Privatisation—dos and don’ts

For the last few months, privatization has been a key component of economic news. The previous government, interim government, and now new government in office, all have underlined privatization as a top priority on economic agenda. The international financial institutions (IFIs) are also seeking a roadmap on privatization under their respective covenants.

Factually, privatization proceeds are an integral part of ‘non-tax revenue’ in annual budget presented before the parliament. The last big-ticket privatization was carried out in 2008. Cumulated privatization proceeds from 2008 to 2024 are a fraction of budgeted revenue.

It is imperative that we revisit our approach on this important element of economic manifestation. The Buyer-side dynamics have also changed drastically over these years. The big investors, particularly the sovereign funds with billions at their disposal, are far advanced in their approach and due diligence.

We have to level up our privatization approach to an extent that is mutually beneficial to the country as well as to the incoming investor. Mere pitching our loss-making entities without policy certainty, regulatory predictability and unaddressed encumbrances, will continue to make investors shy away after initial interest. Privatisation attempts for DISCOs, PSM, power plants and even real estate assets, all have identified a whirlpool syndrome, which has to end now.

For this we have to redefine our answers to four questions; (a) why we want to privatise, (b) what we want to privatise, (c) how we want to privatise, and (d) when do we want to privatise. With the privatisation lessons from progressive economies and the experience we have gained from our own successful and unsuccessful transactions, now we ought to be wise enough to answer these questions. Some key elements are discussed as under:

Why to privatise: PC Ordinance inter-alia refers purpose of privatization to use its proceed for retiring government debt and for poverty alleviation. Whereas stakeholders push to privatise loss-making entities due to their immense burden on national exchequer. Certainly, there is nothing wrong in both perspectives; however, the vision for privatisation in fast changing economic fundamentals cannot be too confined. Economies are crafting their privatisation agenda aligned with futuristic economic growth trajectory.

As seen, successful economies foremost identify the sectors they consider core to country’s long-term strategic trajectory, then evaluate their capacity gaps and in third step select the entities in those sectors for privatization. The first two steps are carried out jointly by finance and planning ministries, whereas third step is carried out jointly by the administrative ministry and privatization ministry for submission to cabinet or to the parliament, as per their law. After political debate, a homegrown privatisation agenda emerges which is far more organic and sustainable than those crafted by financial advisors (FAs) or by IFIs, is adopted with a pragmatic and futuristic mind.

The regional economies started privatizing banking, oil &gas, telecom, health, tourism sectors in 90s and within few years, their GDP was getting big contribution from each of these sectors. The key was choosing sectors wisely and opting for suitable model either full privatization, public private partnership (P3) or liberalization. Offering state entities was a part of that holistic approach not the other way round.

Presently, sectors on which global economies are strategically focused are IT, Fintech, chip designing, electronic vehicles, space technology, health, energy and food. We also need to think much beyond our PIA and DISCOs nucleus privatization agenda and offer entities to induce investment in high-tech manufacturing (chip, robotics), improved productivity (Shale gas, mining, gems) and services (IT, health, vocational training). Artificial intelligence (AI) has already identified the future outlook of various sectors. We have to just strategize our privatization approach with futuristic economic outlook.

What to privatise: PC Ordinance requires PC to prepare privatization programme to be approved by the Cabinet. CCOP has to formulate privatization policy. In 2018, incoming government approved PSM, PECO, Republic Motors, Sindh Engineering from industrial sector. All these remained in earlier privatization list too.

Most were nationalized in 70s but due to negligence of ministries, these lost control on their assets worth billion but are eagerly placed for sale. On energy side, shares of E&P companies and DISCOs were included as a permanent feature. New entrants were RLNG Plants, Guddu Power Plant (GPP) and Nandipur Power Plant (NPP), which are discussed in later paras. In the banking sector, HBFC, SME Bank, FWBL were included. After putting efforts for four years, most of these entities have been delisted from privatization programme. Like always, the administrative ministries and FAs absolved themselves and blame has to be functionally borne by PC and politically by Chair CCOP.

