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Privatization: A flickering light in dark, scary storm

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September 23, 2019 (MLN): Privatization as an economic phenomenon has been spreading like a wildfire all over the world, especially since 1990s. Amongst all the institutions that displayed deep interest, developing economies were the first ones to become a part of this trend for economic reasons.

The same phenomenon applies to Pakistan, as records show that privatization transactions from 1991 onwards, wherein government sold prominent stakes like MCB, were higher than capital market transactions. However, since 2010, transactions pertaining to Initial Public Offerings (IPOs) have taken the lead.

A major privatization program has been re-launched by Government of Pakistan to reduce the fiscal imbalances after a break of four years; the last completed transaction for privatization was NPCC sale in September 2015. A positive fiscal impact is expected to result from the sale proceeds, as they will be used to retire the national debt, as well as eliminate losses of the public sector units which are currently being financed by the Government.

The aforesaid development became much evident following the press conference held by Finance Advisor, Dr. Hafeez Sheikh’s on September, 15, where he hinted towards targeting proceeds worth Rs.1 trillion in privatization transactions. This suggests that the Government’s clearest move as of now is to restart the privatization process after a hiatus of four years.

If we see the current privatization transaction pipeline, it is heavily burdened by unlisted private entities, including properties and financial institutions. These institutions may seem less attractive to strategic buyers as they are likely to see them as distressed assets which regularized heavily by conforming laws. Since these troubled assets are heavily associated with current privatization pipeline, investors do not show any appetite, or lose if any, to purchase these assets.

Market trends suggest that capital market transactions have lost their appeal for many investors. This is clearly an outcome of some adverse events that have been occurring lately. For instance, circular debt for energy and power companies in Pakistan is constantly increasing and relevant authorities, instead of handling the situation, are running the rumor mill. Another case is offshore drilling, where government authorities are claiming high returns from drilling which was not even completed. However, there is an ongoing EFF program launched by the IMF, through which it is likely to put forward possible guidance on list of privatization entities and some kind of timeframe in its second review which is expected to be held on January 2020.

In a recent report released by IMF stated that the three biggest state-owned enterprises, i.e. PIA, Pakistan Steel Mills and Pakistan Railways continue to incur heavy losses. However, the government has guaranteed the Fund that new audits of these entities shall be conducted by December, 2019.

Studies show that most of the governments since 1991 have shown high inclination towards privatization. This notion is backed by the fact that around 173 individual transactions took place during this time, having a value of Rs.648.9 billion. Out of all the Governments, the most aggressive was the period between 2005 and 2009 during which, nearly Rs.335.12 billion were raised via 22 individual transactions. PTCL was considered the gem during this time, as it contributed 24% value of all transaction proceeds from privatization, highlighted in AKD research report. However, the last decade was not good in terms of privatization or private sale of public entities. The trend changed to selling shares of public companies on stock exchange, and the largest of such transaction was divestment of 41.5% government owned shares in HBL to public. Here is a list of entities that have been approved by Cabinet Commission of Pakistan for active privatization programme.

Active Privatization Programme

Entities

Status

1223 MW Balloki Power Plant

Transaction structure expected within 15 days

1230 MW Haveli Bahadur Power Plant

Transaction structure expected within 15 days

SME Bank Limited

Seller side due diligence completed

First Women Bank Limited

 

Services International Hotel, Lahore

Due diligence under process

Jinnah Convention Centre, Islamabad

Appointment of Financial Advisor under the process

Mari Petroleum Limited (divestment of remaining shares)

Auditor’s certificate expected in Oct’19

Pakistan Steel Mills

Appointment of Financial Advisor under the process                                                                     

Pakistan Engineering Company

Heavy Electrical Complex (HEC)

Appointment of Financial Advisor under the process

Sindh Engineering Limited (SEL)

House Building Finance Corporation (HBFC)

Appointment of Financial Advisor under the process

Pakistan Re-Insurance Co. Ltd. (PakRe)

Oil and Gas development Company Limited (OGDCL)

Appointment of Financial Advisor under the process

Pakistan Petroleum Limited (PPL)

Appointment of Financial Advisor under the process

Guddu Power Plant (747 MW) – Central Power Generation Company Ltd – CPGCL (GENCO – II)

Appointment of Financial Advisor under the process

Nandipur Power Plant (425 MW) – Northern Power Generation Company Ltd – NPGCL (GENCO – III)

Appointment of Financial Advisor under the process

Source: Privatization Commission Govt. of Pakistan

 

When we look at the current list of privatization entities and compare the same with publicly list companies, we’ll notice that Government is favoring those entities whose shares are already listed. This is perhaps due to the fact that less time and resources are needed to float the remaining stake of these companies in the market.

Since borrowing funds in Pakistan has become a luxury owing to high interest rates, investors are weighing this factor to take their funding decisions more wisely. In addition to these macro variables, a long list of documentations are required to invest in capital market, such as regulatory approvals required by CDC, a flare-up between Pakistan and India, US-Afghan peace process ending without any deal etc., have increases the risk of investment in capital markets.

Privatization is a complicated mechanism which has to be dealt with delicacy. Before privatizing an enterprise, a cost-benefit analysis (CBA) is usually conducted to gauge trustworthy buyers (party which doesn’t strip the assets and sell the real estate). Moreover, sequencing and timings, competitive restructuring, regulatory reforms, preferences given to loss making enterprises, investment climate and public interest goals are also taken into account.

Thus, there is no benchmark that can showcase success of current divestment approach of government, but anything that government would do in this regard is at risk because of fiscal imbalance concerns. Additionally, there is risk for government’s current divestment approach, mainly emanating from higher spending than tax collection by government.

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Posted on: 2019-09-23T13:08:00+05:00

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