During the past ten to twelve years, the continuous and unbearable financial haemorrhaging within the Public Sector companies coupled with total breakdown of the norms of corporate governance necessitated the Government of Pakistan (to a significant degree caused by the ‘conditionalities’ of the multilateral agencies. IMF, World Bank, ADB) to initiate a range of corrective measures, which would lead ultimately to the privatization of these Public Sector companies. In arriving at this strategic decision of privatization of Public Sector companies, amongst other things, consideration was also given to the fact that pressure and influence of external elements would be substantially reduced (and totally eliminated over a period of time) so as to enable these Public Sector companies the ability to perform at an optimum level and manner.

 

The primary purpose/objective of privatization was, is and continues to be that the Government should basically play the role of strong ‘Regular’, i.e. the umpire who can and should be the ‘whistle blower’, have the minimum possible role in controlling, managing and/or operating commercial or business enterprises. Thus, in the ultimate phase, the Government would disinvest from all of these Public Sector companies and channelise the resources of the Private Sector for the economic and social well being of the country.

 

The Public Sector institutions engulfed in this economic quagmire covered the entire spectrum of the country’s economy, i.e. telecommunication, oil marketing, commercial banking, power generation, power distribution, fertilizer, cement, etc. While during this period of 10 to 12 years there have been a number of different administrations with divergent political philosophy running the country’s administration, however, the primary objective has not only remained the same but also has been vigorously reinforced by successive administrations. Simultaneously, to accelerate the process of privatisation as well as make the process fully transparent an independent body, the Privatisation Commission, was established with a Federal Minister primarily responsible for this onerous and demanding task.

 

This exercise of privatization of Public Sector companies would in turn bring about overall economic benefits for all segments of the society as well as ensure that the governmental bodies and its allied institutions are able to fully and effectively perform the primary functions, i.e. provide the enabling environment that will permit all the sectors of the economy to play a forceful and rewarding role in the country’s economic and social development on a sustainable basis.

 

It was anticipated that these corrective measure would, over a period of time, not only rectify the precarious economic position the country was confronted with respect to its exceedingly limited resources but, also, enable the country to meet the various loan conditionalities of the multilateral agencies such as IMF, World Bank, ADB, etc. At the same time, some of these Public Sector entities have been successfully privatised without even initiating the necessary corrective measures. In such cases it was preferred that the new owner(s) would be able to handle the required remedial measures in a process and manner that these new owners deemed fit. Some examples of the successful privatisation of Public Sector entities are Millat Tractors, Muslim Commercial Bank, etc and some examples of failed efforts have been Zeal Pak Cement, Allied Bank of Pakistan (to some degree), etc.

 

Habib Bank, country’s leading commercial bank with an extensive and diversified branch network both within the country and in 25 countries across the globe, has too been in the midst of this profound and major restructuring exercise for the past six years. This has entailed:

 

Firstly, immediately arrest its rapidly deteriorating operating performance:

 

Secondly, restore its financial health so as to bring it in conformity with acceptable international standards and requirements;

 

Thirdly, unlock its true potential as a major financial institution in the domestic environment and meaningful player in the highly competitive international arena; and

 

Fourthly, make Habib Bank fit for privatization and an attractive investment opportunity for potential strategic investors.

 

The Government of Pakistan in conjunction with the State Bank of Pakistan has in the past six years taken an extensive range of comprehensive corrective measures as part of the Financial Sector Reform Programme. These diverse and profound action steps were initiated with the induction of professional management team and the establishment of a strong Board of Directors primarily of non-executive one from the Private Sector. This Board is composed of individuals who have an established reputation and creditability at the decision-making level. Thus these Directors have assisted the management in performing the critical role of guiding, controlling and reviewing the performance of the Bank through this transformation phase.

This task was in a way akin to turning around a grounded ‘super tanker’ in a  highly turbulent and challenging environment.

 

The financial and related results for the past few years indicate that the radical corrective measures which were not only demanding but to some extent unpalatable are definitely bearing fruit. The grounded ‘super tanker’ is now on the high seas and, more importantly, gaining momentum.

 

More significantly, if the systematic and profound changes along with the processes and practices that have been introduced (based on the established international management concept of merit, performance, and reward) are allowed to be consolidated and strengthened, without any unnecessary impediment, in the very near future this ‘super tanker’ should be in the ‘cruise’ position (barring any unforeseen factor or factors). This would generate sustainable and attractive results for the overall benefit of the country’s economy as well as the people of Pakistan while at the same time enhancing the international image of the institution and the country.

