PRIVATIZATION OF
By:
MAHMOOD ABDUL GHANI
B.Com., LL.B.
Advocate Supreme Court of Pakistan
"The way to get started is to quit talking and
begin doing"
Walt Disney
American Co. Founder of Wall Disney Company
Pakistan Steel
Mills, known to be the country's largest industrial unit incorporated in 1968
at a total cost of Rs. 24.7 Billion, with an annual designed production
capacity of 1.1 Million ton of steel products is reported to have suffered over
the last few years' accumulated loss of over Rs. 100 Billion. It may perhaps
not be out of context at this stage to point out that Supreme Court of Pakistan
in the case of earlier privatization of Pakistan Steel Mills reported in PLD
2006 SC 697 had cancelled the sale of Pakistan Steel Mills following the
privatization. This heavy cumulative loss of over Rs. 100 Billion has been
suffered by Pakistan Steel Mills with overall liabilities of more than Rs. 110
Billions. Reasons briefly for this state of affairs is discussed below. This be
viewed keeping in view that for the year 2004-2005 Pakistan Steel Mills had
recorded sales of over Rs. 30 Million and net profit of Rs. 6.00 Million.
It may be
pointed out that
To cover up
unchecked corruption, inefficiency and over-employment, Pakistan Steel Mills
received a bail-out package of more than Rs. 41.20 Billion in 2009 onwards with
total bail out grant of Rs. 150 Billion in the past five years. Pakistan Steel
Mills in early September 2013 was running at mere 11% of its capacity. It docs
not even have enough working capital to support its operation beyond September
2033. It has now demanded a future bail out package of more than Rs. 28 Billion
from the Government.
Privatization
world wide is a phenomena and state owning and operating business is fast
receding. President Barrack Obama of
Of late two well
known and respected Senators have been vocal in insisting that there should be
no privatization of Pakistan Steel Mills, It is unfortunate that these
respectable Senators have failed to come up with an alternative option for
converting Pakistan Steel Mills into an economic viable unit, without any
further bail out package, apart from not giving valid and cogent reason, as to
why contemplated reasons and grounds now given if any were not followed by
earlier Government over the last few years, preventing Pakistan Steel Mills to
accumulate financial loss of more than Rs. 100 Billion as in September 2013. It
is the tax payers hard earned money that has gone down the drain.
World Bank
report is "The case by case approach to Privatization - Techniques and
Example". In
Our Government
can obtain copies of these books from out High Commission in
In his book
titled "Privatization Evolution of Indian Thought" by R.K. Mishra in
India, the learned Author have evaluated this issue, and has identified certain
factors responsible for review as to the role of the Government with marked
preference towards privatization and has formulated five issues as under:-
i. The
macro economic environment resulting in recession or slow recovery was partly
attributed to the expanding role of the State and the limits imposed on free
flow of trade and capital;
ii. The
pressures on the budgets with increasing tendency towards deficits and
consequent inflationary pressures forced the Government to look at ways of pruning
the budget burdens, and one of the relatively easier ways of reducing the
budget pressures was perceived to be a reduction in the role of the State in
general;
iii. It was
felt that the unions in the public sector have developed as a powerful lobby
cornering the benefits in the economy disproportionate to their contribution.
The Government felt that the only way of reducing this burden without serious
political repercussions was to privatize enterprises and where possible
functions presently performed in the Government.
iv. Certain
technological developments that have taken place, part: jlarly in areas like
telecommunications, have opened up possibilities for competition (hence private
ownership also) and consequent efficiency that did not exist before;
v. The
evolution of organizational structure and information revolution has brought
about greater opportunities for regulating the functioning of the market system
by the State and promoting the private sector to provide services in a socially
acceptable and more efficient way compared lo the past.
