupees. Nevertheless, the caretaker government must ensure that all entities slated for sale are priced appropriately. This includes not only assessing the total value of their assets but also considering any potential future income streams. Additionally, it is imperative to ensure that the bidding process remains free from any involvement by politically exposed individuals, their families, or dummy companies.

While privatisation serves as a means to generate revenue and curtail financial strain on the treasury, it is essential that the process begins with negotiations and settlements with existing labour unions before engaging with potential bidders in earnest.

In light of the pressing economic challenges facing Pakistan, the caretaker government’s pursuit of privatisation is not without its hurdles. Bridging the financing gap, addressing understated interest payments, and ensuring transparent and fair privatization processes are paramount. While the caretaker government’s decisions may face legal challenges, it is imperative that the privatisation process begins with constructive dialogues with labour unions. These steps, though challenging, are essential to achieving the dual goals of revenue generation and fiscal stability in Pakistan’s economic future.