ISLAMABAD: The Cabinet Committee on Privatisation (CCoP) headed by Finance Minister Shaukat Tarin is all set to approve Reserve Price of Heavy Electrical Complex (HEC) on Monday (today), sources close to Privatisation Minister told Business Recorder.
The PC Board has two options of Reference Price for bidding of HEC: (i) Reference Price of Rs.82.35 per share, as per DCF method with terminal growth rate of 2.9%, equivalent to Rs.1.202 billion; and (ii) Reference Price of Rs.98.23 per share, as per DCF method with 4.5% terminal growth rate, equivalent to Rs.1.434 billion. The sources said the PC received earnest money from three potential bidders by the deadline of February 14, 2022.
According to sources, bidding process will also be completed today (Monday), soon after approval of the CCoP. However, insiders claim that bidding process of entity will be illegal until Cabinet’s nod on reserve price is obtained.
Sharing the details, the sources said that on November 25, 2021, the PC Board was apprised that in terms of Privatisation Commission (Valuation of Property) Rules, 2007 and conduct of PC Board Meeting Regulations, 2019, the Reserve Price for bidding for HEC was submitted for consideration by the PC Board on September 71, 2021.
However, on the basis of input received from some of the Board members, it was decided by the PC Board that the matter should be initially considered by the Transaction Committee (TC) and then to re-submit recommendation to the Board for consideration. It was also desired that PC Board members, Ashfaq Yousaf Tola and Khurram Shahzad may attend the TC meetings through special invitation.
PC asked to complete HEC bidding process
Subsequently, three meetings of HEC’s TC were held on September 28, October 20 and November 08, 2021. All three meetings were attended by the five PC Board Members, (three regular members of TC and two on special invitation). In the last TC meeting it was decided after extensive discussions that FA consortium shall submit the reserve price computation under following modes as per Privatisation Commission (Valuation of Property) Rules, 7007: (i) Discounted Cash Flow (DCF); (ii) Market Multiple; and (iii) Adjusted Net Assets Book Value (NAV).
However, under the DCF method there will be two variants for consideration by the PC Board - one with the terminal growth rate of 2.9 per cent with justifications as proposed by FA Consortium and the other with 4.5% terminal growth rate proposed by two Board Members who attended the meetings on special invitation and supported by other TC members, except DG (I&T).
It was decided that FA Consortium will submit their proposal and also give rationale for not adopting the terminal growth rate as endorsed in the TC by the majority. It was agreed that both the proposals will be placed before the PC Board for consideration. It was also decided that in view of discussion held, FA Consortium will revise the Beta factor used and the period to be used shall be five years.
In the PC Board meeting, the financial analyst (FA) presented the reserve price valuation for HEC bidding under methods as allowed under Privatisation Commission (Valuation of Property) Rules, 2007. It was briefed that as has been endorsed by the Transaction Committee also, the DCF method is considered as most suitable for an entity being privatized as a going concern as it comprehensively captures future cash flows and its future earning potential which translates into the reserve value determined. It was also briefed that the adjusted net asset book value method is not suitable in this case as it is neither a distressed asset nor forced asset sate. Under this method, the assets value will have to be further adjusted downwards as presently there is lesser return on assets of the entities engaged in transformers manufacturing.
While deliberating the market multiple mode, it was discussed in the meeting that this method is also not appropriate for HEC’s reserve value determination since manufacturing capacities of transformer manufacturers have not been used beyond 60% in Pakistan in the last couple of years. This method thus under values the entity as it does not capture the future growth potential of transformer business in Pakistan, particularity considering that IGCEP approved by NEPRA reflects substantial growth in power production capacities till 2040 which will translate into more transformers demand in the power Distribution Companies (Discos).
While considering the assumptions used under the DCF mode for determining the reserve price for HEC bidding, FA Consortium did not agree with the terminal growth rate of 4.5% on the basis of which TC had endorsed the Reference Price. PC Board argued that terminal growth rate has to be consistent with the future economic outlook of GDP growth and not less than 4.5%. FA responded to the queries of the PC Board Members and did not agree to revise the valuation using the terminal growth rate of 4.5% and instead argued in favour of using the2.9 percent figure.
FA insisted to use the2.97 terminal growth factor after adjusting the inflation projections with the GDP growth figures. They argued that higher reserve value on the proposed perpetual growth assumption could have an adverse impact on the interest of bidders considering the previous unsuccessful attempt to privatize the entity in 2015. The Board; however, was of the view that bidders always desire to acquire an entity at lowest possible price whereas it is the responsibility of the PC to ensure that the reserve price is rationally determined for the public entity to ensure maximum proceeds for the government, based on its earning potential.
Majority of the Board members observed that terminal growth rate needs to be consistent with future GDP growth outlook and cannot be assumed to be less than 4.5%. It was finally agreed that as the future GDP growth rate is an integrate part of Government’s own future economic projections so the matter should be placed in the CCOP for an informed decision.
The PC Board recommended to place before the Cabinet Committee on Privatisation (CCoP) the following Reference Price options for bidding of HEC: (i) Reference Price of Rs.82.35 per share, as per DCF method with terminal growth rate of 2.9%, equivalent to Rs.1.202 billion; and (ii) Reference Price of Rs.98.23 per share, as per DCF method with 4.5% terminal growth rate, equivalent to Rs.1.434 billion.
Copyright Business Recorder, 2022
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