ISLAMABAD: The World Bank has issued a stern warning regarding Pakistan’s strategy for privatizing its state-owned entities (SOEs). In a recent report, the international financial institution highlighted the potential pitfalls of this approach, citing concerns about judicial challenges, political interference, the sale of K-Electric, and what it termed the flawed Sarmaya-i-Pakistan model.

The World Bank cautioned that Pakistan may face legal disputes if it proceeds with the sale of SOEs to foreign governments through government-to-government (G2G) contracts. Instead, the bank recommended pursuing public offerings via stock exchanges, followed by privatization under the vigilant oversight of a special joint parliamentary committee.

The report, titled *Public Expenditure Review 2023*, specifically addressed the Inter-Governmental Commercial Transactions Act 2022, which permits the government to offer shares of SOEs to foreign nations. The World Bank expressed reservations about this approach, fearing that it could lead to legal disputes, questions regarding transparency, and a further slowdown in the privatization process.

One of the central issues identified by the bank was the declining profitability of Pakistan’s SOEs, which have been incurring losses for nearly a decade. The profitability of federal SOEs in Pakistan is now among the lowest in the South Asian region. In 2014, their aggregate profit stood at 0.8% of GDP, but by 2020, it had plummeted to losses amounting to 0.4% of GDP, significantly contributing to the fiscal deficit.

The World Bank also pinpointed several factors that have hindered successful privatization efforts in Pakistan. These factors include economic volatility, judicial activism, litigation, weak political commitment, and perceived corruption. Some political parties have opposed privatization irrespective of individual SOEs’ performance, opting instead for employee stock option schemes. These decisions have resulted in negative sentiments, elite capture, unemployment, and social unrest.

Moreover, the bank emphasized that judicial decisions in cases related to Pakistan Steel Mills privatization and the Reko Diq mining contract have damaged Pakistan’s reputation as a reliable country for honoring international contracts. This, in turn, has discouraged decision-makers from further privatization or seeking foreign direct investment.

The incorporation of Sarmaya-i-Pakistan Limited (SPL) by the PTI government in 2019 was intended to take control of all SOEs, revamp or privatize them. However, the SPL initiative encountered delays and never fully materialized.

Addressing the power sector, the World Bank pointed out that privatization efforts have faced resistance from trade unions, vested interests, fears of private sector monopolies, and previous negative experiences with privatizing distribution companies (Discos).

To overcome these challenges, the World Bank recommended several measures. First, Pakistan should prioritize political and macroeconomic stability, demonstrate strong political commitment to privatization, and build a broad-based coalition for change. The bank also called for a revamp of the privatization commission with qualified professionals to prepare financial models for each entity to be privatized.

Transparency and competition should be at the forefront of the privatization process, with strengthened regulatory bodies and safeguards to protect the public’s interests. The Competition Commission of Pakistan should be equipped with greater powers to enforce its decisions effectively.

Lastly, the government should ensure that the social impact and costs of privatization, such as worker displacement, are adequately addressed, similar to successful privatization cases.

In conclusion, the World Bank urged Pakistan to consider making public offerings of SOE shares, gradually moving towards divestment and privatization. This approach has proven successful in the banking and telecommunication sectors. Restructuring of Discos and phasing out government shares should also be part of the strategy, supported by a robust regulatory framework. The bank’s recommendations aim to promote efficiency, enhance service delivery, and foster healthy competition in the privatization process.

It remains to be seen how Pakistan’s government responds to these critical concerns and whether the suggested measures will lead to a more successful privatization agenda in the future.

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