Dinakar Sethuraman: Military rules Pak privatisation

With foreign firms wary, Pakistani army-run corporations have emerged as key bidders of state units

When Pakistan's privatisation commission opened the bids for sale of a majority stake in National Refinery (NRL) last month, Attock Oil Group, a local conglomerate, walked away with a $ 680-million-turnover company.

Fauji Foundation, a business run by the Pakistan military, lost out having bid only $ 112 million for a 51 per cent stake in NRL well below Attock's $ 275 million. But Fauji edged out the likes of Kuwait Petroleum and Russia's Lukoil International Trading and Supply in earlier rounds to make it to the final shortlist.

Pakistan is aggressively going ahead with plans to sell a majority stake in key state companies involved in oil and gas, telecommunications and power among others, and the military is an active participant.

The country sold minority stakes in a wide variety of companies ranging from banks to natural gas, and has earned around $ 2.8 billion in privatisation proceeds in the last 15 years.

The focus is now on large state players in critical sectors. Pakistan intends to sell majority stakes in Pakistan Petroleum (PPL), Pakistan Telecommunication (PTCL) and Pakistan State Oil (PSO) by the end of the year. A majority stake in Oil and Gas Development Company Ltd should go on the block, too.

PSO is the country's biggest refining and distribution company, and its 3,800-plus gas stations give it a 60 per cent market share. PPL, Pakistan's second-biggest exploration company, operates the Sui gas fields, which produce 940 million cubic feet per day, or a third of the country's gas.

Bidding in PTCL, scheduled for June 10, was postponed, following protests by workers, but Pakistan is going ahead with plans to sell stakes in other companies. Progress is slow owing more to external factors than bickering among political parties. A spate of terrorist attacks and increasing mob violence has diminished the appetite of western investors for Pakistani stocks.

Angry mobs torched a KFC outlet last week in Karachi in retaliation for a mosque bombing further scaring investors and damaging valuations of companies on offer. So Islamabad is counting on regional investors such as Singapore Telecom, companies from west Asia and local conglomerates to drive its privatisation programme.

The military is a key player. Fauji is gunning for a 51 per cent stake in PSO, one of Pakistan's most valued companies, along with Chevron Texaco, Kuwait Petroleum and Russia's Lukoil, and a group company Fauji Cement has bid for a 85.3 per cent stake in Mustehkam Cement Limited (MCL), a 660,000 tonnes per annum state facility, according to data by Pakistan's privatisation commission. In an earlier state sell off, Fauji Fertilizers bought Pak Saudi Fertilizers in 2002 for around $ 136 million.

Fauji's bid for a role in big ticket privatisations illustrates the emergence of the Pakistan military as an economic machine breaking into the corporate mainstream even as its political influence looks threatened in a democratic framework.

Pakistani Defence Minister Rao Sikander Iqbal told the parliament recently that the country's powerful armed forces run a total of 55 businesses. Most of the businesses are controlled by three trusts "" the army-run Fauji Foundation, the air force-run Shaheen Foundation and the navy-led Bahria Foundation. Right from recruitment agencies to natural gas companies, and from bakeries to sugar mills, Pakistan's military has a finger in every pie.

The Fauji Foundation is the most active and the biggest among the military-backed businesses. Set up in 1954 with three mills and assets of just $ 300,000 with the aim of helping retired servicemen, they are said to be worth more than $ 450 million today.

The Fauji Foundation, which offers womb-to-tomb benefits for nearly nine million ex-servicemen and their dependents, earned $ 40 million on a turnover of $ 71 million as of September 30, 2004. The Fauji group posted a turnover of around $ 980 million and earned $ 218 million on assets of around $ 1.7 billion as of September 2004, according to the Fauji website.

In fact, the Fauji Foundation, and a host of other army-run corporate enterprises in the country, have come to control such a huge proportion of the economy that it would not be unreasonable to suggest that the army literally controls the destiny of a sizeable proportion of the country's population, says Aasim Sajjad Akhtar, an independent political analyst.

For instance, the Fauji group, including its associated companies, contributed as much as $ 400 million in direct taxes, duties and other levies to the national exchequer during the year 2003-04.

The extent to which the armed forces have penetrated daily life was illustrated in a recent article by Islamabad-based columnist Farrukh Saleem. He eats Fauji cereal from a box with wrapping made in a Fauji propylene factory, uses sugar, cement and paint made by Bahria companies, and electricity produced by Fauji Kabirwala Power.

He banks with Askari Commercial, the country's biggest private bank run by the Army Welfare Trust "" also under army control "" and uses the leasing services of Askari Leasing. He uses Bahria Travels to buy his tickets and Shaheen Cargo to send goods.

In response to criticism the Pakistan army says that it needs these businesses to generate pension funds and to start welfare schemes for hundreds of thousands of retired soldiers and officers.

A Pakistan senior diplomat said that the army's growing role in business is to make enough to fund hospitals, schools, training institutes and other welfare organisations for military personnel. Bidding for stakes in state companies such as PSO would also fulfil the other objective of the army, of keeping control over assets critical to national security.