The News, September 28, 2016
By Muhammad Zubair
The Privatisation Programme of Pakistan has recently been in the limelight due to reports that imply that the programme has suffered major setbacks and missed the opportunity to lessen the burden on the national exchequer caused by budgetary support to ailing Public Sector Enterprises (PSEs). Those who believe that the privatisation programme has yielded no results need to revisit the programme’s milestones.
During the present government, the Privatisation Commission (PC) has raised Rs173 billion (equivalent to $1.7 billion), including over $1.1 billion in foreign exchange. The successful strategic sale of the National Power Construction Corporation (Pvt) Limited (NPCC) raised Rs2.5 billion in proceeds, all in FX of $25 million. The sale price was 49 percent higher than the break-up value and 27 percent above the CCoP-approved reserve price. The NPCC was sold after four unsuccessful attempts during previous governments. Also, this was the first completed strategic sale by the GoP since 2008.
When the present government came to power in June 2013, poor governance of PSEs under the previous governments had contributed to increasing losses and operating inefficiencies in the PSEs.
Therefore, in October 2013, the Cabinet Committee on Privatisation (CCoP) approved a privatisation programme consisting of 69 PSEs as part of its economic reforms agenda. Subsequently, the PC initiated the process for the divestment of shares in oil & gas companies and residual shares in already privatised banks through capital market transactions.
It was also under the present government that the PC completed the transaction structure of PIA, PSM and power-sector entities, despite the fact that both PIA and PSM have been on the privatisation list since 1997, while some of the power-sector entities have been on the list since 1993. This is the first time ever that PIA and the power-sector entities’ transactional work has reached such an advanced stage.
The capital market transaction of HBL was a landmark deal for Pakistan. Not only did the transaction generate gross proceeds of Rs102 billion (equivalent to $1.005 billion), including foreign exchange inflow of over $764 million, it also had a record domestic demand of over Rs45 billion with over 480 investors participating, generating demand of over 253 million shares. This is a major achievement for Pakistan. It has also increased the interest and quality of investors for strategic sale transactions and for other investment opportunities in Pakistan.
The government of Pakistan has also been awarded five international awards for the HBL, UBL and ABL. In addition to this, the privatisation programme has been recognised and appreciated by global financial institutions, multilateral donor agencies, international press and others.
The PC had also initiated the process for the divestment of shares through capital markets in the Oil & Gas Development Company Limited (OGDCL), when the global oil prices were over $100 per barrel. The process was however delayed by more than two months due to the ‘dharnas’ and protests. Due to this delay, when the time came to finalise the strike price for sale of shares, the oil price had dropped significantly, which had a negative impact on the value of the shares of OGDCL. Therefore, in national interest, the OGDCL transaction was halted at the very last moment.
In response to the criticism about the delays in the programme, one has to understand the difference in the requirements and processes of carrying out capital market transactions and strategic sales. Whereas a capital market transaction can be completed in around 4-6 months, strategic sales require at least 24 months for completion, other than for small units. Anything less than this would not meet the requirements of the PC Ordinance which aims to ensure a fair and transparent process.
Therefore, the strategic sale processes that have been run by the PC entail thorough due diligence by PC-appointed financial advisers. Due diligence has been conducted on the basis of international best practices and have been analysed on a scientific basis by the financial advisers. Both the findings and the analyses have been captured in the form of comprehensive due diligence reports for each of the entities.
Therefore, in the event that the privatisation of some of the entities mentioned above does not move forward or is delayed by the government, these reports will form the basis for improved decision-making. Furthermore, the findings and analyses in these reports can play an important role in understanding the real problems and issues pertaining to each entity and assist the government in taking reformatory steps like restructuring, which would lead to significant operational efficiencies and reduction in financial burden on the exchequer.
The process has, however, also been a challenging one. Once the PC brought these transactions to an advanced stage, protests against privatisation were started by the opposition parties, and by labour unions.
Believing strongly in the power of democracy, the GoP engaged all opposition parties in parliament to address their concerns and build consensus, rather than using the government’s numerical strength in parliament to pass any legislation required for privatisation. The GoP has also been making all possible efforts to engage the labour unions at various levels. The prime minister has even held direct meetings with the Wapda Hydro Electric Workers Union as well as the PIA labour representatives.
As a result of these meetings, the Wapda Union representatives promised that if the GoP halted the privatisation process of the power-sector entities, it would help reduce line losses and increase revenue recoveries within one year. In order to give the union a chance to perform, the GoP has reconsidered the privatisation mode of the power sector by shifting it from strategic sale to divestment through capital markets. The Initial Public Offering (IPO) for Faisalabad Electric Supply Company (FESCO) is now being initiated.
In the meanwhile, a joint effort has been initiated between the Ministry of Water & Power and the Wapda Union to improve sectoral performance, which has indeed started resulting in reduction of line losses and increase in recoveries of receivables. In the case of the Pakistan Steel Mills (PSM), the GoP gave the government of Sindh, in October 2015, the offer to acquire PSM with all its assets and liabilities. Since then, the Sindh government has been unable to provide a definitive response to the offer, despite having been provided complete access to PSM’s site and management. The CCoP has now directed the Privatisation Commission to reinitiate the process of privatisation.
It is worth appreciating the transparent and quality work that has been invested into the process of the privatisation programme, which is not looking at short-term solutions but solutions that have long-lasting benefits.
The writer is state minister for privatisation and the chairman of the Privatisation Commission.