Without going
into merits and demerits of these factors, for the present purpose, it is
proposed to indicate the policy package that logically follows from accepting
the thrust towards privatization of loss making organizations which should be
formulated followed by enumeration of the actual policy packages. As a policy
package, privatization starts with the premise that strengthening the market
forces in the form of introducing competition would result in a greater level
of operational and allocative - efficiency and involves the following
elements:-
i. This
would imply regulation to the extent of removing the barriers to entry and the
barriers to exist. At the same time, it might imply regulation to ensure a continued
atmosphere of competitiveness (i.e. at least contestability).
ii. The
prices have to be right, rejecting the relative scarcities. Thfi prices should
reflect the relevant scarcities not only in the domestic market but with
reference to the international situation also;
iii. The
State element has to be replaced by a private clement in production and/or
funding of the economic activities. Privatization need not be restricted to the
commercial or potentially commercial areas only but could extend even to other
areas, if necessary voluntary and nongovernmental agencies could replace
government. Such a process of privatization can take place with reference to
establishment and/or operation of such a production/funding facility. Private
ownership and control is, in the final analysis a necessary but not sufficient
condition though private control or operation can surrogate for ownership to
some extent.
It is not out of context to
mention that different weights have been adopted in different countries keeping
in view the country's specific social, political and economic condition in
relation to privatization. Review of the broad patterns which may help a better
focus on the
i. Privatization
is often equated with supply sided management of the economy which includes a
review of the role of the Government in regard to budget, employment,
Government provision of welfare and regulatory atmosphere. Two prime examples
would be
ii. The
privatization of public enterprises has been taken to wean transfering the
public assets to the private sector and thus enhancing efficiency as well as
competitiveness. Prime examples would be
iii. There
has been an intensive review of the functioning of public enterprise with a
view to making them stimulate the working of the private sector through a
variety of instruments, including distancing them from the Government in terms
of financing and operations. The instrument of Memorandum of Understanding
practiced by
iv. Deregulation
and introduction of competitive forces within the economy seem to be an
important area, particularly in developing countries practicing a comprehensive
planning approach. It is too early to make an assessment of the impact of such
deregulation, though by and large, there has been a greater thrust towards
removal of barriers to entry rather than removal of barriers to exit.
v. The
liberalization in terms of promoting international trade through more realistic
foreign exchange regime, as well as relaxation of restrictions on imports and
exports has been advocated. While in some countries like
vi. Contracting
out and giving franchises to Private sector has been attempted in
vii. The
donor agencies, in particular the International Monetary Fund and the World
Bank are advocating a whole package of measures towards privatization, and the
flow of resources from these institutions is overtly related to appropriate
policy icsponse from the recipients. The major donor countries in the world are
acting in close union with the multilateral agencies in regard to the policy
thrust. There is as yet little evaluator study made by these institutions on
the results of the thrust towards privatization, but the fragmentary evidence
that is available in the reviews made in the recent past does not conclusively
establish the superiority of "Market' through failures of State are well
established.
If one is to make broad
generalization on the basis of experience resulting from earlier privatization
in
In analysis the
scope and limitation of privatization in
Any debate on
privatization of loss making companies in
British
Government through outright sale of British Airways through open offer and sale
to the public received oversubscription of the amount to the extent of Pound
Sterling Six Billion. Denationalization in
Today Government
business interests in
The voices
against privatization of Pakistan Steel Mills, Pakistan Railway and Pakistan
International Airlines are invariably trade unions having support of the party
then in power and some Senators, who strongly resist privatization for very
obvious reasons. The issue for consideration for the present Government is
whether they are to please the few vested interest or avoid billions of tax
payers rupees being poured in loss making organizations even at the coit of the
welfare of this country.
