File photo. Rizwan Tabassum—AFP
The World Bank has advised Pakistan to consider privatizing state-owned entities (SOEs) through public offerings at stock exchanges rather than through divestments to foreign states under government-to-government contracts, as the latter risks attracting litigation.
In its Public Expenditure Review 2023 report, the lender noted Pakistan’s longstanding desire to privatize loss-making SOEs, stressing that judicial activism, political nuisance, K-Electric, and the Sarmaya-i-Pakistan initiative had all hampered the process. Referring to the Inter-Governmental Commercial Transactions Act 2022 that allows the government to offer SOE shares to foreign governments, the bank said it could lead to litigation, raise questions about transparency and full disclosure, eventually leading to a prolonged slowdown of the privatization process.
A preferable approach, said the World Bank, was to “make public offering” of SOE shares to gradually move toward divestment and ultimately privatization—or awarding management concessionaire, a model that has worked successfully in the banking and telecommunication sector. It also advised the government to restructure distribution companies (DISCOs), especially those in loss, through an effective regulatory framework to promote efficiency, investment to improve service delivery and competition.
Noting the declining profitability of SOEs in Pakistan for the past decade, it said they had become a major driver of fiscal deficit and source of substantial fiscal risk. Referring to previous failed attempts at privatization, it blamed “economic volatility, judicial activism, litigation, weak political commitment and perceptions of corruption cost post-2007” as the key drivers.
Acknowledging that all political parties retained ideologues that opposed privatization regardless of the losses incurred, it said the public perception was also negative due to elite capture, unemployment and social unrest. Referring specifically to the Pakistan Steel Mills and Redo Diq cases as having “badly hurt Pakistan’s image” as a trustworthy country where international contracts would be honored, it said businesses believes they were always at risk of “falling victim” to judicial activism as a consequence.
Similarly, it said, Pakistan’s failure at international arbitrations in various critical cases had discouraged governments from further privatization or foreign direct investment without consideration of the state’s exposure. Of the PTI government’s 2019 plan to take management control of all SOEs under the Sarmaya-i-Pakistan Limited initiative, it noted this had never taken off.
Referring to K-Electric, the World Bank report said its “unsatisfactory performance” had raised public apprehensions about privatizing other distribution companies (DISCOs). This, it said, was accompanied by resistance from trade unions and vested interests; fear of private sector monopoly; circular debt and management issues.
To move past hurdles in the way of privatization, the bank suggested taking necessary measures for political and macroeconomic stability; emphasizing a strong political commitment to the process; and building a broad-based coalition of change underlining structural challenges in the economy and the need for privatization. This, it said, should be accompanied by a revamping of the Privatization Commission to comprise professionals who could prepare necessary financial models for all SOEs requiring privatization. The Commission, it said, should ensure that privatization promotes efficiency and competition in the relevant sub-sector of the economy rather than leading to private-sector monopolies and cartelization. As part of this, it said, the Competition Commission of Pakistan should be equipped with powers so an appeal against its decisions would only be entertained by courts after depositing a penalty amount.
To avoid further litigation, the report proposed, the entire process should be made more transparent and parliamentary oversight of privatization strengthened with a Special Joint Committee of the Parliament.