Privatization: Is it worth the hurry?

September 11, 2019 (MLN): As part of the IMF programme, talks of privatisation have resurfaced as the government has firmed up a plan to sell 7% stake (301 mln shares) and 10% stake (227 mln shares) in two of its majority-owned E&P players, OGDC and PPL.

This divestment would reduce the government’s shareholdings to 60.5% (OGDC) and 57.5% (PPL), signifying that the sole purpose of transaction is to raise funds, rather transfer of management to improve operational efficiencies, as the government will remain the majority shareholder and retain management control, says a research report by EFG Hermes.

This move by the government amid political instability and economic uncertainty,has popped the question that how much can the government raise and is it worth the hurry?

The first foremost concern stated in the report on the proposed transaction is, “Is it really the ideal time for the government to divest their stakes in the two companies?"

As the stock market has had a rough ride for over two years, where not only political instability and uncertainty over the IMF programme contributed to the dismal performance, but aggressive macro rebalancing also took its toll. This has declined stock prices considerably as OGDC/ PPL’s share prices are down 18/29% YTD, on top of the 21/27% decline, respectively, last year, said the report.

The second major concern highlighted in the report is, “How much money will the government raise and how significant it is in the context of the overall deficit?"

As the major objective of this divestment is to raise funds, having said that, the proposed stake sale would fetch cPKR60 bln for the government considering last closing price, which represents c1.8% and c4.6% of FY19’s fiscal and primary deficit respectively. This suggests that it wouldn’t really make any significant impact in the bigger picture, the report added.

The third main concern in the report is, “If USD fund raising is the target, will the stake sale attract foreign interest?”

The fund raising through the stake sale could actually be of more significance if foreign investors buy the stake. Nonetheless, due to the not so enticing production growth in the sector, foreign investors have remained net sellers.

Moreover, the stock prices of OGDCL and PPL are likely remained under pressure during this secondary public offering process. As free float for both the stocks will increase, and this could create a supply overhang. Hence, the potential discount could be even higher to the already low valuations of the stock, the report highlighted.

In conclusion, considering raising funds as primary purpose from the proposed divestment, it is prudent to say that this will not make a material change in Pakistan’s fiscal position. However, if foreign interest turns out strong in this transaction, foreign currency inflow will be meaningful and would be more positive given how important the forex reserve build-up for the government is right now.

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