 

In order for these financial and non-financial results to improve even further and thereby accelerate the economic, social and related benefits to the country it is indeed imperative that Habib Bank should be privatized sooner than later. There is a school of thought that now that the turnaround at these companies (Habib Bank, PSO, PTCL, etc.) has taken place, the financial plus other costs have been incurred by the Government, and in the case of Habib Bank the international Regulators have removed the controls and restrictions on the bank’s operations it would be desirable to keep this bank as state owned one.

 

This argument holds no water. A model that totally failed should not be revisited or tried again. Rather efforts should be made to provide further impetus to the successful model, i.e. the prevailing model (barring of course the ownership aspect) so that the country and its people are able to derive the benefits of successful operations.

 

Amongst other things the privatization of the Bank would ensure unlocking its full intrinsic value as well as, more importantly, provide the new Board and the senior management the long-term vision and direction that would enable the Bank to avail the opportunities that are and would be available both in domestic and international arenas.

 

However, any privatisation of such a strategic asset (and this is true of other similar strategic entities such as the oil marketing company, power distribution, fertilizer, cement, telecommunication, etc.) has to be evaluated and measured considering the overriding interests of the country. These interests concisely are:

 

1.  What value would the new ownership bring in the form of:

       - Composition of the senior management team;

       - Induction of technology-driven products and services;

       - Technical skills and expertise; and

       - Enhancing the good corporate governance environment.

 

2. The overall price and the related pay-back period;

 

3.  The strategic implication(s) that such a disinvestment would bring about for the country.

 

In the subsequent part of this article each one of these aforementioned factors have been commented upon so as to bring about a useful and purposeful dialogue and discussion amongst the opinion makers of the country and thereby enable the country to have a final decision which would be in the overall best interest of the country and its people.

 

Composition of The Senior Management Team

Considering the recent experience of other Public Sector companies that have been privatized and where the controlling shareholding has been acquired by an overseas investor as well as other relevant factors (such as quality of life in Pakistan, perception of the country’s law and order situation the personal taxation structure, etc.) it is highly unlikely that expatriates, either from the developed markets of the West or Arabs from the oil rich economies of the Middle East, would provide his leadership or talent at this critical level.

In the case of three banks that have been privatized in the past ten/twelve years, Muslim Commercial Bank, Habib Credit & Exchange Bank (now Bank Alfalah) and United Bank Limited, the senior management team continues to be of Pakistani professional. Looking in to the future, the senior management team would most likely continue to comprise of Pakistani professionals who have had a successful innings with a major multinational or multilateral institution and would now relish the opportunity of transplanting this knowledge, experience and skills in to the local market place.

 

Induction of technology-driven products and services:

Barring a few limited areas wherein export of such products &/or services have been barred by that country’s government, in today’s competitive international environment any one of these items can be acquired or purchased from the international market place. For example, in the rapidly developing and changing commercial banking sector by paying the appropriate price any one of these items can be acquired more so in the area of computer hardware or software. The technical and related manpower required to derive the benefits are also available in the local market place.

In other words, the transfer of technology from the new owner to any particular Public Sector company may be of a limited extent. This is particularly true due to the fact that there are very few proprietary products and services that would be available to the investor involved in such an acquisition.

 

Enhancing the good corporate governance environment:

In the past 4 to 6 years the regulatory framework in the country has gone through a sea change. Thus, it would not be incorrect to say that profound and effective steps, which have been taken by the country’s Regulatory bodies, have, in turn, resulted in the country’s corporate and banking sectors to take the necessary steps to correct the rather archaic policies, practices and procedures. Thereby within a rather short period of time the good corporate governance environment has taken roots and in the near future (if not the case already in some of the larger local corporations) will fully conform to the best corporate governance practices prevailing in the international market place.

 

More importantly, this knowledge is readily available in the local market place and the infusion of an overseas investor into these Public sector entities would not bring about any appreciable difference. Rather, this adherence to good corporate governance is only the case of change in the mind-set and this in the past few years, undoubtedly, has taken place within the local corporate and banking world.

