RISK AVERSIVE FOREIGN FUNDS
TARIQ AHMED SAEEDI
July 12 - 18, 2010
Some perceive the government's mantra of public-private partnership as an effective tactic to avert the political implications of privatisation of state-owned enterprises. PPP-led ruling government does not want to let critics point finger at its pro-people image on the context that it is giving up state ownerships over companies that have a large number of employees to earn livelihood from them.
Without judging the veracity of this statement, this article discusses the ways of privatising public sector units and whether or not initial public offering can become an effective option-for the government to get rid of lose making companies-in all possible selloff options; and to attract foreign equity funds.
Different governments in Pakistan in past have practiced two popular strategies to feed private money in to the state-owned companies. One was to offer a small percentage of shares to private parties or consortium based on predetermined dividend yields. Secondly, private investments were injected in the public sector companies through floating their shares in general public.
Selloff to individual companies or consortium with all its advantages has some downsides one of which is cartelisation that is a usual carryover of such acquisition by the consortium. This has happened in various privatisation examples in cement sector in Pakistan. The individual companies acquire shares of other public sector companies in the same industry to keep a firm hold on the market shares. Lack of transparency in privatisation transactions is another common outcome apart from concentration of assets in few hands of privatisation on favouritism.
From 1991 to June 2010, about 167 privatisation transactions have taken place in banking, telecommunication, textile, oil and gas, power, cement, food, and other sectors. Aggregately, these transactions earned government of Pakistan a little over Rs476.42 billion, which is not a significant amount when compared to total cost the government incurs every year because of lose making state-owned enterprises. Finance minister Dr. Hafiz Sheikh put this number around Rs250 billion.
The valuation of assets had have some flaws and suffered the indelible bonds between politics and economy.
INITIAL PUBLIC OFFERING
Total privatisation proceeds also included the amount generated through offering shares in stock exchanges. Initial public offering has not been a successful strategy for many reasons one of which was size of shares offered were too scant to fulfil the financial needs of privatised units. Offering shares in stock exchanges of various state-owned enterprises turned the government towards selloff to consortium or private parties in subsequent effect. PTCL is a latest example of this summersault of polices. The government floated two percent shares of the leading fixed line telecom service provider in stock exchange, but the income statement of the company could not be improved and therefore 26 percent shares of the company were offered to UAE based telecom company Etislat. The transaction is still passing through hiccups due to incomplete transfer of payments from the buyer, which holds back instalment because of non-transference of properties.
Stock analysts are hopeful that sizeable shares floating in stock exchanges would bode well for the financial structure of the capital markets. However, they also keep in view the insignificant stories of initial public offerings of state-owned enterprises in past. Almost eleven public sector companies have so far been privatised through stock exchanges. Some of them were put before open market afterwards. Shares of NBP, DG Khan Cement, OGDCL, SSGC, PIA, PPL, Kapco, UBL, HBL, and PTCL are listed on stock exchanges.
World over, initial public offering is used to seek public funds for companies under financial strain. It is logical methodology to upgrade capital market and to make public partners in pushing turnarounds amid recessionary pressures. China in a recent historical move is planning to offer shares of Agriculture Bank of China in public. Investors in China's key index restrained investments in other shares in order to gather financial strength ahead of reportedly the biggest IPO in the world's history, which may raise $22 billion. HK and Shanghai indexes kept on paring gains due to losing risk appetite of awaited traders.
IPO VERSUS PRIVATISATION
Understandably, offering shares to public is equal to diversify the privileges of shareholding to a host of people without any favouritism. And, trading volumes would determine the market value of shares. It is said this also adds improvement to the accountability in financial affairs. This quality of IPO has not healed the financial woes of lose making listed public sector companies in Pakistan.
Pakistan International Airline was listed on the stock exchange in a bid to alleviate the financial burden national exchequer sustained to keep up the airliner. However, things are not toward improvement and policymakers have taken the hammer to straighten the airliner's curls on the privatisation anvil. But, the government has apparently not found right price of the flag carrier presently. In this global environment when fears of double-digit recession are haunting the fund managers, it is obviously not easy for the government to have desirable price of assets of big state-owned companies like PIA as well as Pakistan Steel, which is also a story of resources-mismanagement and hallmark of rampant corruption in public sector enterprises. The overstaffing and hiring for political scoring has distorted the shape of state-run companies. Though such hiring brings down unemployment rate, yet cost on overall economy is huge.
Stock exchanges can prove a bonanza of capital to turn around lose making companies. An investment policy is needed to ensure security of and good yield on funds invested in shares of publics sector enterprises. Foreign funds are pouring in the stock markets and taking interest in profitable stocks of oil and gas sector mainly. Confidence of investors on other third-tier stocks can be restored by making these attractive for investors.