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Special Report
Hubco Shareholders' Returns: A Promise That Did Not Hold Out


Corporate Profile
Science & Technology
Special Report

"This article would set the record straight towards some of the accusations that it addresses"

By Dr. Anjum Siddiqui
Senior Advisor & Economist
The Hub Power Company Ltd.
Sep 18 - 24, 2000

The Hubco Project remains mired in controversy since its media trial started in early 1998. When one sifts the wheat from the chaff, it surfaces that the facts are quite contrary to the numerous allegations appearing repeatedly in the media. Doing the media rounds are not only ever changing allegations of corruption but also the misinformation that (i) Hubco has paid very high dividends to its shareholders and (ii) Hubco Sponsors have already taken all their money out and the rest of the returns will be play money.

Public perception in respect of such allegations should not be based on hearsay and suspicion but on hard core data on equity injections and dividend repatriation a data set, which is available with WAPDA, GoP and Hubco and which, is presented below.

Were Hubco Dividends the Highest?

The declaration in February 1998 of a 70% dividend of Rs. 7 for a face value of Rs. 10 per share has been referred to as yet another "evidence" of shareholders trying to take all their money out. An analysis of the dividend payouts of the Karachi Stock Exchange (KSE) companies for the period 1994-98 reveals that Hubco's dividends were much lower than other companies. The ranking of the companies that paid 70% or more cash dividends in 1998 is presented below.

Hubco's Dividends Ranked Lower Than Other Companies

Cash Dividend in 1998

Lever Brothers Pakistan Ltd


Siemens Pakistan Engineering Company Ltd


Cherat Papersack Ltd


Rafahan Maize Products


Shell Pakistan Ltd


Fauji Fertilizer


Millat Tractors Ltd


Dawood Hercules Chemicals Ltd


Engro Chemical Pakistan Ltd


Ninth ICP Mutual


Pakistan State Oil




Source: KSE

In terms of 5-year averages for the dividends over the period 1994 to 1998-99, Hubco's average dividend is only 14% compared to the dividends of Lever Brothers 73%, Dawood Hercules 71% and PSO 64%. Thus, contrary to the widely propagated misinformation that Hubco's 70% dividend was the highest amongst listed companies, the fact is that 11 KSE-listed companies ranked higher than Hubco and 4 companies had dividends of 100% or higher.

Wapda's Flawed Analysis of Sponsors' Return

WAPDA has alleged that the Hubco Project Sponsors (National Power, Xenel, Entergy etc) have reaped enough returns and have already repatriated their equity injection of $148 million. There is no truth whatsoever in this allegation as revealed by an examination of the actual dividends paid out to the promoting project sponsors.

Project sponsors have only received one dividend in 1998 for a total amount of $70.7 million, which is, clearly less than the sponsors injected equity of $148 million. WAPDA would not accept this explanation. They assert that in the total shareholder return, the share premium of $86.9 million received by Project Sponsors in 1994 should also be included. According to WAPDA's arithmetic, the total Sponsors' return then becomes $157 million ($70.7 dividends + $86.9 million share premium) which is greater than the $148 million equity. Therefore, all equity has already been taken out in a very short time with dire consequences for WAPDA's cashflows.

There are two fundamental flaws in WAPDA's argument. The first flaw pertains to the definition of return. The risk premium was not a return given to shareholders from the revenues of the Hubco project. According to the textbook definition of "return", a return is specifically earned from the sales of goods and services of the project. Since the share premium did not come from the electricity sales of Hubco, it cannot be classified as a project "return".

Furthermore, the premium did not affect the project cost or the tariff and had no effect whatsoever on WAPDA's cashflows. It was simply a return received by Project Sponsors when they allowed their rights shares to be sold in the open market through the stock exchanges of Karachi and Luxembourg. The payment of the premium was entirely bonafide as at that time the Corporate Law Authority, WAPDA and Hubco had agreed that Sponsors needed to be compensated for the period 1987 to 1994 during which they had injected millions of dollars in equity and not earned a single penny in return. Those who purchased the shares in the open market perceived Hubco to be a blue chip stock and were willing to pay a premium of Rs. 3.26 per share for a face value of Rs. 10 per share. If Hubco was not perceived as a good stock, the Initial Public Offering (IPO) would have resulted in shares being sold for a discount and Project Sponsors would have to bear that loss. Would WAPDA have lamented that loss?

The second flaw pertains to the concept of the time value of money. Anyone knowledgeable about the basic principles of finance will realize that WAPDA is making a fundamental mistake by ignoring the time value of money and comparing the incomparable, that is, nominal dollar amounts of equity and dividends from different time periods. By the time value of money, an equity dollar in hand today is more valuable then a dividend dollar received tomorrow and the two "dollars" are simply not comparable.

