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The Privatization Commission has to revisit and redefine its entire privatization program rather than encountering one troubled transaction after another

Nov 21 - 27, 2005

The present regime had chalked out a very ambitious privatization program right from the beginning in 1999. Initially it was led by Minister for Privatization, Altaf Saleem and subsequently taken over by Dr. Abdul Hafeez Shaikh. Till early this year one transaction after another was concluded in a swift and amicable manner. However, after stock market debacle in March the whole process seems to be running into snags. While some other transaction has been concluded rather comfortably, two transactions namely KESC and PTCL faced serious problems. While the government has succeeded in convincing the second highest bidder of KESC to match the price of Kanooz Al-Watan in case of KESC, the negotiations are still going on to convince Etisalat to take control of PTCL.

It is often said that the government was keen in selling profitable entities rather than getting rid of loss making entities. KESC was certainly a difficult transaction where the government has to make compromises to make it a saleable entity. While some of the analysts were critical of the low price quoted by Kanooz Al-Watan, many were surprised. They were never sure how this strategic investor would manage the problematic entity, the Karachi Electric Supply Corporation. Therefore, when the government didn't get the payment from Kanooz Al-Watan no one was surprised. It is commendable that Privatization Commission continued its efforts and finally succeeded in convincing the second highest bidder to match the price quoted by Kanooz Al-Watan. It is heartening to know that the new strategic buyer has paid $100 million and the remaining amount would be paid according to the terms of sale.

Similarly some of the critics were surprised at the bid offered by Etisalat for Pakistan Telecommunication Company. Not because of the absolute amount committed but by the difference between the top three highest bids. Some of the critics were surprised that if some of the global operators could offer low price how come a smaller regional player could offer such a fabulous bid. However, according to some unconfirmed news soon after the bidding a couple of senior managers of Etisalat were sacked for offering an unrealistic bid for PTCL. At the same time one extension after another was given to Etisalat for making the payment. But, the payment never came in and discussions are going on between the Privatization Commission and Etisalat on the fresh terms and conditions submitted by Etisalat. Many analysts fear that the Commission would finally bow down before the pressure of Etisalat to save the deal.

Some of the analysts are also of the view that the repeated extensions given by the Commission to Etisalat clearly suggest that the efforts being made can only be termed as 'face saving' because Etisalat has virtually defaulted and its security deposit should have been forfeited soon after expiry of the deadline. They also say that like Kanooz Al-Watan, Etisalat was ready to take rather a smaller hit rather than taking management control of PTCL. There is another group, which says that Etisalat does not have the money to withstand its commitment. To substantiate their point of view they refer to the new terms and conditions, particularly raising funds through pledging PTCL shares. Although, it is difficult to accept this point of view, the circumstantial evidences force the analysts to reach the same conclusion.

However, it is the most bitter pill because looking at the assets of the royal family of Abu Dhabi and their global business interests, it is just impossible to believe that they don't have the funds to withstand commitment made on their behalf. Saying this many analysts are of the view that being prudent businessmen they should not be ready to withstand a wrong commitment made by their employees. They have a right to pay the penalty and get themselves free from a bad commitment. If one accepts this rationalization than it seems true that whatever is going on is face saving effort of the Commission because they don't want this transaction to be classified as 'failed' effort.

Looking at the track record of the Commission the nation may be ready to condone two bad transactions. However, the nation would be right in demanding from the Commission better performance in the months to come. As presently the Commission has been following two-tier policy 1) transfer of management control through sale of substantial shareholding and 2) divestment of government holding under 'Privatization for People' program. The policy is good as well as very practical but certainly needs a thorough review in the light of above stated two difficult transactions. The history tells that nations learn from their past mistakes and so should Pakistani economic managers.


The Privatization Commission has received a total bid amount of Rs 3. 204 billion from Bestway Cement for acquiring 85.29 % shares (10,507,934 shares) of Mustehkam Cement at the rate of Rs.305 per share. The bidding was held and participated by the parties in September this year after depositing the earnest money of Rs 75 million each. The parties included 1) Bestway Cement, 2) Maple Leaf Cement Factory and 3) Three Stars Hosiery. During the final open bidding round Three Star Hosiery Mills improved its offer to Rs 260 per share and Mapel Leaf Cement Factory gave offer of Rs 300 per share. Bestway Cement gave the highest offer of Rs 305 per share. Mustehkam Cement is a public limited company listed on the stock exchanges. The original unit commenced its production in 1966, while the new unit started commercial production in 1981. The company produces portland cement. The plant is located at Hattar, Haripur, and has a rated capacity of 630,000 tons per annum. The unit holds approximately 444 acres of land, while the factory area is approx. 146.3 acres. It was closed down in 1999 and employees were paid off GHS/VSS. The government has decided to assume SCCP loans of Rs. 1.239 billion as on June 30, 2005.

