KEY UPCOMING TRANSACTIONS
The job is not easy but the commitment can help in achieving the target
By SHABBIR H. KAZMI
Mar 13 - 19, 2006
One may write pages and pages on the ongoing process of privatization in Pakistan. People at the helm of affairs may also boast about the success. However, the real test of the privatization is in the completion of some of the forthcoming transactions.
To begin with it is necessary to discuss the much talked about transaction, privatization of Pakistan State Oil Company (PSO). In a pre-bid meeting held at Karachi, important issues regarding privatization of PSO were discussed. The meeting was chaired by Tahsin Khan Iqbal, Secretary of Privatization Commission of Pakistan. The bidders attending the meeting were 1) Abu Dhabi Group of UAE, 2) Al-Ghurair Group of UAE and 3) Consortium of Al-Jomeih Group of Kingdom of Saudi Arabia and Al-Noor of Kuwait. They have already completed the due diligence. The Government of Pakistan (GoP) holds approximately 54% stake in PSO, including direct and indirect holdings through GoP owned institutions. J.P. Morgan is assisting the GoP as the Financial Advisor on the privatization of PSO.
The power sector has attained importance after the privatization of the Karachi Electric Supply Corporation (KESC) and this sector needs new impetus through fresh investment and privatization of existing facilities. Though, the transaction looked impossible at one stage, it was completed ultimately by convincing the second higher bidder to meet the offer of highest bidder. The next entity being focused is Jamshoro Power Company (JPC). A pre-bid meeting was held under the chairmanship of Dr. Abdul Hafeez Shaikh, Minister for Privatization and Investment. Six pre-qualified firms have completed the due diligence of JPC. These include 1) Al-Abbas Power Generation, 2) Engro Chemicals Pakistan, 3) National Power Generation and Supply Company, 4) China National Machinery and Equipment Import and Export Corporation, 5) Metro Securities and 6) United Bank / Siemens / GAZ Power Consortium. The participants, except 1 and 2 attended the meeting. They were informed that the bidding for JPC would be held by June this year.
JPC, located at Jamshoro in Sindh Province, was established as a result of the unbundling of Pakistan Water and Power Development Authority (WAPDA). It was to take over all the properties, rights, assets, obligations and liabilities of three thermal power stations namely, Jamshoro, Kotri and Lakhra with a total nameplate capacity of 1204 MW. The company was incorporated in August 1998 as a public limited company. Subsequently in June 2002, the Lakhra Power Station with a nameplate capacity of 150 MW was spun out of JPC and a new company, Lakhra Power Generation Company was established. JPC has been granted a Generation License by National Electric Power Regulatory Authority (NEPRA) to engage in generation business.
The GoP intends to sell 51% shares of JPC along with management control to a strategic investor or a consortium of strategic and financial investors. JPC facilities are connected to the NTDC grid, enabling it to inject power into the grid for supply to major load centers in the Southern part of the country including Karachi. JPC facilities compete with other grid connected power plants in Pakistan for position in the merit order including hydel plants and would remain important part of overall generation portfolio of Pakistan.
Growing import of various types of fertilizers forces the planners to take some corrective steps. One such step is privatization of fertilizer units working in the public sector. The successful sale of Pak Saudi fertilizer and transfer of management to Fauji Fertilizer Company gave courage to sell off other but smaller companies. The Privatization Commission has received the highest offer of about Rs. 20 billion from Ibrahim Fibers for the purchase of Pak American Fertilizers (PAFL). The bidding proceeding was chaired by Dr. Abdul Hafeez Shaikh Federal Minister for Privatisation and Investment. During the first round the bidders dropped their sealed bids in the transparent box, which were opened and read over by the representatives of the print and electronic media present over there. According the details Ibrahim Fibres offered the highest bid of Rs 667 per share making a total close to Rs 20 billion for total number of 30 million shares, AZGARD-9 were second with a bid of Rs 537 per share with a total of Rs. 16.11 billion, Kohinoor Textile Mills and Associates offered Rs 453 per share with a total offer of Rs.13. 59 billion and remained third while Nishat (Chunian) gave a bid of Rs 451 per share with a total of Rs.13.53 billion and Pak Arab Fertilizers remained the lowest bidder with an offer of Rs 371 per share with a total of Rs 11.12 billion. The second round was held for an open auction among the top three contenders but no bidder increased their earlier offers. PAFL is the first fertilizer manufacturing concern in Pakistan. It was established in 1959.
The PAFL is located at Iskanderabad (Daudkhel), District Mianwali and produces 1050 metric tons of urea per day. PAFL is the subsidiary of National Fertilizer Corporation of Pakistan (NFC). Japan Bank of International Cooperation (JBIC) provided loan for setting up the fertilizer plant. The plant was commissioned in 1999. The old plant was closed down in 1997 and a new Ammonia/Urea plant commenced commercial production in 1999. The new plant is designed to produce 600 Ton/day Ammonia and 1,050 Ton/day urea. Both plants have been designed by TOYO Engineering Japan. Ammonia plant is under license from Kellogg International, USA, while urea plant is TEC's own. The plants are latest in design and most modern. The company also possesses over 11,481 Kanals of land, comprising 6,432 for factory, 2,818 for housing colony and 2,230 for experimental farm.
In the energy sector two transactions are being watched minutely. Some of the Indian companies have also expressed interest in participating in the bidding for Sui twins. While in London, the Secretary for Privatisation and Investment, Tahsin Khan Iqbal participated in a two-day road show with parties interested in acquiring Sui Northern Gas Pipeline (SNGPL) and Sui Southern Gas Company (SSGC). The show was also attended by the transaction manager and the representatives of Financial Advisers. The Secretary PC met with potential bidders from Pakistan, the Middle East, Asia, and Europe. In one-on-one sessions, he responded to the questions and provided insights on the investment opportunities in Pakistan and the sale process. As a consequence additional organisations committed to form consortia and submit statements of qualification by 11th March 2006. The Secretary PC expressed the commitment of Pakistan to a fast, efficient privatisation completed by the third quarter of 2006. SNGPL and SSGC are Pakistan's two integrated gas transmission and distribution companies.
