The debate over the privatization of State-Owned Enterprises (SOEs) in Pakistan has long been a contentious issue. The rationale behind privatization includes reducing fiscal deficits, enhancing efficiency, and attracting domestic and foreign investments.
The debate over the privatization of State-Owned Enterprises (SOEs) in Pakistan has long been a contentious issue. The rationale behind privatization includes reducing fiscal deficits, enhancing efficiency, and attracting domestic and foreign investments.
In the case of divesting industrial units, the modernization of plants and the acquisition of the latest technology become critically important. Privatization has been a significant part of Pakistan’s economic policy since the 1990s, marked by various phases, each reflecting the political and economic ideologies of successive governments.
In reality, however, successive governments have largely failed to achieve these goals. Most privatization transactions have been marred by scandals involving corruption, favouritism, and vested interests. Foreign participation in the 1990s large-scale privatization programme remained marginal. For instance, privatization transactions of all seven engineering industrial units during the 1991-2022 period were made at a nominal sale price of Rs183 million. Furthermore, some engineering units have remained on the privatization list for long periods without being divested.
A notable case is the divestment of Pakistan Engineering Company Ltd (PECO), located in Lahore. PECO, a public limited company listed on the Karachi, Lahore, and Islamabad stock exchanges, is a pioneering engineering unit incorporated in Pakistan in 1950. The government nationalized the company in 1972, including its works located at Badami Bagh and Kot Lakhpat in Lahore. At one time, the PECO brand guaranteed the quality and performance of its large variety of products, which were popular, competitively priced, and economical in operation. The long list of its products included machine tools, automatic power looms, bicycles, pumps, electric motors, high-speed diesel engines, concrete mixers, electric overhead cranes, mini-hydropower turbines, electricity transmission towers, general fabrication, and more.
The privatization of PECO has a chequered history. The company has been on the privatization list for more than three decades, adopting different strategies and modalities but failing to be divested due to ill-conceived and myopic government policies. When the government launched an ambitious privatization programme in the early 1990s, PECO was included on the list of SOEs to be divested, but the process did not progress significantly. Various engineering units were sold off or privatized, including Metropolitan Steel Corporation, Quality Steel Works, Karachi Pipe Mills, Textile Machinery Corporation (all located in Karachi), and Pioneer Steel Mills, Pakistan Switchgear Ltd, and Millat Tractors Ltd (located in or around Lahore). However, PECO could not attract any potential buyers.
Efforts to privatize or partially divest PECO continued during subsequent governments but were half-hearted. As a result, PECO faced significant operational challenges, including outdated technologies and financial losses. More than 3,000 employees were laid off under the Voluntary Separation Scheme (VSS). Attempts were made to revive and restructure PECO by adopting a comprehensive business plan, but it was not implemented due to financial constraints. During 1997-1999, the government renewed its focus on privatization, including PECO in its plans. The government of Pervez Musharraf continued the push for economic reforms and privatization, focusing primarily on larger and more critical units like the Pakistan Steel Mills, with no progress on PECO's privatization.
Meanwhile, PECO’s production operations suffered a great setback as its Badami Bagh Works closed down in 1992 after its auction of machinery and land in separate lots failed. Subsequently, its machinery was shifted to Kot Lakhpat Works for reinstallation but remained in storage. As a result, 32.5 acres of the 34 acres of vacant land at Badami Bagh were disposed of by the Privatisation Commission (PC) in 2001.
Production of machine tools and power looms at Kot Lakhpat Works was discontinued in 2000. The remaining production units, including the bicycle plant, furnace and rolling mills, electric motor production shop, and general engineering section, were closed down in 2002. Another 1,500 employees were laid off in the process. In 1999, the PC offered for sale Kot Lakhpat Works in operation on 247 acres, along with the remaining vacant land of Badami Bagh, but the transaction could not be finalized. The total land, located in Lahore’s prime business areas, is estimated to be worth billions of rupees. Eventually, only the fabrication of electricity transmission and communication towers continued.
Political instability and economic challenges during the 2010s slowed down the privatization process. There was, however, a renewed commitment in 2018 to privatize SOEs, including PECO. The government developed strategic plans for privatizing the company, focusing on attracting investors who could modernize its operations and improve its financial performance. The PC sought expressions of interest for appointing financial advisers for divesting the government's residual shares in PECO in September 2019.
However, further progress was hampered by a change of government and global and national economic challenges. The current government has renewed its commitment to privatization to reduce fiscal deficits and enhance economic efficiencies. PECO is still among the SOEs to be privatized, but its production operations are at a standstill.
The Planning Commission suspended the divestment process of PECO in June 2021, delisting it from the active privatization list to first address the issues and encumbrances the company faces. The commission initiated the privatization process again in June 2023 and asked for government intervention in November 2023, deciding that privatization could be considered when the company is free from technical and legal hitches. Prime Minister Shehbaz Sharif issued a directive, but without any positive result so far. The issues and impediments mainly relate to the change in company structure due to the sale of PECO shares under suspicious circumstances.
This situation developed between the years 2003-2004. As of June 30, 2002, the government held 56 per cent of PECO shares, including 31 per cent through government-controlled entities such as the National Investment Trust (NIT), Investment Corporation of Pakistan (ICP), State Life Insurance Corporation, Pakistan Reinsurance Co, and National Bank of Pakistan (NBP). The remaining 44 per cent of shares were held by private shareholders and companies. However, within a couple of years, the shareholding structure of PECO shifted in favour of private shareholders and companies, who acquired a 67 per cent majority share, leaving the government with only 33 per cent. Consequently, private shareholders took over the ownership and management of PECO.
Since 2018 the National Accountability Board (NAB) has been investigating the illegal disposal of PECO shares by NIT. Additionally, inquiries conducted in 2010 by the Public Accounts Committee of the National Assembly related to corruption, embezzlement, mismanagement, and insider trading have not been finalized. It is tragic that a profitable, well-established company of strategic importance has been destroyed in the name of privatization, which ultimately did not even materialize.
The writer is a retired chairman of the State Engineering Corporation, and former member (PT) of the Pakistan Nuclear Regulatory Authority.
