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Non-industrial transactions are complex and require different execution

Feb 19 - 25, 2001

The pace and fate of efforts for privatization are largely dependent on the process and procedures followed. Pakistan was able to undertake privatization of industrial units at a relatively faster pace due to a less complicated process about 100 industrial units witnessed change of ownership. However, now the GoP intends to undertake sale of non-industrial units where the transactions are complex and require different procedures. One integral part of such transactions is appointment of credible financial advisors for the units being offered for privatization.

Before going further it is necessary to understand why these financial advisors are normally paid a higher fee. Financial advisor has a key role to play. Therefore, there is a need to appoint an advisor who has past record of concluding such transactions. Normally, the services include: advises on any needed restructuring, proposes a privatization strategy, carries out technical, legal, and commercial due diligence and a valuation of the unit, conducts all marketing activities (preliminary information memorandum and road shows) and assists in bidding and post bidding activities. Normally a financial advisor is a consortium of firms. The process for hiring of a financial advisor is little lengthy and technical. Though, the fees may appear a handsome amount, it is linked with the successful completion of the transaction.

Then comes the selections of mode of privatization. The various available modes are: sale of assets or business, sale of shares through auction or tender (with or without management control), public offering through stock exchanges, management or employee buyouts, and lease, management or concession contracts. Or the Commission can follow any other method as may deem necessary. In Pakistan, most of these modes have been used. The experience shows advantages and disadvantages of each mode followed in the past. The only lesson is to avoid any subsequent confusion/litigation in the future transactions.

The actual bidding procedure is lengthy and painstaking. First a reference price is calculated and approved by Board and CCOP. Then pre-bid conferences/seminars are held. At the same time mechanism for the bidding is determined. This could be sealed bids or open auction. Once the bidding is over, Board and CCOP approve price and bidder and Privatization Commission sends letter of intent to successful bidder. Then sales agreement between the Commission and the buyer is executed and management is transferred, if applicable. Cash and/or bank guarantees are submitted by the buyer before executing the sale agreement.

At this juncture it is necessary to make a brief review of some of the transactions executed in the past. According to some reports Privatization Commission was involved in nearly 850 suits and nearly 350 are still pending. This clearly indicates oversights and inadequacy of the process followed. Therefore, in the upcoming transactions efforts should be made to avoid any litigation. This can only be achieved by following a transparent process. Live transmission of bidding on television alone cannot ensure transparency.

According to Mateen Thobani, Advisor to Privatization Commission, "No two transactions are identical. Each transaction has to be structured in a way most suitable to attract the highest proceed. Pakistan has followed the procedure of 'up-front money' which may not be attractive in the future." Referring to KESC, he said, "It may not be easy to find a strategic buyer who is willing to put up a large 'up front money' but if the transaction is structured in such a way that the GoP gets the money over longer period, investors makes fresh investment and also makes profit, the total amount received over the years may increase manifold. However, this can only be done by an expert financial advisor who has concluded similar transactions in other countries."

Saying this much, one point must be kept in mind that WAPDA-HUBCO controversy has tarnished Pakistan's image. Though, there has been a resolution now, the legacy will haunt the GoP for a long time. Pakistan has to give the confidence to investors that its policies are firm and will continue despite whoever remains in power. In this respect the statement of an executive of a transnational company must be remembered by the policy planners. He said, "Give me the worst possible policies, my company would still be willing to work in Pakistan but do not change the policies overnight. We need transparent and predictable environment and do not look forward for sovereign guarantees."

This reminds many that the GoP has often not been able to withstand its own words. The Pakistan Electric Power Company (PEPCO) was incorporated in late 1998. It was given a two years time to complete the restructuring, corporatization and facilitate ultimate privatization of WAPDA's Power Wing. However, the time is passing by and investors may find some other proposals more attractive outside Pakistan.