General public should be offered more shares of state owned enterprises

Mar 14 - 20, 2005



The overwhelming response to initial public offering of Kot Addu Power Company should be an eye opener for those who were critical of government's divestment policy. They opposed the divestment policy on the premise that the market did not have the appetite. Earlier they were also proved incorrect when National Bank, OGDC, SSGC and PPL, offerings were oversubscribed. Keeping in view the tremendous public response, the government must revisit its Privatization Policy.

The government is following two pronged policy 1) divestment of part of its holding in public sector enterprises and 2) sale of majority shares along with transfer of management. Divestment option has been exercised in case in National Bank, SSGC, PIA, PPL and KAPCO. Shares of National Bank were offered in three tranches, the first being at Rs 10/share and last on at Rs 46/share. Shares of SSGC, PPL and KAPCO were offered at premium and the response was tremendous. The three major successful transactions are sale of majority shares along with transfer of management of United Bank, Habib Bank and KESC. The other major transactions in the pipeline are PPL, PSO, PTCL, OGDC and National Refinery.

Some of the critics say that sale of United Bank, Habib Bank and KESC can only be termed 'distress sale'. Their point of view is that government has sold these entities much below their 'fair price'. They also fear that government is bent upon to sell PTCL at a throw-away price. They also say that in order to keep PSO privatization hype, the government is distributing huge dividends. To ensure higher dividend, POL consumers are being forced to pay punitive prices.

However, some of the analysts are of the view that the response to call for privatization of PTCL, PSO, PPL and National Refinery clearly indicates the keen interest of foreign strategic investors. These investors are not buying these entities on the basis of present value. They are eyeing the enormous growth potential of these entities. Even if the sale of entities is termed distressed sale, it will be a great achievement. Entry of global giants in Pakistan can open the floodgate of foreign direct investment.

To support their point of view they refer to PTCL. The company, under the state control has not been able to exploit the market potential. For example Mobilink has a client base, which is many times the size of Ufone subscribers. While PTCL has not been able to exploit the WLL potential, the new entrants have got a large share of the market in a short span of time. This is only because of the mindset of management of PTCL. Though, there has been a change but the decision making process is still too slow and full of bureaucratic hassles.



The same is also true about the KESC. The commitment of the successful bidder to inject additional equity is clear indication of the economic fundamentals enjoyed by the KESC. The peak demand of electricity in KESC's franchise area is almost double the existing generation capacity. Bulk of the T&D losses are due to theft and highly depleted transmission and distribution network. If the existing infrastructure of KESC is revamped, its earnings can be increased substantially. The KESC has not been able to do this only because it did not have the resources.

Some of the analysts are of the view that the government may continue its efforts of finding strategic buyers for the 'big' entities, but in the mean time must off load more shares of the companies. It will help in achieving various objectives 1) reducing government's holding in these companies and sharing the benefits with local investors, 2) gauging the value of these entities based on the quoted prices to arrive at reference price for ultimate privatization and 3) broadening the shareholders' base in Pakistan.

To establish the validity of their view they refer to public offering of shares of National Bank, SSGC, OGDC, PPL and KAPCO. To further dilate they quote the offering prices of the three tranches of national Bank. While the first offer was at par value, the third offer was at Rs 46/share. All other offering were at premium but the response was unprecedented.

They also say that offering of up to 25% shares of state owned enterprises also supports the private-public partnership strategy being followed by the government. The initial resistance against the divestment policy was based on the fears that market had limited appetite. However, the time has proved that the market suffers from acute shortage of quality scrips and their free float. Off loading of part of the holding will also help in containing the market volatility.

Market analysts say that some of the foreign fund managers have already made a debut and it is an appropriate time for divesting of government holding in the blue chip public sector companies. Once they acquire even a small percentage and know the companies in detail, they would also start looking at other listed companies.