Bigger strategic deals are very much in the sight

Feb 28 - Mar 06, 2005



Since its launch in the early 1990, Pakistan's bid to privatize state-owned enterprises has proceeded in fits and starts.  Despite privatization being a mantra for reducing the budget deficit and improving efficiency, until 2003 the country had only managed a couple of major deals though successive government had sold well over 100 state-owned units to private entrepreneurs in the past decade.

The first hallmark deal was the issue of global depository receipts for 9.8 percent of state-owned telecom monopoly PTCL and the sale of another two percent stake in the local market in 1994, raising about US$900 million.

The second major effort was the sale of a 26 percent strategic stake (followed by another 10 percent) in the 1,600mw Kot Addu thermal power plant to British conglomerate International Power for about $200 million.

Sporadic privatization in banking and finance, energy and manufacturing continued until 2002. In all, stakes in 121 companies were sold, generating about $1.3 billion for the national coffers.

But in 2003, the Privatization Commission made 697 million dollar or more than half of its total achievements in 13 years, giving a strong boost to what was looking like an extremely lacklustre programme.  It's going on in quite a swift way ever since. 

However, a raft of negative factors had been hobbling the commission. The absence of a legal framework defining privatization's limits, some questionable deals, frequent changes of government and the result confusion over policy, all contributed to the drift. A deteriorating law and order situation as well as strong resistance from unions and politicians only made matter worse.

International Power, for instance, had to fight a legal battle for over six years to establish the legitimacy of its deal to buy into Kot Addu Power. Several leaders of the commission faced lawsuits and charges of taking kickbacks. Widespread pre-privatisation layoffs at overstaffed organization cost former prime ministers Nawaz Sharif and Benazir Bhutto much of their earlier popularity. 

But with most of the spadework having been done by the government so these two former premiers, President Pervez Musharraf was able to move things along after he seized power.

In 2000, the government has promulgated an ordinance legitimizing the Privatisation Commission and defining its power to assist the government in formulating and implementing its divestment policy.  In addition, since the general election in October 2002, the present government has announced a series of reforms that have furthered the deregulation and privatization process and kickstarted the robust privatization.

In December 2003, Pakistan sold a 51 percent stake in Habib Bank, the country's second largest bank, to the Aga Khan Fund for $389 million.



While waiting for foreign strategic investors to show interest in the assets on offer, the commission improvised a way to implement the plan rapidly. It decided to make initial public offerings to domestic investors. The commission raised more than $83 million through the sale of a 5 percent stake in the country's largest hydrocarbon explorer, the Oil and Gas Development Company. A larger, strategic stake could be sold this year while another lot of shares is scheduled to be offered to public. The Pakistanis went after vehemently when another such IPO of Pakistan Petroleum Limited (PPL) was announced, which was heavily oversubscribed. Now IPO of government shares in Kot Addu has created unprecedented euphoria. The commission offered 20 percent shares of the government to general public and these 317,000 shares are said to be chased by the applicants four times bigger in number. This is a great opportunity to take an ownership stake in a highly profitable company with a long and respectable operational track record.

The total number of small shareholders in different state-owned enterprises would reach to over 0.7 million that itself is a hallmark for the country where capital market had remained unreachable for a commoner.

This year could be rated as year of privatization as bigger strategic deals are very much in the sight. Though, only one considerable deal has been made Karachi Electric Supply Corporation bigger offers are likely to come during current fiscal.

The current year's sales programme includes Pakistan State Oil, the country's largest oil marketing company, with the planned transfer of a 51 percent controlling stake and 51 percent stakes in PPL. The process to privatize the Pakistan Telecommunication Company Limited (PTCL) will begin after the company's restructuring, which is expected in one month.

With a long list of public sector organizations to be privatized, the commission also plans to sell Pakistan Steel, Pakistan International Airlines, and other local giants. The country has committed itself to using 90 percent of the privatization proceeds to retire foreign debt of some $35 billion. It would be intriguing to see whether the next public sector upliftment budget would reflect it or not.