Pakistan Steel
Mills at present employ about 18000 workers. It is alleged that if Steel Mills
is to be privatized, it may result in unemployment of 18000 workers. This plea
on the face of it is untenable, ridiculous and attempt to fool this nation. If
Pakistan Steel Mills is to be privatized it will save almost Rs. 30 Billion for
the Government demanded as immediate bail out package, which can be channelized
for feeding poor people and for other nation building activities but it will
also absorb labour employed by the other sectors. The plea that privatization
will result in loss of employment of 18000 workers is hard to appreciate. No
private sector employer can afford to remove highly qualified and technically
trained employees. After all he has to employ the workman to run the mills. If
there are surplus workers they should not be removed without giving Golden Hand
Shake benefits. Example of privatization of MCB, UBL, HBL, ABL and in KESC are before
us. The private sector after privatization retained honest, hard working
workers and sincere employees, and those who were surplus thereafter were
offered Golden Hand Shake severance payments. This is an encouraging trend to
support hard and honest workers, as through this mean survival of Banks and
Financial Institutions as also KESC has brought about a turn around of loss
making Banks like UBL or even KESC into one of the most flourishing institution
of
No employer will
bid for privatization of State Owned Enterprise only for the purpose of
retrenchment of employees and closing down the establishment. No doubt all
privatization should be free and fair and above board. The objective of
privatization in the context of labour should be to clarify the concept of
privatization in the light of its historical growth. To find out the ways and
means to reduce the pressure against privatization in the context of our social
and economic context, identified major areas which requires clarification,
research and study with a view to formulate well understood and defined policy
framework.
It has been
observed that whilst effecting privatization, Government does not undertake due
diligence in most matters pertaining to labour. One area of research and work
that must be necessarily undertaken by the Privatization Commission is to
collect all past settlements and agreements with CBA in SOE. Through legal
opinion to be determined, it be ascertained as to how far they are binding on
the employers, and to find out how the terms and conditions of service of the
employees could be modified by subsequent agreements and what are the current
terms and conditions of employment of the workers. Areas where prospective
buyers, on the eve of privatization, would possibly be suffering due to
privatization and the problems pertaining to labour, must all be identified.
Short term political advantage should be ignored. Exploitation of labour
through hollow slogan must be avoided. Utilizing labour, in State Owned
Enterprises, a weapon to further strengthen political objectives of the
political parties should be avoided. National interest above party's interest
should be guiding motive. This rule is repeated to the point of annoyance.
"Positive
thinking will let you clo everything better than negative thinking"
Zig Ziglar
American Author
It is also
alleged that if Pakistan Steel Mills is privatized whosoever bids would be
entitled to discontinue its operation and sell of land and or undertake
construction of multistory building or otherwise utilize the land measuring
4437 acres which is unbundled from the total land of 19086 acres on which
It is also
reported that Pakistan Steel Mills presently require Rs. 30 Billion for
improvement so as to ensure that it may be privatized and handsome amount
received by the Government. It is argued that if additional amount is not
injected, privatization will not bring about desired result. Unfortunately
those making this plea fail to notice that when UBL or for that matter ABL were
privatized they were loss making Banks. Once UBL was privatized, reorganization
of surplus employment was taking care of and through handsome Golden Handshake
payment, surplus deadweight employees were reduced to the very barest minimum,
and today Banking Industry, after privatization is one of the most flourishing
institution generating huge employment and giving massive payments to the
Government by way of taxes etc. Privatization can be on the basis of "As
is where is Basis".
Karachi Electric
Supply Co. Ltd. is yet another classic example of an organization earlier run
and operated by the Government with huge accumulated financial loss of billion
of rupees. In the first three to four years of privatization of KESC, turn
around became evident, as surplus employees were paid handsome Golden Handshake
payment, in some cases as high as Rs. 5.00 Million was paid to individual
workers and KESC is today a classic example of profit making unit. No wonder it
was reported sometime back that its CEO was asked to address Harvard School of
Business Administration in
First phase of
privatization in
Presently the
monthly salary bill of Pakistan Steel Mills is almost Rs. 480-500 Million. This
payment has to be made to the employees even if the Mills is non operational
unless other measures suggested are adopted. State Owned Enterprises (SOE)
costs the nation Rs. 500 Billion annually. During the past five years, these
SOEs have drained off $ Five .Billion (Five Billion United States Dollars).
