Capital market faring well: government plans privatisation to fund fiscal deficit

The government plans to start privatisation process to fund its fiscal deficit in the wake of improving capital markets, analysts said. The process is likely to commence from the next month (April 2012) exactly when new Capital Gains Tax (CGT) regime is scheduled to take effect, they added.
"With all the fiscal deficit-funding being done through domestic sources while external sources still largely dried up, the government finally plans to give shape to its looked-for privatisation process to fund its fiscal deficit," Khurram Schehzad, head of research at InvestCap said.
"In this regard, the government has planned to initiate a total of eight (8) Initial Public Offering (IPO) and Secondary Public Offering (SPO), after the Privatisation Commission's proposal of Capital Market Transaction Road-Map has been reportedly approved by the Cabinet Committee on Privatisation (CCoP)," he said.
The process has been reported to commence from April 2012, exactly when the new CGT regime is scheduled to take effect, he said adding that proposals and suggestions regarding CGT have been accepted through verbal commitments by the Ministry of Finance.
There is expected to be a mix of listed and non-listed companies to be privatized through both local and global capital markets ie IPOs/SPOs and Global Depository Receipts (GDRs).
According to Schehzad the listed companies on cards for IPOs/SPOs and GDRs include PPL, HBL, NBP and Kapco while non-listed public sector holdings (stake being offered by the government) include State Life Insurance Corporation of Pakistan (SLICP)), Pak Arab Refinery (Parco), National Insurance (NIC), Government Holding Private Limited (GHPL), Islamabad Electric Supply Company (Iesco) and Faisalabad Electric Supply Company (Fesco).
Ironically, the government does not seem to have included any of the highly uneconomic government entities ie PIA, Railways, Wapda/NTDC, Pakistan Steel, etc, amongst the available companies' lot being offered for privatisation, he said. "However, even putting up profitable companies for sale first would not be a bad idea to get privatisation off the mark for this government," he added.
"As far as the amount to be raised to fund fiscal deficit goes, we expect proceeds in the range of Rs 30-35 billion ($330million-390 million) depending upon the final size of Parco's IPO (largest refinery with 41 percent market share), with price levels (government already expecting price premiums ranging 0-17 percent on planned SPOs and GDRs)," he said.
This is expected to lower FY12E fiscal deficit by 0.2 percent of GDP to 6.3 percent, he said. However, viability of the government privatisation plan is largely contingent upon timely materialisation of newly proposed CGT regime and price levels the government may fetch (not all SPOs/GDRs can fetch price premiums especially banks, given their portfolio mix with uncertain ratings due to their rising stake in government instruments), he added.