Pakistan and Saudi Arabia-based Mansour Al Mosaid Group recently signed a share purchase agreement for 1.760 million shares, or 88% of National Power Construction Corporation (Pvt) Ltd (NPCC), for Rs.2.5 billion or Rs1,420 per share.
The new owner intends to retain all Pakistani employees and expects to add more with a planned major expansion of Pakistan operations. The government has already received $752,500 from the company to fully fund the ‘golden handshake’ and voluntary separation schemes for those employees opting to leave.
Mansour Al Mosaid has 30 working days after the acceptance letter issued by the Privatisation Commission (PC) on August 11, 2015, to meet the payment terms.
With its acquisition of a major regional competitor, Mansour Al Mosaid adds to the large-scale engineering and construction capability comparable to its own and, as well, NPCC’s accounts and projects to its business base, arguably improving its market position, both factors – one would suspect – contributing to its high bid.
The NPCC transaction will formally conclude after the government receives payment, other ‘conditions precedent’ are met, and finally, the transaction announcement is published in The Gazette of Pakistan. PC estimates that, when concluded, the NPCC transaction will add $24.5 million to Pakistan’s foreign exchange reserves. Mansour Al Mosaid, of course, remains liable for tax on revenues earned in Pakistan.
Why privatization is the right step ahead
Not all future transactions will be, nor can they be, as successful as NPCC, but this should not deter Pakistan from continuing to divest stakes in state-owned enterprises — whether loss-making, marginal, or even profit-making like NPCC.
According to rough estimates, Pakistan loses around Rs500 billion annually through state-owned entities. Imagine if Pakistan ditdid not need to borrow from the International Monetary Fund (IMF) to meet these state-owned enterprises’ budgetary needs. This amount could be better spent improving health care, education, infrastructure and housing.
We also need to look at the effects of privatization on the welfare of the growing population in Pakistan, which is increasing at 1.96% per year. Unless the GDP growth increases to a level of 6-7%, we will not be able to provide additional jobs to the people coming to the labor market every year.
How do we push the GDP growth rate? Among other factors, one important factor is the privatization of state-owned enterprises, which can help the overall GDP growth.
Why profit-making entities
So why privatize profit-making entities such as NPCC? First, consider5 million NPCC will add to Pakistan’s foreign exchange reserves. But also consider the long-term scenario had NPCC not been privatized. If NPCC profits and taxes paid last year continued,’ Pakistan could expect to wait many years for an amount equivalent to the proceeds it should receive by September 22nd or before. This result is the basic calculation using the discounted cash flow analysis model – a way to accurately calculate currency appreciation or depreciation over time to project a return on investment.
So, can Pakistan put $24.5 million to use now better? Of course, it can, and it should. NPCC is just one example of why privatization has both short and long-term benefits.
Do we want to continue to mortgage our future when we have an exit strategy – privatization – that has already been demonstrated to work? Do we want to settle for ‘profitable’ state-owned entities that underperform private competitors in the marketplace? Or, should we refocus government resources on the ‘business of government’ and leave the ‘business of business to the private enterprise while holding all actors accountable and fostering investment?
Strike that balance, and we progress. Failing to do so, we continue the status quo.
We have already seen a lot of progress. For example, the now privatized telecommunications sector delivered better service to the consumer and returned Rs245 billion in taxes to the national exchequer in the fiscal year 2013-2014. Similarly, four recently privatized banks collectively returned Rs36 billion in taxes.
We should also realize that Pakistan is following the successful examples of Turkey, Malaysia, Indonesia, England and other countries who are reaping significant economic and social benefits from their completed privatization programs while enjoying better services. It takes bold decisions to move away from the status quo and bring positive results and change.
The writer is the Minister of State and Privatisation Commission chairman.
 Ltd (NPCC), for Rs2.5 billion or Rs1,420 per share.){kind=link}