During the past five years, Pakistan Steel Mills received a bail out grant of
Rs. 150 Million. It is for the present Government to decide after discussing
with all stake holders as to what is in the best interest of the country. Since
1991
Present analysis
is only with a view to ensure that as a result of privatization, there is no
major labour unrest created in the country. Two options are open for the
present Government: Either to continue dolling out bail out packages with the
expectation that the Mill will in due course of time turn out to be a
profitable organization and or in the alternative to ensure that the Government
privatize key entities, which privatization will also be in conformity to IMF
conditions for any future bail out package given to the country. However,
unlike private sector who terminate the services of their employees on either
payment of notice salary and or gratuity or even apply for permission to close
down the establishments, the State has an additional responsibility to ensure that
it parts with its employees without least labour trouble or unrest. By and
large employees of Pakistan Steel Mills have now started realizing that this is
a loss making venture. Sooner or latter it is to be privatized. With the
present strength of labour, perhaps privatization may not bring about desired
bids as the private sector may not necessarily be in a position to introduce
Golden Hand Shake pay package unless intended buyer is foreign investor who is
prepared to come forward and make additional investment and contribute towards
"Golden Pay Package."
The only other
alternative left is fo.1 '.he Government to introduce, inrU [\y in the first
stage, Voluntary Golden Hand Shake Pay Package offer. This siiould be
restricted and confined for a limited period of 15 days. If within these fifteen
days period, the response of acceptance of Golden Hand Shake Pay Package is not
encouraging, two options are open to the Government:
a) To
effect retrenchment of less than fifty percent workmen on payment of one month
salary in lieu of notice and other legal dues binding in law on assignment of
reasons;
b) To apply
to
Golden Hand
Shake Pay Package offered by HBL, MCB, UBL and KESC may be minutely examined,
and thereafter Golden Hand Shake Scheme be floated in Pakistan Steel Mills, The
alternative option of retrenchment, may possibly lead to labour unrest and
prolonged litigation, which keeping in view the present state of affairs in the
Province of Sindh, should be avoided as far possible. If reasonable amount in
Golden Shake Hand Pay Package, is offered, it will be accepted by substantial
number of employees. One should be conscious of the fact that during the last
live years, when these huge accumulated loss was created, large number of
employees earlier treated as contract employees, were even confirmed as
permanent by the previous Governments oblivious of its financial long term
implications. This was not restricted to Pakistan Steel Mills only but also in
PIA, Parisian Railway and other State Owned Enterprises. Apart from this, large
number of employees were recruited due to political and other considerations
with no vacancy. In any package so offered, it should be taken care off that
employees who are senior in service are conferred greater amount of pay out
than those who were either recently employed or recently confirmed.
Finally the
apprehension of judicial intervention in any privatization be next examined. In
the case of earlier privatization of KESC which was challenged before Supreme
Court of Pakistan in the case of Wattan Party vs Federation of Pakistan
comprising of Nine Learned Judges of Apex Court reported in PLD 2006 SC 697 at
737, Supreme Court cf Pakistan in Para 57 of the judgment authored by Chief
Justice Mr. Justice Iftikhar Muhammad Chaudhry observed as under:
"It is a well settled that normally in exercise
of the power of judicial review, this Court will not scrutinize the policy
decision or to substitute its own opinion in such a matter as held in M/s Elahi
Cotton Mills case."
Furthermore in
the case of Balco Employees Union vs Union of India case reported in AIR 2002
SC 350, Indian Supreme Court has more or less taken the same view. Supreme
Court of Pakistan have referred to this judgment of Supreme Court of India in
"Process of disinvestments is a policy decision
involving complex economic factors. The Courts have consistently refrained from
interfering with economic decisions as it has been recognized that economic
expediencies lack adjudicative disposition and unless the economic decision,
based on economic expediencies, is demonstrated to be so violative of
constitutional or legal limits on power or so abhorrent to reason, that the
Courts would decline to interfere. In matters relating to economic issues, the
Government has while taking a decision, right to "trial and error" as
long as both trial and error are bona fide and within limits of authority."
