A big push toward privatization in Pakistan
Seeks a strategic partner for its international airline
Privatization has not been easy anywhere in the world and more so in a country like Pakistan. That’s how Muhammad Zubair, chairman of the Privatization Commission of Pakistan, described to The Asset the task of offloading state-owned assets that included some of the country’s big-ticket companies.
Pakistan’s privatization scorecard shows four stake sales and one strategic sale in the past two years, raising for the government a total of US$1.72 billion. That included the disposal of a 41.5% stake in Habib Bank for US$1 billion via a fully-marketed secondary placement in April 2015 – the largest ever equity offering in Pakistan and any frontier market in Asia.
Four months later, the government divested its 88% stake in the National Power Construction Corporation for 2.5 billion Pakistani rupees (US$24 million) – its first successful strategic sale since 2008 and after four unsuccessful attempts at a sale of the construction firm by the previous administrations. The buyer was the Saudi business group M/s Mansour Al Mosaid. Pakistan was able to obtain a price that was 27% above the approved reserve price of 1.97 billion rupees by the Cabinet Committee on Privatization (CCOP).
The country’s privatization push is driven by the government’s objective to boost the economy using private sector expertise, capital, technology and management. It aims to minimize government losses, deepen the capital markets and enhance the attractiveness and visibility of Pakistan as a favoured investment destination.
In a briefing given The Asset at his office in Islamabad, Privatization Commission Secretary Sardar Ahmad Nawaz Sukhera says the commission is working on 18 privatization deals involving such assets as Pakistan International Airlines (PIA), Pakistan Steel Mills (PSM), State Life Insurance Corporation, SME Bank and power sector-related entities.
The commission reveals the government’s plan to shift its power and aviation sectors from public domain to private sector hands. It is doing this after a number of privatization initiatives in its banking and telecommunication sectors.
In July, the commission approved the disposal of the government’s remaining 40.25% stake in Kot Addu Power Company on the stock market. The move was in line with the three-year US$6.6 billion fund facility the government obtained from the International Monetary Fund (IMF) due for completion this year. Under the loan programme, Pakistan will undertake structural reforms that included the reduction of stakes in state-owned enterprises.
As for the other assets, the privatization process for PIA and PSM is already close to two decades in the making. In 1997, the Council of Common Interests (CCI) gave its go-ahead to PIA and PSM to undertake privatization. CCI is a constitutional body that resolves disputes of power sharing between the federation and the provinces. CCI reaffirmed its decision for PSM in 2006.
Out of control
But government’s efforts at privatization is faced with myriad challenges. What is making the privatization process a frustrating exercise is the need to appease various parties and interests to get a deal done. “Apart from preparing the final balance sheet of the companies that you are going to send to the board of Cabinet Committees for approval, you also have to deal with politics,” Zubair points out. “This is why the privatization programme has faced difficulties since its launch in 1991. You have to deal with the political side of the process. Some of it you can manage and control, but some of it is out of your control. You need to work with all the stakeholders and that would include the opposition political parties and the employee unions.”
Sukhera agrees: “Privatization in Pakistan is a very contentious thing. The opposition always talk against privatization.” Religion also comes into play in many of these initiatives, says Zubair. “Privatization has been an endless topic of discussion among the religious groups so we have to deal with them and listen to their arguments,” he says.
For Zubair, it is vital to get everyone on board even as it delays the privatization process. Conflicts are best avoided. He recalls an incident in February when protesting PIA employees engaged law enforcers in a violent confrontation. “The planes were grounded. There were no flights. It was obviously a very difficult situation,” he recalls. “But the most important thing was that (it) was a moment of truth whether the Prime Minister and the government would buckle or stand up to it. We stood up to it.”
Zubair describes the privatization of the country’s airline as complex because it involves separating the airline assets into two groups – the “good” and the “bad”. “We are only selling the core business of PIA – the airline business – and not the non-core businesses that included hotels, kitchen business, ground handling and poultry business.”
The plan is to create a new subsidiary that will hold PIA’s core airline business, which can eventually be sold to a strategic investor. “This will be the good PIA with a clean balance sheet. The bad PIA (on the other hand) will remain with the government. That is where all the losses are taking place.”
The government will keep the bad PIA, or its unprofitable ventures, including a hotel each in New York and Paris as well as the kitchen business that was set up to cater to airlines flying to Pakistan. The business is in the red as there are few airlines flying to the country. “The business is bleeding like anything,” he says. “The same situation is true with ground handling with fewer airlines to service.”
In selling the PIA airline business to a strategic buyer, Zubair says the government is after quality management. “PIA is competing with some of the best airlines in the world, so we need a buyer with sufficient experience in managing such an institution,” he points out. “If we simply offload this asset into the capital market, all you do is raise some capital – you still have to deal with the same management.”
Taking difficult decisions
Zubair believes the airline business has a bright future. “With the economy taking off and with the rising consumer spending by the middle class, the airline business is considered an attractive asset,” he adds. “Also the security situation, which has been one of the main obstacles to economic growth in the past, has been improving during the last few years. We have all the ingredients for an economic take-off.”
He continues: “No major economic reform comes without taking difficult decisions, which are not popular in the short-term. But I have a long-term view. No economy can be turned around if you are not ready to take those difficult decisions. The easiest thing for any government to do is to keep subsidizing everything. We need to explain to the people that this is being done with a long-term perspective. There has to be sacrifices. There has to be an acceptance – the present state of affairs cannot continue.”
Also in the privatization list is power distributor Faisalabad Electric Supply Company (FESCO). It is the first on the list of nine power companies on the privatization block because it is one of Pakistan’s best assets. “This is a marketing strategy that you bring the best one to the market first. Create a momentum and get the best demand from inside and outside Pakistan,” says Zubair. “This is a company that is being run very well, generating cash flow and earning profit.”
FESCO has received expressions of interest from a number of overseas companies, including those from China, Malaysia and Turkey.
Pakistan encountered serious setbacks to privatization efforts. Oil and Gas Development Company Limited (OGDCL) was one of those deals that failed to cross the finish line so to speak and left a bad impression in the market. The company on November 5 2014 initiated a bookbuilding to divest up to a 10% stake (about 311 million shares) at a strike price of 216 rupees per share. It closed the book on November 7 and received total orders worth US$342 million for 162.76 million shares, for a subscription rate of just 0.52%.
But CCOP had to pull the deal amid falling oil prices. “When we started the OGDCL privatization process, the price of oil was over US$100 per barrel,” Sukhera recalls. “By the time we pegged the strike price, the oil price has dropped to around US$60 per barrel. The finance minister took the position that we do not want to give the impression of a desperate sale.”
The incident was a source of embarrassment for the government. “When we did our next roadshow following the failed sale of OGDCL stake, the more outspoken equity fund managers were telling us – Are you going to do another OGDCL trick on us? Are you sure you’re going to finish this deal. We’ve put so much work on OGDCL, but nothing happened.”
Sukhera is not deterred, however. His work at the Privatization Commission carries an extra motivation, he admits.
“If we can recoup even between 70% and 75% of the money being lost by the state-owned enterprises and use them for polio eradication, child and maternity care, emergency health care in the hospitals and elementary education, that as a person is my driving force for the job that I am paid for to do.”