ARTICLE (March 11 2010): Senator Waqar Ahmad Khan, Federal Minister for Privatisation, announced on March 5 that out of 58 of the state-owned enterprises (SOEs) on active privatisation list, 23 entities were being divested through public private partnership on a fast-track basis.
According to the policy, 26% shares of these enterprises will be offered to the private investors, along with the management control, thereby significantly reducing the government involvement in these units.
The list of the 23 SOEs includes engineering industrial companies; namely Heavy Electrical Complex (Pvt) Ltd (HEC), Hattar (NWFP) and Pakistan Machine Tool Factory (Pvt) Ltd (PMTF), Karachi. Both, the PMTF and the HEC, are of great strategic importance, high-tech industries and the only industrial units of their kind in the country. Engineering industry is complex in nature, highly capital-intensive and involves long gestation period.
There are high costs of technology and building-up of inventory of imported materials and components for longer time. Therefore, it is not very attractive to the private investor, the driving motive for whom is the profit. On the other hand, it should be recognised that public sector has to continue to play its role in the industrial development and to achieving self-reliance in strategic areas.
It will, therefore, be against the national interest to divest these units along with the management control to private sector. Machine tools industry is fundamental for the industrial growth in any country as it provides principal industrial equipment base for manufacturing sector. Machine tools are widely used in capital goods, automobiles, consumer-durables, defence, electronics, railways, atomic energy and IT-related industries. PMTF, which was set up in collaboration with the world renowned Oerlikon-Buhrle of Switzerland, has built up, over a period of decades, technology of precision machine tools, having developed capability to design and manufacturing of conventional and CNC machine tools.
The diversified product range of the PMTF includes automobile transmission parts and components, die-cast parts and armaments. Another strategic feature of the PMTF is to act as a shadow defence project in case of emergency. For decades, it has been producing weapons for Pakistan armed forces as well as for export market, with cumulative domestic sales amounting to PKR 1.6 billion and an additional USD 47 million export proceeds. The company has so far produced 15,458 numbers sophisticated weapons (Table-1). Currently, the company has domestic orders in hand for supply of weapons valuing PKR 14 million, whereas export orders of additional USD 2 million are being negotiated.
Source: Privatisation Commission.
The manufacturing of defence equipment at the PMTF could come to a halt, in case of its divestment, and related technology that it assimilated and corresponding expertise it developed over the decades will go down the drain. In view of its strategic importance, the then Prime Minister Benazir Bhutto had decided not to privatise the PMTF.
The company has been on active privatisation list for quite sometime though. The irony is that the previous attempt of the government to privatise it failed. The expressions of interest were invited in November 2007, and due date for receiving, it was extended by the Privatisation Commission (PC) a number of times due to poor response from the private sector.
It reflected on lack of will on the part of prospective investors to continue to run the PMTF as an industry, which was mandatory on its take-over. Finally, only one small enterprise showed interest by closing date in February 2008. The privatisation process was, therefore, called off. But, the damage was done.
The short-sighted policies and long delays in implementing the privatisation process have adversely affected the company's performance, causing loss of production, sales, productivity and efficiency, resulting in lower profitability, besides negative socio-economic impacts. The PMTF has been profitable for many years, having earned pre-tax profit of PKR 48 million in 1998-99, PKR 61 million in 1999-2000 and PKR 65 million in 2000-01, until 2004-05 with a profit of PKR 40 million.
Market value of its assets, in real terms, has also gone down meanwhile, with the persistent devaluation of Pak rupee, and divestment of its valuable assets, supposedly at throwaway price, becomes highly questionable. It is obvious that this time again, the prospective buyers would be interested only to purchase its assets, particularly the enormous real estate it owns.
The 26% shares of the company to be offered for divestment are expected to be worth PKR 76 million, whereas the PMTF's land alone, 226 acres prime industrial and commercial land located in Landhi, Karachi, is valued over one billion rupees. Out of this, 60 acres is vacant, which can immediately be utilised for commercial purposes. Heavy Electrical Complex at Hattar, another strategic unit, was inaugurated by Prime Minister Benazir Bhutto. The complex has an installed capacity of producing power transformers of cumulative capacity of 3,000 MVA annually.
Power transformer industry, though growing at slow rate internationally, is concentrated among developed countries. The Western sources are reluctant to transfer design, manufacturing and testing technology to the developing nations. Nonetheless, the HEC has created strong technical foundation for high voltage transformers based on the Chinese technology, and has independently designed, produced, tested and qualified 31.5/40 MVA, 132/11.5 transformer. The complex has state-of-the-art production and testing facilities.
So far, it has manufactured and supplied about 200 new power transformers, of various capacities, meeting the domestic demand satisfactorily. As new construction and grid expansion takes place in a big way, Pakistan requires a large number of power transformers.
Though on privatisation list for long, its privatisation was re-activated in 2006. Expressions of interest (EOI) from eleven interested groups to participate in privatisation process were received by December 2006. The PC pre-qualified five potential bidders in October 2007, which included well-known global players of heavy electrical equipment, like ABB of Switzerland, Areva T&D of France, Siemens of Germany and Iljin Heavy Industries of South Korea, besides local Pak Electron Ltd (PEL).
They all had shown a visible commitment to continue to operate the HEC's manufacturing facilities and developing further domestic engineering capabilities in the field. The prospective buyers had completed due diligence by December 2007. In the pre-bid meeting held in June 2008, the PC had given timeframe for receiving bids from these short-listed companies.
Suddenly, the whole process was scrapped and transactions of privatisation could not materialise. The company is on sale once again. This time poor response is expected from the foreign companies as these are not likely to show interest to participate yet another time. It may be recalled that ABB and Siemens, among others, had also responded well to the PC proposal, in 1990s, to establish a joint venture with the HEC. After a couple of years' negotiations, however, the proposal was dropped by the PC.
Excellent opportunities have been lost in the past for privatisation or divestment of the HEC and nothing better can be expected in future as now there are negative factors too, such as of global financial recession and poor domestic investment climate due to prevalent law and order situation. As uncertainty about its future prevailed, the HEC has suffered a net loss of PKR 80 million during 2008-09, while it was profitable entity until then.
The company had earned pre-tax profit of PKR 127 million in 2007-08 and PKR 79 million in 2006-07. Located in a front-line industrial estate, with all requisite infrastructure facilities, the HEC is of great attraction to real estate investors. The premises cover an area of 81 acres, of which 31 acres is free land attached to the factory. Meanwhile, its government loans of about one billion rupees have been written-off and brought-forward losses of Rs 377 million are to be borne by the PC. It may be noted that the total assets of the HEC are worth PKR 1,404 million, whereas total liabilities are only of the size of PKR 233 million.
Can these transactions be termed successful by any standard? The government, is therefore, well advised to learn from the past experience of privatisation, in particular of engineering industrial SOEs. In the words of philosopher George Santayana: "Those who cannot remember the past are condemned to repeat it."
(The writer is retired Chairman of State Engineering Corporation, Ministry of Industries and Production, Government of Pakistan.)
Source: http://www.brecorder.com/index.php?id=1029303&currPageNo=1&query=&search=&term=&supDate=
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