 

It would be pertinent to mention over here that the induction of individuals, from the corporate, legal, accounting and other similar experience with established track record, on to the Board of Directors of these companies has been a major and significant factor in bringing about this radical change and subsequent adherence to the corporate governance concept and practices.

 

This, interestingly, is the process most of the successful multinational and major corporations have adopted in the developed countries where the management drives the corporation and the Board is composed of individuals who have excelled in their area of business operations with their leadership, performance and contribution to the society. This thus brings about the additional value to the institution as well as provides the vision for future growth and progress.

 

The overall price and the related payback period:

Considering the country’s risk profile, the geo-political environment of the region and other factors having a bearing on determining the price and, more significantly, similar opportunities available in the other parts of the globe any overseas investor would look at a rather short pay back period. This, depending upon the particular Public Sector Company, would be in the medium-term time horizon, i.e. a range of 4 to 8 years.

 

In other words after the initial benefit of foreign direct investment in the first year, the country will perpetually be remitting foreign exchange from the country’s exchange reserves in the form of dividends, etc.

 

The type, nature and scope of commercial banking activities, particularly in the area of lending, that Habib Bank is involved in the local market place and more critically the role it plays in meeting the financing needs of the country’s vital assets is difficult for an overseas investor to comprehend. It is, therefore, critical that to continue to generate and derive the maximum economic benefits such strategic assets should remain in the hands of country’s private sector.

 

The people of Pakistan are the only strategic investors for such Public Sector companies. Any overseas investor would be guided and driven by his own pre-determined goals and objectives.

 

The people of Pakistan can become the strategic investor if entities like Habib Bank are listed on the country’s stock exchanges while for those like PSO, PTCL, etc the government further reduces its shareholding through the stock exchanges. This listing on the stock exchanges must ensure a large diverse shareholding with no single investor, Group or community permitted to hold more than 5% shareholding. That is no particular investor should be allowed to have the controlling shareholding. This can be achieved by stipulating that:

 

A certain percentage (10 to 15%) be sold to the employees (and the employees cannot sell their shareholding for the next five years);

 

A substantial slice (40 to 65% in one or more tranche) be sold through the stock exchanges by offering new equity at face value and thereby enhance the equity base of these companies;

 

The shareholding up to 5,000 shares would be sold at the face value of the shares:

The Government at all times should hold 15 to 20% of the shareholding, so that it can also share in the benefits of the turnaround plus provide the creditability in the international arena; and

 

Those who subscribe to more than 5,000 shares would have to pay a premium.

 

Further, to provide a large and diversified ownership of shareholding (as is the case for major international banks such as HSBC, Bank of America, JP Morgan Chase, Deutsche Bank, etc.) this ownership has to be restricted by the number of shares a person, a company or a Group can hold. This would also preclude any one party or Group having a controlling shareholding in the Bank (or other similar entities, which are in the process of being privatized).

 

This afore-said process amongst other things will create a diversified and large ownership within the country and, more importantly, create wealth amongst the people of Pakistan. Rather, it would also give to the Pakistani people the pride and honour of being the shareholder of entities like Habib Bank, PSO, PTCL, etc. as well as provide the shareholders reasonably good returns on the long-term.

 

Any other investor from the overseas market would be solely driven by his perceived economic self-interest, which is, primarily, to have the maximum possible returns in the shortest period of time. It is neither in his plans or interest to take a cross-border investment that will generate returns over an extended period of time in a geographical area of the world, which is somewhat prone to unforeseen risk(s) or developments.

 

I would even go to the extent of suggesting that the State Bank of Pakistan should permit all the financial institutions to financé up to 90% of the proposed investment that an individual plans to make provided the maximum investment is not more than 5,000 shares. As this quantum of shareholding would be acquired at the face value the subsequent appreciation in share value would provide additional cushion to the financing bank.

Finally, now that the much-needed macro-economic stability has been arrived at and substantial rupee liquidity is available in the local market, which is presently chasing a few shares only and with limited alternative investment opportunities, time is opportune that we move expeditiously to provide alternative investment opportunities to the people of Pakistan. In the final analysis, only the conviction, deeds and commitment of the people of Pakistan, i.e. the domestic investor, can be the basis for strong and sustainable economic and social development of the country. The power and engine of growth can only come from the investment by the people of Pakistan in these strategic assets, as they are the real custodians of the country’s strategic assets. The overseas investor can only add momentum to the economic growth and undoubtedly the reverse can and is never the case.