PRIVATIZATION THROUGH STOCK EXCHANGE WINNING FOREIGN INVESTORS' CONFIDENCE

Privatization can also be used as a tool to provide some form of monetary incentives to lower income groups

By HARIS ZAMIR
Mar 13 - 19, 2006

The effects of the privatization process have been widespread on the bourses in particular and the overall economy in general. With foreign direct investment (FDI) flowing in, the investment scenario is becoming healthier and projecting a refined outlook to further onlookers seeking to invest in emerging economies like that of Pakistan.

It provides a feeling of trust and entices other major foreign investors inactive in this part of the world to turn their heads and follow suit. Money coming in can be better utilized in all walks of human life in the form of government spending utilized for poverty alleviation, infrastructure development, deficit servicing, loans repayments and even further investments all activities that eventually lead to a positive impact on the GDP which is an indicator of the growth in the economy. It also improves the efficiencies of the privatized entities since they get better managements looking forward to optimize process and escape the wastefulness brought about by the ever present political clout in the government-owned organizations.

Privatization can also be used as a tool to provide some form of monetary incentive to lower income groups by allowing only people belonging to such income cohorts to participate in the IPOs a very good example of which is a recent IPO in the UAE, that allows only teachers to participate.

The effect on the bourses can be seen in the form of increasing activities since privatization is deemed as a very healthy activity by equity investors. Entities in good shape are generally privatized at share prices higher than those that are being traded in the exchanges and when this happens, the prices in the stock market try to stretch to that level. This in turn makes the scrip relatively more attractive and hence the demand increases, further peddling the prices upward.

According to Dr. Hafeez Shaikh, Federal Minister for Privatization, the Commission has fetched nearly Rs 290 billion in three years period, while between 1990 to 2003, the government earned Rs 95 billion.

Azhar Javid, research analyst at WE Financial Services, said that the increase in activity, volumes and prices make a show of strength in the overall market and sentiments become elevated, finally leading to appreciation in other related and even non-related sectors. This is besides the increase in market capitalization brought about by an increase in the number of floating shares, which enter the market through the public offering of privatized institutions. Such movements in the market have been witnessed time and again and very well might continue to do so in the future.

The privatization process is still underway with many transactions luckily sealed and many more in the pipeline including that of the stock market heavy weight, PTCL. The buzz is that the uncertainty haunting this particular transaction is no more and would be finalized soon. PTCL's privatization will bring in Rs 155 billion of foreign investment in Pakistan over a period of a few years. The recent successful transactions have been that of KESC, fetching Rs 20.24 billion in November 2005 by selling stakes to a Consortium of Hassan Associates, Al-Jomaih Holding Co. & Premier Mercantile Services. The privatization of other listed entities like PSO, SSGC and SNGPL - all blue chips, is currently underway and is expected to come to its finalization within the first half of the current year.

It is being generally said as to why reputed foreign pension funds and investment companies shy away from Pakistan's high flying market. One of the main reasons is the little float available with the institutions and the general public which is believed to be not more than 20% of the total market capitalization of the companies listed at the KSE. Even today, it is the 'game of float', which is being played to take the proportions of shares away from the retail investors by artificially bringing down the prices of the fundamentally sound companies. However, the government under the auspices of the Privatization Commission can remedy this phenomenon, as more government holdings can be released from huge state owned entities in the country, this was narrated by Faisal Shaji, head of research at Capital One Equities.

This however is not a new exercise, as it has been done in the past in the shape of floatation of PTCL vouchers in mid nineties and than offloading of stakes from OGDCL, SSGC, NBP & PPL in early 2000 to create fiscal space for debt retirement. This has contributed massively to the market capitalization and overall free float position of the market. Moreover, the government is encouraging private enterprises and fair market competition by deregulating public utilities in order to bring more efficiency into the system. Giving management rights for smooth functioning of processes on modern lines and contribution in shape of taxes and dividends is the core idea behind the deregulation exercise of PTCL, KESC, HBL, ABL and UBL. On the supply side economics, deregulation of public utilities would go a long way in overhauling the system, balance-sheet restructuring and further capital injection. This would result in improving public services and long-term profitability as being envisaged in the case of PTCL and KESC.

"We have already seen turnaround of state-owned banks such as ABL and UBL in shape of reducing accumulated losses and stock of NPL," Shaji said. The case in point is that of UBL, where NPLs have been relegated to mere 2% of the total gross loans as against a massive 54% in 1999. Another case study is that of ABL, which had a negative equity base before SBP, auctioning in mid 2004. Today, with private capital is in place, the overall performance of the bank has made a turnaround wherein the accumulated losses have been reduced to a great extent.

Moreover, as the country is facing an energy shortfall, government is striving to deregulate E&P companies such as PPL and OGDCL as well as T&D companies of SSGC & SNGPL to institute modern technology into the sector in tapping energy resources.

Khalid Iqbal Siddiqui, head of research at Investcapital Securities said that the privatization through stock market has enabled the government to offload shares of various companies at attractive prices (given the situation at the time), thus earning good profits along the way and also broadening the shareholder base at the stock exchange. For example, the government's confidence get a boost from the IPO of NBP in 2001, and then offloading shares of Pak Oilfields, when it was unable to sell a 26% stake in a block deal.

The selling creates a benchmark for that particular company and market forces helped government to sell shares on higher prices making huge capital gains out of it. Privatization Commission couple of years back sold shares of OGDC at 32 rupees, raising as much as 6.848 billion rupees. Currently there is market talk that government might sell another 5 percent shares to oil and gas giant at 90 rupees a share, which means they would raise as much as 19 billion rupees, an analyst said.

Muzzamil Aslam, economist at KASB Equities said that the economic deregulation is the broad policy initiative through which the government has decided to abandon the "business of doing business". In this process, the divestment/ privatization initiatives of the government received the boost from the deregulation exercise, whereas the government has been able to privatize quite a few large tickets companies like PTCL, NRL, HBL, UBL, ABL, KESC and Pak American Fertilizer. Resultantly, the policy of privatization has set up the advantages for the economy at initial stages; it has eased the government's burden of managing too much with its limited resources. In the later stages, this should make the de-regulated business more efficient. While, its impact on stock market was well receptive and market anticipated too much from it. Such as, timeline on the privatization of big ticket items, like PSO and PPL, does not seem to be living up to the expectations of investors- needless to say that the market as usual has been expecting very quick progress on such huge transactions, which typically is not the case.