NEW PRIVATIZATION POLICY APPROVED; GAS FIELD PRIVATIZATION

UNCLAS SECTION 01 OF 02 ISLAMABAD 000412 SIPDIS SENSITIVE E.O. 12958: N/A TAGS: EINV ECON ETRD ECON ENRG PK SUBJECT: NEW PRIVATIZATION POLICY APPROVED; GAS FIELD PRIVATIZATION ON HOLD ¶1. (SBU) Summary. On February 19, the Cabinet Committee on Privatization (CCOP) approved a new privatization policy whereby 26 percent and management control of a number of state owned enterprises would be sold. While total privatization is the eventual goal, the GOP intends to proceed in steps to avoid monopolization and to maximize share value. The privatization of Qadirpur gas fields in northeastern Sindh was taken off the table due to local union and political pressure; this highlights the difficulty of pursuing integrated policy measures at the federal level when control over resources is a provincial matter. There are few expectations for a successful privatization program at the current time, however, given the dismal global economic climate and the continued outflow of foreign portfolio investment from Pakistan. End Summary. ¶2. (SBU) On February 17, the Cabinet Committee on Privatization (CCOP) approved a new privatization policy, as well as the partial privatization of 21 state owned enterprises (SOE). The list includes most of the 17 SOE's already approved by the National Assembly this past November. However, Qadirpur gas field was removed from the list. Pakistan Post, Pakistan Railways, and the Utility Store Corporation (government subsidized food retail outlets) were added. -------------- Public-Private Partnership Approach -------------- ¶3. (U) Syed Naveed Qamar, the Federal Minister for Privatization, said that the new policy was based on public-private partnerships. The GOP plans to sell 26 percent of each entity's shares along with management control. By dividing up an SOE's equity into more manageable portions, the GOP is hoping to attract more potential investors. The remaining equity would be sold in phases, once the private sector management had brought about an increase in share value. Qamar said the GOP would insure that the divestment would not result in private monopolies and cartels (Comment: But did not specify how. End Comment). The new policy also envisages the transfer of 12 percent of the shares of all SOE's to their workers. Qamar emphasized that the IMF agreement did not require this privatization, but that it was a GOP initiative "in accordance with the country's needs." ¶4. (SBU) Dr. Azmat Nawaz, Director at the Ministry of Privatization, told Emboff that the policy shift was to enhance the profitability of public sector "white elephants" to enable their eventual complete privatization. He wants to introduce a private sector corporate culture into such poor performers as Pakistan Railways and Pakistan Post, although only the financial services arm of the Post, not its mailing services, would be privatized. -------------- Qadirpur Gas Fields Removed from List -------------- ¶5. (SBU) After the November 2008 decision to privatize roughly one third of Qadirpur gas fields - located in Ghotki district in northeastern Sindh - there were widespread protests from workers and provincial politicians. The Qadirpur Gas Field Union called the proposal a ruse to sell off a national asset at a deep discount. (Note: The CCOP appraised the gas fields at $2 billion, while the union claimed the actual value was closer to $7 billion. End Note) Union members in Ghotki picketed Naveed Qamar's home protesting the CCOP decision. Sindh Minister of Commerce and Industry Rauf Siddiqui, a member of the Muttahida Quami Movement (MQM) political party, told Karachi EconOff that his party was concerned that federal sale of the rights to Sindh's gas reserves would impinge on the province's constitutional right to control its own resources. He added that union workers were concerned about their continued employment in the event of a privatization. ¶6. (SBU) Asim Murtaza Khan [protect], Deputy Managing Director of Pakistan Petroleum, Ltd., an SOE that owns a minority share of Qadirpur, told Karachi EconOff that future privatization of Qadirpur ISLAMABAD 00000412 002 OF 002 was unlikely due to the political pressure exerted on the GOP by the unions and the MQM. ¶7. (SBU) Comment. The climate for privatization is extremely unfavorable at the moment, given the global financial crisis and questions about the stability of the current government. Last week's announcement of the new policy was greeted with corresponding skepticism in the press. The removal of Qadirpur gas fields from the list of SOE's available for privatization highlights the ambiguity over provincial versus federal control of valuable resources, an issue that has impeded foreign investment in the energy sector for many years (septel reports on challenges facing the development of Thar Coal). The Qadipur gas fields, a source of Sindhi pride, which were inaugurated by Benazir Bhutto and which provided the GOP $180 million in revenues last year, are a case in point. We have maintained in the past that the privatization of Qadirpur was questionable, since in recent years the GOP has invested heavily to improve output and the results have been very promising. In addition, since Qadirpur's parent company, the Oil and Gas Development Company, Ltd., has also been a candidate for privatization, it would make more sense to privatize them together. FEIERSTEIN