1 Privatization
• Introduction to Privatization in Public Administration
Privatization is the transfer of ownership or control of public assets and services
from the government to the private sector. This concept, which promotes reducing
government involvement, emerged across political and economic landscapes worldwide
in the late 20th century. A key example is Great Britain’s sale of British Telecom in
1984, with similar initiatives seen in the U.S., China, and Bangladesh. Regardless of
political systems, privatization aims to reduce the public sector's role, transferring
functions to private entities to foster efficiency and productivity.
• Defining Privatization: Key Aspects and Interpretations
The term privatization encompasses diverse practices, all of which shift some
functions from public to private. Decisions may involve complete divestiture or partial
contracting-out to private firms. Economists and public administrators alike emphasize
that privatization aims to limit government control, pushing services toward a free-
market model that enhances responsiveness to consumer demand.
1. Divestiture: This form involves selling public assets or agencies entirely to
private owners. Examples include selling government-owned corporations, which
transfers all operational control to private hands.
2. Contracting-Out: Here, the government outsources specific services to
private companies. Common at various levels of government, contracting out is
increasingly used for services like waste management, security, and infrastructure
maintenance, often resulting in cost savings and improved service quality.
3. User Fees: Governments may charge fees for services instead of providing
them free, creating a revenue stream that aligns with the cost of provision. For
example, entrance fees for national parks or user fees for public facilities
encourage responsible usage and ensure maintenance funds.
• The Benefits of Privatization
Privatization fosters several key benefits in public administration:
• Efficiency and Cost Reduction: Private companies, motivated by profits, often
deliver services more efficiently than government agencies.
• Innovation: With competition, private companies are encouraged to innovate,
bringing new ideas and technologies into traditional public services.
• Resource Allocation: By reducing state intervention, privatization allows
resources to be allocated by market demand, potentially increasing overall
productivity and economic growth.
Privatization in Pakistan:
• Pakistan’s journey with privatization dates back to the 1960s, when the country
embarked on deregulation and decontrol in the industrial sector—pioneering
efforts that were unusual for the developing world at the time. This initiative laid
the groundwork for later privatization, aimed at reducing state control over
industries and encouraging private-sector participation.
Historical Background
• 1960s: Initiated deregulation policies under the "Industrial Investment Policy,"
partially deregulating the industrial sector.
• 1972: Economic Reforms Order led to the nationalization of 32 industries, including
sectors such as iron and steel, heavy machinery, and public utilities.
• 1973-1974: Further nationalization followed, affecting banks, mills, and export
trade. These nationalizations resulted in widespread government ownership but
led to issues such as mismanagement, inefficiency, and fiscal losses.
• 1978-1993: Gradual shift back to privatization with the Managed Established
Order of 1978, which transferred several enterprises to the private sector. By
1991, the government institutionalized privatization by establishing the
Privatization Commission (PC).
Key Phases of Privatization
1. Early Attempts (1978-1989): Initial denationalization policies faced limited
success, with attempts to sell shares and transfer enterprises back to the private
sector.
2. Formal Privatization (1991): Official establishment of the Privatization
Commission and the divestment of various state-owned enterprises (SOEs). By
1993, sectors such as telecommunications, transport, and financial services were
targeted.
3. Musharraf Era (1999-2008): Peak in privatization activities, with nearly 169 SOEs
privatized, though political instability later interrupted the process.
4. Recent Efforts (2023): Under pressure from the IMF, new privatization policies
were introduced, including the establishment of the Special Investment
Facilitation Council (SIFC) to fast-track SOE privatization, such as Pakistan Steel
Mills, PIA, and energy distribution companies.
Benefits of Privatization
1. Reduction of Fiscal Burden: Privatizing loss-making SOEs can alleviate
government financial burdens. In FY 2022, SOE losses reached Rs. 730 billion.
Privatization allows reallocation of resources to critical sectors like health and
education.
2. Improved Service Quality: Private companies are expected to deliver better
services than government-run SOEs, often plagued by mismanagement, as seen
in PIA and Pakistan Railways.
3. Corruption Reduction: Privatization can minimize corruption in SOEs, which are
often exploited for kickbacks. Transparency and accountability improve under
private ownership.
4. Boosting Foreign Investment: A privatized environment attracts Foreign Direct
Investment (FDI), as foreign investors tend to favor efficiently managed, profit-
driven enterprises.
5. Reduction of Political Influence: Political interference has hampered SOE
performance. Privatization removes these entities from direct political control,
allowing them to focus solely on service and profitability.
Challenges to Privatization
1. Public Perception and Resistance: Privatization often faces public backlash
over fears of job losses, rising prices, and social inequalities. This was evident
during attempts to privatize Pakistan Steel Mills (PSM).
2. Economic Instability: Pakistan's economic volatility, including inflation and
fiscal deficits, discourages investment and complicates privatization efforts.
3. Political Instability: Frequent government changes disrupt long-term policies,
causing delays in privatization. For example, delays in CPEC have shown the
impact of political shifts on large-scale projects.
