While government functionaries are putting on a brave face and seem confident that the Council of Common Interests, when constituted, would approve the privatisation of Pakistan Steel, independent observers feel that the aftershocks of the Supreme Court judgement on Pakistan Steel Mills deal would reverberate through the economy.
More realistic is the view that privatisation process might not be derailed but would definitely slow down. And, this may have adverse repercussions for the budget and the economy.
In 2005-06, privatisation proceeds played a key role in keeping the fiscal and current account deficit within targets. And for 2006-07, the government is again banking upon privatisation receipts to keep the deficits within manageable limits. The privatisation of government managed entities has all along been a divisive issue among the politicians and the economic managers.
In the background, Mujibur Rahman's 'six points', calling for a loose federation, in essence, meant 'confederation'. And, with NAP/JUI governments in power in two provinces, the Council of Common Interests was created under the 1973 Constitution as Pakistan thereafter was a contiguous unit where division of assets, like water supplies (Wapda), railways, mineral oil, and natural gas corporations, created or managed by the Federal government, were placed in Part II of the Fourth Schedule of the Constitution.
The CCI has met six times in the past 33 years. The Supreme Court has said that CCI is a cornerstone of the Federal Structure as it provides protection to the rights of the federating units.
At the same time, the Supreme Court says that the approval for the Privatisation of Pakistan Steel by CCI on May 29, 1997 continues to hold the field. But the counsel for the Federation, Hafeez Pirzada, and the counsel for Pakistan Steel, Wasim Sajjad, have taken divergent stands. While one says that CCI approval to privatise Pakistan Steel still stands, the other said that the matter was dropped subsequently; therefore it would be appropriate that the matter be referred to CCI for consideration.
Further, the Court says that the Privatisation Commission Ordinance-LII of 2000, is not ultra vires of the constitution. This is being interpreted by many lawyers that past and closed (privatisation) transactions are safe. But others are of the opinion that the privatisation of KESC, Habib Bank and PTCL would be impacted by judgement on Pak Steel.
The Supreme Court, while upholding executive's authority to privatise state enterprises, says that it would exercise the power of judicial review and felt that the process of privatisation of Pakistan Steel was vitiated by certain acts of omissions and commissions of functionaries. The Supreme Court is likely to go into these acts of omission and commission in its detailed judgement. However, the short order does point out to certain glaring anomalies.
The Cabinet Committee on Privatisation (CCoP) had reduced the reference price to Rs 16.18 per share despite the fact that Privatisation Commission had recommended value of Rs 17.43 per share.
Again, instead of approving the transaction after opening of bids, as was done in all previous transactions - CCOP, prior to bidding authorised the PC to issue letter of acceptance if the bid was above the reference price.
The four counsel appearing for defence did not co-ordinate their arguments and also failed to answer satisfactorily the queries raised by the Court such as: why was value of land excluded from the valuation exercise? Why did the special purpose agreement (SPA) not specify that about 4,400 acres of land being sold with the plant and machinery could not be used for any other purpose than Pakistan Steels functions? Why did the government use the cash lying with Pakistan Steel to prepay the banks on loans on behalf of Pakistan Steel? What is the position of a consortium in company law? Why did the Special Purpose Vehicle (SPV) - Pakistan Steel (Mauritius) sign the SPA with PC instead of the successful bidding consortium? Why Arif Habib was pre-qualified? Why was the sale agreement different from the initial public offering.
The Court has questioned the inclusion of a Russian entity (though pre-qualified prior to bidding as an intended buyer) to join the Saudi-Pak consortium just before the bidding.
Investigation by Business Recorder shows that the Financial Advisor used the discounted cash flow method to recommend a selling price range of $404 to $464 million. At $464 million, the share price works out Rs 16.18 per share. The PC Board, however, recommended usage of replacement valuation method, which gives a price at Rs 17.43 per share. CCOP disagreed with the PC Board and approved the DCF method as Pakistan Steel was being sold as a 'going concern.' Since the loans to Pakistan Steel were guaranteed by the government, it was decided to pre-pay the banks. SPV's are standard vehicles used by foreign entities in such deals. But what is their status in company law was asked by the court. The right answer was not forthcoming. While senior counsel Sharifuddin Pirzada clearly said that value of land was not included in the sale price - the answer from other advocates was not very clear. They failed to explain that the balance sheet was restructured to make the unit saleable and attract buyers.
It was very clear that the General at the helm of the unit clearly felt that the reserve price should be higher. His letters on this issue were demanded by the court.
According to observers, the government apparently took the case in the Supreme Court lightly and felt that junior lawyers were no match to heavyweights on their side.
The Supreme Court's emphasis to notify the CCI and hold its meeting instead of the Federal Cabinet taking decision on its behalf is what the Constitution contemplates. It will be the forum for provinces to challenge the unilateral decisions by federal government and exercise their economic rights. Will foreign investors be nervous if not scared by the controversy and allegations of non-transparency - will depend on how the fallout is handled.
The Government can recoup the delay in privatisation receipts by selling shares on the bourses. It can raise rupees to bridge the fiscal gap but it cannot print dollars to close the current account deficit. It is a setback for Musharraf/Shaukat Aziz combine, whether they accept it or not.
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