To be able to correctly compare the equity and dividend amounts in question, an account has to be made for the loss in the value of money by discounting future dividends. Such discounting would calculate a number for the present value (PV) of dividends and the PV of equity injections. Since both dividends and equity are in present value terms, only now a correct comparison of the two is possible. It follows that WAPDA's inferences on dividends based on comparison of nominal rupee amounts of different time periods are wrong and misleading. Using the correct methodology of discounting leads to the opposite conclusion that the Hubco Sponsors have not recovered their equity actually they haven't recovered anywhere near their 18% return. The analysis based on Net Present Values (NPV) and Internal Rates of Return (IRR) is presented below.

The Net Present Value Approach: In any project, equity injections are made over a period of time. Similarly, dividends are reaped over the project life and these nominal dollar amounts are not comparable due to the problem of the time value of money of different time periods. Discounting the stream of dividends and equity solves this problem by using an appropriate discount rate (an interest rate). The chosen discount rate depends upon the investor's perceived risk assessment of the project. The higher the riskiness of the project, the higher the chosen discount rate. In simple layman's parlance, the discount rate is the required return from a risky project.

Using 1987 as a start point of investment and a discount rate of 10%, yields the following results: PV of Equity = -$86.75 million, PV of Returns = $68.09 million and NPV of Investment = -$18.66 million.

At the arbitrarily chosen 10% discount rate the Sponsors cumulative returns in 1987 dollars are less than the cumulative value of the equity injections, which manifests itself in a negative NPV. The interpretation of the negative NPV is that the Sponsors put in more than they recovered from the project (in terms of 1987 dollars)- a finding contrary to the media hype of excessive returns. A positive NPV would have indicated that the Sponsors have been better off as the PV of the returns would have been greater than the PV of the equity.

Had we used the 18% discount rate which was the investor's required rate of return for a project of such riskiness, the NPV would have been even more negative and the investors would have lost out even more in terms of foregone opportunity cost.

The Internal Rate of Return (IRR): It is alleged that Hubco Sponsors have earned a high rate of return in terms of IRR. Once again, as is the case with other allegations, this allegation too has not been supported by any evidence on IRR calculations. At the time of public listing in 1994, Hubco shareholders were promised an 18% real dollar rate of return. Has the promised return been realized? Was the return 18% per annum or was it 18% over the project life with fluctuations in the various years of the project life?

The IRR graph based on the Tariff Model of the Hubco Project reveals that the return was 18% over the project life and not 18% each year over the 30-year life of the project. In the initial years the return (IRR) on the Hubco project is low as the project earnings from the sale of electricity to WAPDA are largely expended in debt payments. As the debt gets paid off, more cash is available for distribution in dividends, correspondingly the shareholder returns increase. It should be made clear that this IRR graph is based on the expectations of revenues based on the original PPA. It shows no effect on the IRR of any possible changes in the contract currently under discussion between Hubco and WAPDA.

What exactly is the IRR? Is it a simple measure of a project's return calculated by subtracting the equity investment from the dividend cashflow and calculating a percentage return? It certainly isn't the latter. The IRR is a more popular and common method to analyze project returns whose basic rationale is to find a single number that summarizes the merits of the project. The IRR, a % number, does not depend on the discount rate (interest rate) that investors are seeking for similar risk projects. It is a number, which is intrinsic or internal to the project and does not depend on anything except the cash flows of the project.

In the layman's language, the investment rule using the IRR criterion is that investors would not invest in the project if they perceive that the expected cash flows from the project would not yield the return that they require from projects of similar riskiness. Or in other words there will be no investment if the IRR is less than the discount rate for projects of similar riskiness.

Is it correct that the Hubco Sponsors have earned an 18% dollar IRR on their equity investment? Our NPV analysis should immediately negate any such inference. Recall that we got a negative NPV from the project returns received to-date. The fact is that the Sponsors have only earned less than 2% dollar IRR over the period 1987 to 2000.

Return of Local Shareholders

What has been the return todate of the shareholders who purchased shares at the KSE at the time of initial public offering in 1994? For an investment of Rs.13.26 per share in 1994, a dividend payoff of Rs. 7 per share (70%) in 1998 and an equity redemption of Rs. 10 face value in 2000, the $IRR= -5.9% and Rs. IRR= 4.9%. This compares unfavorably with the return on safer bonds: the return on the safe 5-year US Treasury Bills is 6.05% (in dollar terms) and on the Defense Savings Certificates is 15% (in rupee terms). Had the investors redeemed their shares at today's market price of Rs. 20 per share instead of the Rs. 10 face value, the dollar return would have been around 3% and the rupee return 14% and they would have still earned less than the bonds. Economic theory tells us that the return on safe investments should be lower than the return on risky investments.

Local Investors Earned Negative Real Dollar Returns











Equity Returns

$IRR = -5.9%









Rs. IRR = 4.9%









Bond Returns

$IRR = 6.05%









Rs. IRR = 15%









The talk of a high return evaporates to nonsense when we examine the data on prices and returns. The data shows that for today's (September 2000) price of Rs. 20 per share, the return for domestic investors is 3%. If investors were infact earning the 18% dollar return, the price today should have been Rs. 54/share.

