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Pakistan’s troubled privatization plan struggling to take off

The delay in starting the privatization process may not sit well with the IMF, which recently approved a $7 billion loan for the country

Pakistan’s troubled privatization plan struggling to take off
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The Pakistani government’s plans to privatize its cash-bleeding state-owned enterprises (SOEs) appear to be hitting a snag, with the bidding date for the national flag carrier — Pakistan International Airlines (PIA) — likely to be extended further due to pending issues with prospective investors.

The government plans to offload 24 entities over the next five years, with 10 expected to be sold in the first year. Of the 24 entities, 13 are from the power sector.

According to official figures, the country’s loss-making SOEs reported an aggregate loss of PKR 905 billion in 2023, a 23% increase from the previous year.

The delay in starting the privatization process may not sit well with the International Monetary Fund (IMF), which, when approving a $7 billion loan for Pakistan in September, stated that its new program “will require sound policies and reforms” to stabilize the country’s economy.

The measures include increased tax collection and an ambitious privatization plan, including PIA and other entities.

Difficult to offload

The bidding for PIA, the first entity scheduled for privatization, was initially set for Oct 1 but was delayed to Oct 31, less than a week before the planned date. However, people directly involved in the process say that certain issues remain unresolved and may require more time.

This is not the first time the government has attempted to privatize PIA. Previous efforts failed due to protests from labor unions and political opposition. The national flag carrier reported a loss of more than PKR 76 billion in the first nine months of 2023. The airline’s total liabilities stand at PKR 831 billion, while its total assets are valued at PKR 171 billion.

The current process involves the acquisition of operational assets and the airline function, while the government will retain other assets, including the Roosevelt Hotel in New York, which it plans to sell separately.

This follows a massive restructuring by the government, splitting PIA’s core and non-core businesses in preparation for privatization, reducing the core business’s liabilities to around PKR 202 billion.

Despite these efforts, certain issues continue to hinder the process. Some prospective investors want to purchase 65% of the government’s shares, while others seek full ownership. Concerns have also been raised about the requirement to retain employees for two to three years, which some believe makes the deal impractical.

According to a senior official at one of the six shortlisted bidders, retaining employees will increase the “operating liabilities” for the buyer. The “Pakistan-unique” tax on aircraft acquisition is also considered “punitive”, making the airline non-competitive internationally.

Another less-discussed issue, according to the official, is the terminated United States and European routes for PIA. In April, PIA management expressed hope that flights to Europe would resume by June, but this did not happen. The airline’s annual revenue loss from the suspension of European flights is estimated at PKR 70 billion.

“This is not a PIA issue, but one involving the Civil Aviation Authority (CAA). US and EU aviation authorities expect certain standards from their counterparts, and CAA has so far failed to meet those expectations,” the official told Nukta.

“The government has been trying to resolve the matter, but unless it’s resolved, there’s no sense in buying PIA for domestic and less profitable routes.”

The absence of revenue from these routes also complicates securing dollar inflows with leasing companies, which is crucial given Pakistan’s foreign exchange situation.

“I’m not saying these issues can’t be resolved, but I’m not sure they can be sorted out in the next two weeks,” the official added.

Can’t run, and can’t sell either?

PIA is not the only entity facing difficulties in privatization. On the government’s list for the first year are three power distribution companies: Islamabad Electric Supply Company Ltd., Faisalabad Electric Supply Company Ltd., and Gujranwala Electric Supply Company Ltd. Analysts say selling them could prove as challenging as running them.

Industry officials argue that for successful privatization, the government must create a conducive environment for deregulation, which includes a transparent regulatory framework and stronger legal and enforcement mechanisms.

The country’s political instability is also a deterrent.

“At this point, most investors are unwilling to enter any deal involving the government. They are concerned about political instability,” said an industry expert.

The recent handling of the contracts of five independent power producers (IPPs) has also raised concerns.

The government claims that terminating the IPP contracts will save PKR 411 billion and help cut electricity prices by 60 to 70 paisas per unit. There are widespread reports, however, that the IPPs were forced to end the contracts early. The government denies these allegations, asserting that the power companies “voluntarily agreed” to terminate the contracts in the “national interest”, but the industry sees it differently.

The Financial Timesquoted a businessman involved in the process as saying that the talks were more of an “execution than a negotiation”.

“The discussions around the IPP contracts have led to concerns about the sanctity of sovereign contracts,” said another industry official. “Regardless of the rationale, the way it was handled will make investors think twice before entering a deal with the government, at least for now.”

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