Supreme Court of
Pakistan in the earlier case of privatization of KESC in Para 57 not only
reproduced above observations of Supreme Court of India but have even observed
and endorsed the view as under:-
"This view is in line with this Court's view as
given in Elahi Cotton ibid. Similar view was taken by the Indian Supreme Court
in Delhi Science Forum vs Union of India (AIR 1996 SC 1356)."
It can therefore
be safely concluded, that in principle, Supreme Court of Pakistan is of the
view that process of disinvestment is Government policy decision which involve
complex economic factor which include huge financial accumulated losses and
that Courts have refrained from interfering in such economic decisions so taken
by the Government which are based on economic expediency. The only reason and
ground on which Apex Court will interfere, as was done by the Apex Court in
earlier privatization in Pakistan Steel was that the decision was in violation
of Constitutional and legal limits and on power abhorrent to reason. The Court
was conscious of the fact that at the material time Pakistan Steel Mills was
profit making undertaking with the sale of Rs. 30 Million and net profit of Rs.
6.00 Million. Other reasons and grounds taken by the Apex Court in striking
clown earlier privatization need not detain us any further as those reasons and
grounds apparently may not be available at present unless they are equally
repeated by the present Government. So lung as this privatization is fair,
equitable, reasonable and within limit laid down by the law and the
Constitution, our Judiciary apparently even recognized the fact that in matters
relating to economic issues, the Government can take a decision and even has a
right to trial and error so long as such trial and error is bona fide and within limits of law and
authorities and is not tainted with malice or mala fide will not interfere. In fact in earlier judgment of PLD
2006 SC 697 Supreme Court of Pakistan have held that Privatization Commission
Ordinance, 2000 is not ultra vires
the Constitution of Pakistan and that Supreme Court while exercising power of
judicial review will not interfere in the policy making domain of the executive
so long as such privatization is not vitiated by acts of omission and
commission on the part of the certain state which reflect violation of
mandatory provision of law and the rules framed there under which either effect
adversely the decision both prequalification, violation of the project terms
offered to successful bidder. Superior Court will only strike down either a law
or a decision on the touchstone of the Constitution which is supreme law and
any law or decision contrary to it or this provision alone will be strike down
by the Court as duty and function of the Superior Court is to enforce the Constitution
and the law. In Elahi Cotton Mills Limited vs Federation of Pakistan case
reported in PLD 1997 SC 582 at page 675, Supreme Court of Pakistan have held as
follows:
“The Courts while interpreting laws relating to
economic activities view the same with greater latitude than the laws relating
to civil rights such as freedom of speech, religion etc., keeping in view the
complexity of economic problems which do not admit of solution through any
doctrinaire or strait jacket formula as pointed out by Holmes, Justice in one
of his judgments."
The
privatization to be effected should be transparent and within the ambit of law
and Constitution in order to gain legitimacy. Even though the workers may have
interest in the manner in which the Company is conducting its business, in as
much as the policy decision may have an impact on the workers rights,
nevertheless it is an incidence of services of an employee to accept a decision
of the employer which has been honestly taken and which is not contrary to law.
When Government chooses to run an industry by forming a Company and becomes its
shareholder, then under the provisions of Companies Act, 1984 as a shareholder
it would have right to transfer its share. When the workers seek and get
employment with such a Company registered under Companies Act 1984, it must be
presumed that they accept the right of the directors and the shareholders and
the Government to conduct the affairs of the Company in accordance with law and
at the same time they can exercise their right to sell their shares and get out
of business.
The policies of
the Government ought not and cannot remain static. With the change in economic
climate, the wisdom and the manner for the Government to run commercial
ventures may require reconsideration. What may have been in the public interest
at a point of time may no longer be so now. The Government can take a policy
decision that it is in public interest to disinvest in Pakistan Steel Mills.
While it was a policy decision to set up Pakistan Steel Mills as a Company
owned by the Government, it can equally be a change of policy that
disinvestment now take place. If the initial decision could not be vaiidly
challenged on the same parity of reasoning the decision to privaiize or
disinvestment also cannot be impugned without showing that it is against any
law or is malafide.
