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 Walt 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 does not even have enough working
capital to support its operation beyond September 2013. 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, particularly 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 to 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, reflecting
the relative scarcities. The 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 non-governmental 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 response 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
Government in regulation of
State Owned Enterprises (SOEs). The persistent trade-deficit and increasing
domestic and foreign savings to finance current account deficit calls for
review on the part of the Government and the urgency for earlier privatization
taking advantage of employed workers being unsettled is a gimmick which the
people of
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 cost 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, as 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 do 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 for the Government to introduce, in the first stage,
Voluntary Golden Hand Shake Pay Package offer. This should 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
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
“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 AIR 1994 SC
2233, the Supreme Court 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 decision 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.