Hubco Share Price & Local Shareholder's Return









































Has Hubco Been a Good Investment?

Yes and no, depending on which time period we are looking at. From 1994 to May 1998, the Hubco share consistently outperformed the market by a factor of 539%, but after 1998 shareholders' fortunes dwindled due to the IPP crisis in which the wrath of the establishment was particularly directed at Hubco. This resulted in the Hubco share underperforming relative to the KSE index by a factor of 68%. The initial exponential increase in the Hubco share price was due to the fact that it was perceived all along to be a blue chip stock with an 18% expected real dollar rate of return. No wonder that the initial public offering was oversubscribed and the share sold at a premium of Rs. 3.26 over the Rs. 10 face value (see Hubco Event Chart). After its flotation in December 1994, the Hubco share price hit a high of Rs. 64 in 1997. The increase in the share price was reflective of the project commencing its commercial operations ahead of time. The Company's fundamentals were good and WAPDA had till that point in time been honoring the Hubco contract in letter and spirit.

The slide in the Hubco share price started with the Corrupt Business Practices Ordinance, which was particularly directed at Hubco. The Ehtasab Bureau's anti-Hubco stance, FIA's raids on the Head office and power plant, reduction in Hubco's revenues by the Lahore High Court order, WAPDA & Ehtasab Bureau's 'verdict' that the Hubco PPA was invalid, the commencement of arbitration by Hubco and the GoP's rescinding of Amendments 1 & 2 were other notable factors causing the Hubco price to plummet and which was reflected in the general KSE slide. To make things worse, the nuclear blast of May 1998 and the freezing of the foreign currency accounts eventually broke the camel's back and created the negative circumstances for the huge fall in the KSE Index and alongwith it the Hubco stock declined to an all-time low of Rs. 8.3.

Come October 1999 and the market greeted the new military government with renewed optimism. The Finance Minister's resolve to solve the IPP crisis was manifested in a pre-resolution rally which saw the stock moving up from Rs. l9/ share in June 1999 to Rs. 29/share in March 2000, a gain of 52%.

If all had gone according to the original contract, the discounted cash flow IRR should have been 18%. However, the ground realities are different as Hubco and WAPDA are in a state of dispute, which would only be resolved through a re-negotiated contract with a lower project IRR than the original 18%.

Note that the 18% return was an expected return and not a guaranteed return. The 18% return was on the assumption of ceterus Paribus (meaning that all other factors remained the same). And we know very well that this never happens. Infact events have revealed one major assumption going wrong, that WAPDA would honor its contracts in letter and spirit. The one saving grace with Hubco is that it has a well-maintained power plant operated to the highest standards of efficiency and safety given the technology in use. It also has a capable management team and Board of Directors, which is concerned with shareholder returns. That by itself should instill enough investor confidence in the project.

The promised return would indeed have been earned had WAPDA not reduced its payments to Hubco. Todate, WAPDA owes Hubco Rs. 15.6 billion in arrears for the Capacity Payments Price (CPP) and other payments from which the Company was supposed to pay its "promised" 18% return to its shareholders.


The article effectively falsifies the misinformation that Hubco shareholders have earned high dividends and that they have reaped abnormal returns. Infact what was touted to be a top blue chip stock has to-date earned less than 2% real dollar rate of return for Project Sponsors. Local investors who purchased Hubco shares in 1994 have fared slightly better with approximately 3% dollar returns, if they sell their shares at the current market prices.

It is most unfortunate that IPPs who were once hailed as the pallbearers of foreign investment have been subjected to false accusations, which can never be supported by facts and hard data. Hopefully this article would set the record straight towards some of the accusations that it addresses.

Dr. Anjum Siddiqui

Dr. Siddiqui is an Economist and currently the Hub Power Company's Spokesperson and Senior Advisor on Financial Risk Management.

Previously, Dr. Siddiqui has been a Lecturer at the Graduate School of Business & Economics at the University of Auckland in New Zealand and is Visiting Professor at the Institute of Business Administration (IBA) at the University of Karachi.

Dr. Siddiqui specializes in Macroeconomics, International Trade & Finance and in Project Financing of large multi million dollar projects. He has published many articles in prestigious international journals of economics e.g. International Economic Journal, New Zealand Economics Papers, Pakistan Development Review, Indian Economic Journal etc.

Dr. Siddiqui is an Associate Member of the Federal Reserve Bank of San Francisco and is on the Editorial Board of International Journal of Business Studies published from Australia.

Dr. Siddiqui has been a consultant to the Reserve Bank of New Zealand, ABN-AMRO Bank, Leasing, Power and Gas Companies. He has also lectured senior staff of the State Bank of Pakistan and has worked as a member of the Prime Minister's Committee on "Monetary Policy and Balance of Payments" at the State Bank of Pakistan.