In AIR 2002 SC
350 at 381, the Supreme Court of India has held:
"Public interest litigation was not meant to be a
weapon to challenge the financial or economic decisions which are taken by the
Government in exercise of their administrative power The decision to disinvest
and the implementation thereof is purely an administrative decision relating to
the economic policy of the State and challenge to the same at the instance of
busy body cannot fall within the parameters of Public Interest
Litigation."
In AIR 1970 SC
564 at 601, the Supreme Court of India have observed:
"It is again not for this Court to consider the
relative merits of the different political theories or economic policies... This
Court has the power to strike down a law on the ground of want of authority,
but the Court will not sit in appeal over the policy of the Parliament in
enacting of Law."
In AIR 1981 SC
344 at 353, the Supreme Court of India has held:
"If the Directorate of a Government Company has
acted fairly, even if has faltered in its wisdom, the Court cannot as a
super-auditor take the Board of Directors to task."
In AIR 1981 SC
2138, the Apex Court of India has remarked:
"Laws relating to economic activities should be
viewed with greater latitude than Laws touching civil rights such as freedom of
speech, religion etc."
In ATR 1994 SC
2233, the Supreme C: Jit of India has cautioned:
"It is not the domain of the Court to embark upon
unchartered ocean of public policy in an exercise to consider as to whether the
particular policy can be evolved. Such exercise must be left to the discretion
of the executive and legislative authorities as the case may be."
Again in AIR
1996 SC 1356, the Supreme Court of India has remarked:
"Privatization is a fundamental concept
underlying the questions about the power to make economic decisions. What
should be the role of the State in the economic development of the nation? How
the resources of the country shall be used? How the goals fixed should be
attained? What are to be the safeguards to prevent the abuse of the economic
power? What is the mechanism of accountability to ensure that the division
regarding privatization is in public interest? All these questions have to be
answered by a vigilant parliament. Courts have their limitation -because these
issues rest with the policy makers for the nation. No direction can be given or
is expected from the Courts unless while implanting such policies, there is
violation or« infringement of any of the Constitution or statutory
provision."
The relevance of
the Superior Judiciary to examine the matters of economic policy was again
emphasized in AIR 2000 SC 2047 when it observed:
"in the path of economic progress, if the
informal system was sought to be replaced by more organized system, capable of
better regulation and discipline, then this was an economic philosophy .... Such
a philosophy might have its merits and demerits. But these were matters of
economic policy. They are best left to the wisdom of the legislature and in
policy matters the accepted principle is that the Court should not
interfere."
It is thus
evident from the above decisions of Apex Court of Pakistan and
In fact in AIR
1982 SC 149 at 192, the Apex Court of India has remarked:
"The Courts must not allow the process to be
abused by politicians and others to delay legitimate administrative action or
to gain a political objective."
No doubt
recently the Supreme Court of Pakistan have struck down the decision to
privatize Coal-Fired Lakhra Power Plant while the matter was subjudice and when
the Court was seized with a dispute over the grant of lease of the plant to a
private company. The Court declared 20 years lease as illegal and void being
non transparent. This supports the plea that privatization should be
transparent, within the ambit of law and the Constitution and based on well considered
economic reasons and considerations with no political or other motives
involved.
We should
equally be conscious of the fact that so far 166 SOEs have been sold. Asian
Development Bank in its Report have concluded that 22 percent of the privatized
units performed better than before, 44 percent remained as before, while about
34 percent performed worse. Those in the later category include privatization
to those who were interest more in hand to construct multistoried buildings,
and or units purchased by those who were neither known industrialists,
businessmen but out to make millions through the process of privatization. It
is thus essential that in due process and due diligence the business, industry
background of the person bidding in the process of privatization be also taken
care of. Finally once privatization has been effected, Government should not
subsidize the unit anymore, as this will be in negation to the process of and
defeat the purpose of privatization.