The consortium of Hasan Associates has paid the first installment of US$100 million out of the total bid amount of US$ 265 million, and it is expected to pay the balance amount of US$ 165 million by the end of November. Management control of the utility will be handed over to the consortium after the payment of the final amount. The Commission has issued the Letter of Acceptance (LoA) to the consortium. Hasan Associates has announced its intention to invest US$ 500 million in KESC over a period of three years. During the first phase the buyer will invest US$ 75 million for revamping the existing facilities. The measures taken for the interests of the workers include offering 20 % increase in salaries to contract employees and offering 10 % shareholding of KESC to the employees at a discounted price. The Hasan Associates consortium was the second highest bidder for KESC in the bidding held on February 4, 2005. However, once Kanooz Al-Watan failed to deposit the bid money within the stipulated period it was asked to match the offer. The Cabinet has accepted the improved offer of Rs 20.24 billion of Consortium of Hasan Associates for Karachi Electric Supply Company.

It is hoped that the privatization of KESC will bring better services through professional management, new investment in infrastructure and technology. However, overnight changes in the service provided by the utility should not be expected. KESC has been running into losses for over a decade and last year the government provided Rs 12.5 billion subsidies to the utility to keep it running. The dependable capacity of KESC is estimated at 1387MW as against installed capacity of 1756MW. Last year KESC's own generation was 9304 million KWH and it purchased 4289 million KWH. The utility generated revenues of Rs 39.8 billion in 2005 against Rs 38.3 billion in 2004. However, expenditure side showed a major increase of 10.9% on account of higher cost of fuel and power purchased from WAPDA. Expenditures in 2005 were recorded at Rs 51.7 billion against Rs 46.6 billion in the previous year. Transmission and distribution losses of the company have been brought down but still remained as high as 34%.

The Privatization Commission Board on June 18th recommended the highest offer of nearly US$ 2.599 billion to acquire 26 percent shares and management control of the PTCL received from UAE's Etisalat for approval of the Cabinet Committee on Privatization. The offer was made at per share bid price of $1.96. In rupee terms, the total value of 1.326 billion (26 per cent) shares came to Rs 155.158 billion, highest in the history of Pakistan, at a rate of Rs 117.01 per share. Thus, the total value of the company was placed at about Rs 597 billion. The second highest bidder, China Mobile of China, offered a bid price of US$1.06 (Rs 63.48) per share or US$1.409 billion (Rs 84 billion) for 26 percent shares, which was about 84 percent lower than the highest bid. It estimated total value of the company at Rs 323.74 billion. The third bidder, Sing Tel of Singapore, offered a bid price of US$0.88 (Rs 52.54) per share or about US$1.167 billion (Rs 69.663 billion) for 26 per cent shares. This bid was about 80 percent lower than the highest bid. Sing Tel valued the whole company at Rs 267.9 billion.

It may not be wrong to say that the Privatization Commission as well as the economic managers were carried away by the success achieved in a very short time. However, one tends to get the feeling that they were not able to fully understand the difference between the enormous response to public offering of a listed company and finding a credible strategic investor to entities like KESC and PTCL. Similarly, finding a strategic investor for a cement plant or even a bank is very different from identifying a strategic investor for a public utility and also convincing it to take over its management control. Both the KESC and PTCL suffer from some inherent problems and unless these are identified and properly dealt with their prudent management remains a serious issue. Therefore, it may be said that Privatization Commission has to revisit and redefine its entire privatization program rather than encountering one troubled transaction after another. Let all the transactions be put on hold till a new strategy is defined, properly scrutinized and tested.

It may be true that most of the attention of the government has been lately confined to rehabilitation efforts. However, the other pertinent issues, privatization being the most important, just cannot be ignored. The earthquake has made Pakistan the focus of attention of international community. It also provides an opportunity to project the economic strengths of the country as a preferred destination for investment.

While establishing a joint venture and then initiating a manufacturing business may take longer time, acquiring of state-owned enterprises through privatization enables the strategic investors to own a productive facility immediately. Keen interest of foreign investors in Pakistan's ongoing privatization process shows that the economic managers have done a fair job. As the country enters the next phase of conducting difficult transactions specific attention has to be paid to the intentions and credit rating of strategic investors.


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