PRIVATIZATION OF PUBLIC SECTOR ENTITIES GOES ON
KESC sell-off deal signed with Hasan Associates for $340million
From SHAMIM AHMED RIZVI, Islamabad
Nov 21 - 27, 2005
Agreement for the Privatization of the Karachi Electric Supply Corporation (KESC) was signed with Hasan Associates representing ALjomiah Group of Saudi Arabia which will be paying $ 340 million (Rs. 20 billion) to strike the deal.
It may be recalled that the same amount was offered by a Saudi firm Kanooz Al-Watan in February last but it backed out due to some reasons. Hassan Associates a runner-up in the first bidding was persuaded by the authorities to match the bidding offer extended by Al-Watan.
The Privatization Commission, after almost 8 months of hectic negotiations with the runner up Hasan Associates, has finally succeeded in getting what it was offered in February last.
New buyers Hasan Associates have already paid 160 million US dollars and rest of the amount will be paid by the end of November to take over the management control of the KESC.
The PC has however not succeeded so far in the case of PTCL. UAE-based Etisalat had offered $2.598billion for 1.36 billion shares of the PTCL in June last but perhaps later changed their mind. The negotiations with them are still going on and the PC is trying to save the deal by offering more concessions to Etisalat. The last round of talks is going on in Islamabad these days. As a matter of fact the privatisation program has suffered serious setbacks during the year 2005. The two major deals PTCL and KESC developed flaws and the bidders in the two cases tried to pull out.
It also makes the country's planners look closer at the flaws in its privatisation program in which two deals have met a similar fate within one year. Prior to the PTCL setback, the KESC deal, also with an Arab buyer, fell through as the buyers pulled out of making their payments for the purchase of a 73 percent stake in the utility.
In the case of the PTCL deal, it is obvious that the buyers had second thoughts about the price at which they had agreed to buy the controlling stake in the company. Within days of agreeing to buy PTCL, the Etisalat management had second thoughts about the whole deal. In fact, this is one reason why there were some significant changes within Etisaslat as the company itself tried to come to grip with what it had taken on. Alarm bells started ringing earlier this month when feelers were thrown from Dubai about abandoning the deal. At the time, Etisalat took the line that it wanted to get more concessions from the Pakistan government for purchase of PTCL. There were reports that Etisalat was seeking permission to be able to pledge 26 percent stock with banks so that it could raise loans to pay the remaining dues.
With a delegation coming in for talks with the Pakistan government, it was decided to extend the payment date to end-October. At the time, Privatisation Commission officials assured that all was well and that all differences had been ironed out. It was, however not so. Many well connected people from Islamabad made representations to Etisalat to try to "arrange" some sort of compromise with the Pakistan government under which the UAE company could take over PTCL on more favorable terms.
It can be safely said that Etisalat had taken on more than it could chew. It is a monopoly that was frightened off due to the increasingly competitive Pakistani telecom market. The latest results of PTCL, which show lower earnings, ascribe the performance to greater competition in the market.
Analysts say that while high-level representations have been made to the UAE government, Etisalat, being an independent corporate entity has taken a decision based on some realistic on-ground assessment. And chances of complete re-negotiation are on the cards. Another option is re-auction, which would take six months or so to go through. At the time of the deal, Dr. Hafeez Sheikh had said that the price offered by Etisalat was" beyond our expectations". Maybe that was the problem in the first place. The price quoted was too high and had come about due to the closed option process.
KESC, which feeds electricity to Pakistan's largest city of Karachi, has a 1,750-megawatt electricity generation capacity. KESC's distribution network is spread over the entire southern port city of Karachi and its suburbs have a total covered area of around 6,000 square kilometers (3,729 square miles).
The company had been running up losses for over a decade and the government was providing an annual subsidy of over 12 billion rupees (about 200 million dollars) to finance its operation. "The privatisation of KESC will bring better services through professional management, new investment, technology and employment benefits," the commission said.
Addressing the signing ceremony of bid documents, Dr. Abdul Hafeez Shaikh, Federal Minister for Privatisation & Investment said it was another success for the government after sincere efforts of all the stakeholders as well as the support from the top level of the government including President General Pervez Musharraf and Prime Minister Shaukat Aziz. He said that ALjomiah Holding was a reputed name and their arrival in Pakistan was a good sign for the privatisation program of Pakistan. All the pervious governments had tried their best to improve the efficiency of the company in the largest interest of the consumers and this government was also motivated to bring the transaction to a concluding point, he added.
About the ongoing negotiations with Etisalat in Islamabad, the Privatisation Commission on Monday issued a statement, wherein it said that an official team of the Government of Pakistan had held a series of meetings with Etisalat Telecom in UAE during the last few weeks for the PTCL sell off and now another round was going to be held in Islamabad. The joint statement said that the talks in UAE were in continuation of the ongoing consultation concerning the current status of the agreement for acquisition by Etisalat of 26 percent equity stake in PTCL. It added that during the talks the two sides agreed, in principle, that it was in their mutual interest to proceed with the deal, and agreed to hold a round of meetings to discuss outstanding issues and to arrive at solutions satisfactory to both the parties. Later on, talking to newsmen at Prime Minister House, Privatisation Minister Dr. Abdul Hafeez Shaikh said that the two sides were committed not to divulge information about the talks, and that he would remain committed to the same.
It is, however, commonly believed that Etisalat, the UAE telecom giant, has linked materialization of Pakistan Telecommunication Company Limited (PTCL) transaction with relaxation of terms and conditions given in the bidding document for sale of the public sector entity. Etisalat wants amendments in the original bidding document to extend period of payment of remaining amount up to 20 months. "The top management of Etisalat also desires not to pay interest on the delayed payment of remaining amount saying that they have Islamic way of banking and will not pay the interest which will be accumulated on the delay," an official said. The official said the UAE based company also wants to register the PTCL shares at the UAE Stock Exchange. "All these demands tantamount to violating parameters of the bidding process," he added.
Besides Etisalat, the other two bidders for PTCL were China Mobile and SingTel, Singapore. China Mobile had offered a bidding price of $1.06 per share or $1.409 billion for the 1.326 billion shares representing 26 percent of the total 5.1 billion shareholding in the PTCL. The third bidder, SingTel, had offered a bid price of $0.88 per share or $1.1 billion for 26 percent PTCL stake with management control.
The Etisalat bid was on a much higher side. Initially, the management of Etisalat deposited 10 percent of the total deal money as required under the privatisation process. Due to gross negligence the then higher management of Etisalat, the owner of the company, took severe and serious steps by removing the Chairman along with the CEO. The consultants for the deal were also replaced. The new management since then is trying its best to extract further concessions from the government on various pretexts. Etisalat attempted to introduce a deferred payment structure. It asked for permission to pledge 26 percent stock with banks in a bid to raise loans to pay the remaining dues. The company also asked permission to list PTCL shares on the UAE market in addition to the Karachi Stock Exchange, and to gain various tax exemptions. The company pressed these issues on the grounds that their bid was much higher than other competitors.