Due to the increasing interest of parties to participate in the privatization of National Power Construction Corporation (NPCC) the PC has extended the date for submission of Expressions of Interest (EoI) and Statement of Qualifications (SoQ) up to 20th March 2006. PC had earlier invited EoIs and SoQs from qualified strategic investors having experience of handling similar large power projects on a turn key basis or consortia preferably in partnership with financially sound Pakistani companies. The GoP intends to sell 51% shares of NPCC along with transfer of management control. The advertisement in this regards was published in the national press in mid October 2005 with last date for the submission of the EOI and SOQ respectively 25th October 2005 and 30th November 2005. The Government may also offer a certain percentage of the ownership of NPCC to the employees of the company, in case they are interested.
The NPCC, currently rated amongst top contractors, is a specialist contracting outfit for turnkey management of Power Projects that include Extra High Voltage Transmission Lines, Distribution Networks, Substations, Power Generation Plants, Industrial Electrification, External Lighting of Housing Complexes etc. NPCC's major area of operation during the last three decades had been in the Middle East with concentration in Saudi Arabia. NPCC has successfully secured and completed projects valuing US$ 600 million.
The PC has also invited EoIs from qualified strategic investors interested in acquiring 56% shares of Faisalabad Electric Supply Company (FESCO) along with transfer of management control. It is a unique opportunity to acquire 56% equity stake and management control in Pakistan's first and one of the best distribution companies, being offered for privatisation. The FESCO is one of the electricity distribution companies created after the unbundling of the Power Wing of WAPDA. It serves approximately 1.8 million customers in the central region of the Punjab. The company with sales of about US $ 400 million has low distribution losses and high rate of bill collection. It may also be termed one of the best electricity distribution companies of Pakistan. Being in the heart of the industrial area of Pakistan, FESCO sells nearly half of its electricity to the industrial and bulk consumers.
The PC has received nine EoIs from prospective investors for the sale of minimum of 90% shares of Hazara Phosphate Fertilizers (HPFL), owned by the NFC. The unit is located at Haripur (NWFP) at 75 km distance from Islamabad. The factory is situated on 57 acres on developed land and includes factory, housing and other amenities. HPFL produces 90,000 metric tons per annum of Granular Single Super Phosphate (GSSP) and 30,000 metric tons per annum of Sulphuric Acid required for the production of GSSP. The plant was rehabilitated and re-commissioned in April 1999.
The Cabinet Committee on Privatisation (CCOP) has approved the Secondary Public Offering of 5 % shares United Bank with another 5 % green shoe option. The shares would be offered to the general public in two lots of 500 and 1,000 shares. The offering would be brought to the market shortly. It may be worth mentioning that initial public offering remained grossly undersubscribed. According to some critics it was only because of a policy decision.
Pakistan Steel Mills Corporation (PSMC) is also on the list of companies on privatization. The pre-qualified parties have completed the due diligence of the transaction through plant visits, physical and virtual data room. Five (5) pre-qualified parties include 1) Al-Tuwairqi Group of Companies, Kingdom of Saudi Arabia with Arif Habib Group of Companies, Pakistan. 2) Government of Ras Al Khaimah (UAE), 3) International Industries of Pakistan and Industrial Union of Donbass (Ukraine), 4) Magnitogorsk Iron and Steel Works Open JSC, Russia and 5) Noor Financial Investment Company of Kuwait. The PC has offered 75% shares of PSMC along with transfer of management control, on ' as is, where is' basis. A consortium led by Citigroup Global Markets is advising the PC on the sale.
PSMC is the country's largest and only integrated steel manufacturing plant, with an annual designed production capacity of 1.1 million tonnes. It was incorporated as a private limited company in 1968 and commenced full-scale commercial operations in 1984. PSMC complex includes coke oven batteries, a sintering plant, blast furnaces, steel converters, bloom and slab casters, billet mill, hot and cold rolling mills, galvanizing unit and 165 MW of own power generation units, supported by various other ancillary units. It is located 40 km Southeast of Karachi, in close proximity to Port Bin Qasim. It has access to a dedicated jetty, which facilitates import of raw materials; PSMC manufactures a wide mix of products, which includes both flat and long products. PSMC effectively enjoys a captive domestic market due to the prevalent demand-supply imbalance in the country's steel industry, where demand has historically exceeded local supply.
The PC has invited EoIs for the appointment of a Financial Advisory Consortium for the divestment of 10 % to 15 % equity of OGDC the country's largest oil and gas exploration and production company listed at local stock exchanges. This includes a simultaneous international offering through Global Depositary Receipts (GDR) and a domestic public offering. The GDR issue will be jointly led by at least two book-runners, who have demonstrable and proven capability for undertaking, managing and successfully executing such offerings. In addition the financial advisory consortium is expected to include at least one financial institution that has the capability and the track record to manage a domestic offering. The EOI should include the information regarding the consortium's basic technical qualifications comprising oil and gas equity raising, experience of Emerging markets, privatisations, listing in the stock exchanges of London and Luxembourg, equities research and distribution capabilities.
Sale of public sector entities is not the ultimate objective. The key objective is to make these enterprises economically viable, ensure fresh investment for expanding capacities and provision of goods and services at affordable cost. The task may not be easy but needs commitment by the government. The process has moved at satisfactory speed so far. As the forthcoming tractions are more complicated, the PC must avail the expertise it has gained over the years.