Despite what exasperated officials call the “CNN effect”, foreign capital continues to pour into Pakistan’s privatisation programme. The signs are that the current financial year to June 30 will set a new record for investment in Pakistan’s privatised assets. Figures for the first half show a massive increase of FDI inflows amounting to $3.3bn, compared with $3.9bn in all of 2005/06. Privatisation receipts account for about half of this, followed by portfolio investment and global depository receipt (GDR) issuance.

The government made its intentions clear when former finance minister, now prime minister Shaukat Aziz defined his privatisation philosophy. “We believe it is not the business of government to be in business,” he said. “Our major banks, oil and gas companies, telecoms and several others are being put in the marketplace.” To emphasise his point, Mr Aziz raised the privatisation department to ministerial rank.


“We are seeing tremendous interest in our privatisation programme this year,” says federal minister for privatisation and investment Zahid Hamid. “In our roadshows abroad, in London, New York and elsewhere, we found investors to be quite impressed by Pakistan’s turnaround story.”

The success of the privatisation programme is in itself an impressive achievement because selling the Pakistan story is an uphill battle. The international media version of Pakistan is filled with images of big-bearded mullahs surrounded by angry protestors burning effigies of US president George W Bush. Al Qaeda and Taliban militants are known to be hiding in Pakistan’s tribal territory that borders Afghanistan, and the hitherto unknown phenomenon of suicide bombers has made its devastating appearance in the major cities. There is no doubt that a security problem exists and it is a major deterrent to foreign investment.

Soft target

Yet officials argue that the media is exploiting a soft target, and that crime figures show a decrease in the past couple of years. It may serve as cold comfort to outsiders, but political violence is not indiscriminate. “It is not about random killing,” says one government source. “Al Qaeda is very specific in selecting its targets and foreign businessmen are not on their hit list.”

Shamshad Akhtar, governor of the State Bank of Pakistan, says foreign investors who go to Pakistan are invariably confused by the reality they encounter versus the reports they have read in the Western media. “I’ve had people from countless leading foreign banks and multinationals come here and express their confidence in Pakistan,” she says. “They always say they don’t understand the image that is projected in their home countries.”

Ahsan Javed Chishty, chief economist at investment bank BMA Capital in Karachi, believes a high political risk premium on Pakistani assets is unjustified. “We expect parliamentary elections to take place within the next nine to 12 months, following the presidential election scheduled for October,” he says. “This will be the first Pakistani government to complete its tenure in over 29 years. We are confident about President [Pervez] Musharraf’s re-election, which will ensure continuity in policies and reforms.”

Reform rolls on

Even in the unlikely event of the opposition successfully putting together a workable coalition to challenge Mr Musharraf’s party, there is little likelihood of the economic reform process being derailed. Despite being at one another’s throats over political issues, all the mainstream parties are espousing essentially the same economic reform agenda.

The country’s privatisation programme, enacted after Mr Musharraf seized power in a bloodless coup in 1999, has been focused on roughly 50 state enterprises in oil and gas, energy, telecommunications and banking. At a later stage, the government will consider ending its involvement in the running of airports, ports and other public services. The 10-year programme aims to take the government out of these key sectors and is focused on transactions that will help to enhance the economic reform programme, while stressing that the efforts have an ultimate social objective. By law, 90% of privatisation receipts are earmarked for debt retirement and the remainder for poverty alleviation.

“The two previous governments also made efforts to promote privatisation, but the programme only really got started in earnest in 1999,” says Mr Hamid. “Since 1991, we have had 163 transactions that raised a total of $7bn. Some 87% of that was realised in the past seven years of the Musharraf government. Privatisation, along with transparency, liberalisation and deregulation, make up the backbone of our country’s reform programme. We are proud of our investment policy, which provides foreigners with a completely level playing field and sound statutory protection. This has been a long-standing tradition even in the worst of times. No foreign assets were touched in the disastrous nationalisation that took place in the early 1970s.”

Higher profile

Mr Hamid says that Pakistan was not on the radar screen a few years ago, but today it figures prominently as an attractive investment location. His claim finds support in World Bank rankings comparing Pakistan with its closest neighbour and rival India. The latest Doing Business survey ranks Pakistan 74th worldwide in ease of doing business, well ahead of India in 134th place. In the category of dealing with licences, Pakistan comes in 89th versus 155th for India, and Pakistan is 19th in terms of investor protection, with India behind in 33rd place.

“The fast tracking of our bid for Union Bank was nothing short of amazing,” says Badar Kazmi, chief executive of Standard Chartered in Pakistan. “The approval process took weeks, not months.” Standard Chartered paid nearly $500m last year to acquire one of Pakistan’s privatised banks.

Global advisers

The privatisation programme has involved some of the top global investment banks and consultants in an advisory capacity on the sell-off of some of the government’s assets. Pakistan initially had trouble attracting top financial advisers. There was a lot of scepticism in the market over the government’s commitment to selling off its prized state assets. However, Merrill Lynch and JP Morgan Chase advised on the sale of Oil and Gas Development Corp and Pakistan State Oil, and a consortium led by Goldman Sachs and JP Morgan Chase was mandated to advise on Pakistan Telecom (PTC), 26% of which went to Dubai-based Etisalat. PricewaterhouseCoopers is involved in advising on the power sector.

The main focus of the privatisation programme has been on the banking sector. Muslim Commercial Bank (MCB), United Bank and Habib Bank have been the big ticket privatisations. Before being transferred to private hands, each one carried out a massive restructuring that entailed more than 17,000 jobs cut amounting to a 50% reduction in the state-owned sector’s workforce. Several hundred branches were shut in the process. It was a bold step for a government that came to power in a coup and was struggling to establish its credentials in a hostile political environment. United Bank was bought by a group of Middle East and overseas Pakistani investors, and the Aga Khan Foundation acquired Habib Bank. MCB is the last of the large private banks on the block and there are strong rumours of a global institution taking an interest in the group, with Barclays the prime suspect.

The privatisation process has not been without its hiccups, the most serious of these being the recent Supreme Court decision to challenge the sale of 75% of Pakistan Steel Mills (PSM) for $362m to a consortium of Russian, Saudi and Pakistani bidders. Although it was an annoying and embarrassing development, the court action was almost greeted with a sigh of relief by the government because it did not signify a much-feared judicial backlash to the sell-off of state assets. The snag was over a procedural issue and the government has appealed the decision. “The PSM privatisation was set aside in June of last year,” says Mr Hamid. “This is the first of more than 160 transactions that has been challenged by the court.”

Family jewels

Mr Hamid says that many more attractive assets among the family jewels are waiting in the pipeline to be transferred to private ownership. “People should be aware of our demographics and the fact that in a country of 160 million, 54% of the population is under the age of 19 and another 27% is under 40,” he says. “The economy is growing at a strong rate and it is this young, up-and-coming middle class that is fuelling a spending boom.”

The government is inviting expressions of interest in a range of companies spanning a wide range of sectors. It is looking for financial advisers for the privatisation of SME Bank, Pakistan Mineral Development Corporation’s coal and salt mines, Hazara Phosphate Fertilisers, Pakistan State Oil Company, Electric Supply Corp and Sui Southern Gas Company, to name a few of the assets coming up for privatisation.

“There is a misconception that most investment is coming from the Middle East,” says Mr Hamid. “This is not the case. The bulk of it is from the US, Britain and the rest of Europe, and we are quite satisfied and encouraged by the geographical spread of our investors.”