4. Legal and Regulatory Constraints: A lack of robust legal frameworks and market
reforms can hinder the privatization process, deterring potential investors and
limiting the effectiveness of privatized entities.
Current Privatization Initiatives
The IMF has been a key driver in recent privatization efforts. Recent agreements require
Pakistan to:
• Privatize SOEs, such as NHA, PNSC, PBC, and Pakistan Post.
• Shift SOEs under the Finance Ministry for better accountability.
• Pursue public-private partnerships to enhance efficiency and minimize the
financial strain on the government.
The Special Investment Facilitation Council (SIFC) is actively promoting these
reforms, with plans to outsource the operations of airports and other assets to generate
foreign reserves.
The Privatisation Commission
• Formation: Established on 22 January 1991 as part of the Finance Division, the
Privatisation Commission (PC) was created to manage the Government's
privatisation agenda.
• Legal Empowerment: With the Privatisation Commission Ordinance, 2000, the
PC became a corporate body, further solidifying its authority in executing
privatisation policies.
Mandate and Scope
• Objective: PC is responsible for privatising federal government assets, including
stakes in banks, industrial sectors, public utilities, and infrastructure providers.
• Decision-Making Structure: The Privatisation Commission Board (PC Board),
comprising industry experts, oversees key decisions, which are later reviewed by
the Cabinet Committee on Privatisation (CCOP) and ratified by the Cabinet.
Strategic Role in Economic Reform
• Privatisation Goals: As part of broader economic reforms, privatisation aims to
improve efficiency and promote growth, aligning with policies of deregulation and
liberalisation.
• Targeted Assets: The programme includes all viable public assets, excluding
essential or strategic industries where private sector involvement may be limited.
Transparency and Accountability
• Commitment to Transparency: The PC strives for transparent, fair transactions,
ensuring maximum benefits for the government and strengthening the private
sector’s role in service provision.
Privatisation Process in Pakistan
The privatisation process in Pakistan aims to sell Public Sector Entities (PSEs) in an
open and transparent manner to achieve the best possible price. This process varies
based on the nature of the entity, the proportion of shares offered, and whether
management transfer is involved. The Privatisation Commission Board and the
Cabinet Committee on Privatisation (CCoP) determine the specific mode of
privatisation from the following options:
1. Sale of assets and business.
2. Sale of shares through public auction or tender.
3. Public offering of shares via a stock exchange.
4. Management or employee buyouts.
5. Lease, management, or concession contracts.
6. Other prescribed methods, including:
o Public offerings of shares outside the stock exchange.
o Sale to individuals with pre-emptive rights.
o Negotiated sales.
o Transfers to trusts for employees.
o Conversions of exchangeable bonds or hybrid debt instruments.
Steps in the Privatisation Process
The privatisation process consists of several key steps, divided into two main
categories: Strategic Sales and Capital Market Transactions.
Strategic Sales Process
1. Identification of PSE: Determine which public entity is to be privatised.
2. Approval of CCI: Obtain approval from the Council of Common Interests, if
required.
3. CCoP Approval: Secure approval from the Cabinet Committee on Privatisation.
4. Hiring a Financial Advisor (FA): Engage a financial advisor for the transaction.
5. Due Diligence: Conduct due diligence by the FA and the Privatisation
Commission.
6. Finalisation of Transaction Structure: Outline the structure of the transaction.
7. Invitation for Expressions of Interest: Solicit interest from potential investors or
bidders.
8. Submission of Qualifications: Require potential bidders to submit their
qualifications.
9. Pre-Qualification of Bidders: Assess and pre-qualify interested bidders.
10. Due Diligence by Pre-Qualified Bidders: Allow pre-qualified bidders to conduct
their due diligence.
11. Sharing Bid Documents: Distribute bid documents to pre-qualified bidders.
12. Pre-Bid Conference: Hold a conference to address bidder inquiries.
13. Valuation Approval: Get valuation and reference price approved by the PC Board
and CCoP.
14. Bidding Process: Conduct the bidding process with media presence for
transparency.
15. Approval of Bidding Results: Obtain approval of the results from the PC Board
and CCoP.
16. Letter of Intent: Issue a letter of intent to the successful bidder.
17. Execution of Sale Agreement: Finalise the sale agreement and receive payment.
Capital Market Transactions Process
1. Identification of PSE: Determine the PSE to be privatised.
2. Approval of CCI: Obtain necessary approvals from the Council of Common
Interests.
3. CCoP Approval: Secure approval from the Cabinet Committee on Privatisation.
4. Hiring of FA: Engage a financial advisor.
5. Due Diligence: Conduct due diligence by both the financial advisor and the
Privatisation Commission.
6. Finalisation of Transaction Structure: Outline the transaction framework.
7. Regulatory Requirements: Fulfil any required regulatory conditions.
8. Preparation of Marketing Material: Develop a prospectus and other promotional
materials.
9. Approval of Floor Price: Determine the floor price and conduct marketing
roadshows.
10. Book Building: Carry out book building and approve the final price and allocation.
11. Settlement and Financial Closure: Finalise the settlement and close the financial
transaction.