Meanwhile, new government has assigned the development privatization programme. Mistaken approach of placing an entity on active privatization list without its preliminary due diligence needs to be discontinued instantly. The administrative ministry, with assistance from PC, should jointly carry out preliminary due diligence. Under this approach, sector experts and transaction experts jointly evaluate entities, analyze encumbrances and firm up proposalsfor CCOP.

This will also bring huge efficiency in existing model wherein 10 to 12 months are spent in appointing financial advisors, awaiting due diligence report, knowing encumbrances and requesting CCOP to issue directions on basic issues and then awaiting actions. This inefficient model cannot lead to success stories. It goes without saying that preliminary due diligence will also make TORs of FAs highly result-oriented with CCOP’s directions already in field, FA will be focused on next phases of restructuring, valuation, investor road shows.

It is also time to decide whether PC is to be run as a professional setup or a conventional ministerial setup. Initial vision of PC was to be established on pattern of SECP, however since PC and Privatization Division both work under same Ministry of Privatization, the distinction between two vanished.

Posts in PC were assigned to government officials and professionals hired were given the hat of ‘consultant’ to assist them. With no career paths, below market salaries, presently only two mid-career level consultants are shouldering the entire portfolio. Whereas, professionals that worked for PC preferred to work for FAs, sovereign funds or owning their own advisory firms. Due to this unfilled vacuum, exorbitant financial quotes are now received by PC from FAs for basic due diligence work and their reports get placed before PC board and CCOP without in-depth review due to PC’s capacity limitations.

How to privatise (the process): One size doesn’t fit all; each sector and entity has its own dynamics. PC Ordinance is flexible enough to cater 5 modes of privatization; besides, G2G Act is also an option with maximum flexibility. PC Ordinance also specifies that monopolies are not to be created in process of privatization, all these aspects are good lead on transaction structuring.

Taking again the lesson from past, once an entity is put on active privatization list, transaction process has to be consistent. In my previous article on privatization of DISCOs, it was analyzed how each attempt on DISCOs got derailed since 2005. In near past too, the process for RLNG power plants, GPP and NPP could not create a different history.

GPP and NPP were recommended by administrative Ministry but later their encumbrances were not removed despite repeated directives from fora. Later, in one of the CCOP meetings, a proposal from an invitee came that equity of both power plants be adjusted against receivables of PSO.

While discussions started on how a circular debt hit entity will acquire two circular debt hit entities, whether the payables of one GENCO be adjusted against another GENCO’s assets, can public be deprived cheap electricity from GPP. In all these circles, a few turbines of GPP got impaired in an incidence and international parties also backed off. The entire cost and effort of PC turned futile. Therefore, the tendency and temptations of distraction and diversions need to be avoided when the privatization agenda approved is far above these operational debates.

Due care is needed in ongoing transactions too, transaction structure of PIA was approved a day before elections, and it was proclaimed in a segment of media that 98% of the transaction stands completed. This may have helped some activity at stock exchange, but transaction experts knew that factually transaction was not even at 30% level and such uncorroborated statement can adversely impact next phases as stakeholders can demand and investors could expect pitching of transaction in next few days.

During the transaction, entire focus has to be on restructuring, creditors & lenders NOCs, regulatory compliances to avoid post privatization issues. Extensive preparations are needed for road shows, pre-qualifications, pre-bid meetings. Similarly, reference price is a very technical subject to be deliberated by all fora. And not to undermine that last mile is often toughest, whether it was a big-ticket transaction like KESC or a small like Heavy Electric Complex, the time taken to close the transactions even after bidding was more than 18 months. A clear focus and avoidance of larger-than-life claims is imperative.

When to privatise: Globally, it is an established rule that sovereign bonds and large size privatization transactions are not simultaneously pitched. Market may not have the appetite or may opt for lesser risk which could be exact opposite to government’s priority for privatization. A prudent approach is to opt for sequence wisely. For example, if the Government presently intends to launch the panda bonds, it may sequence privatization transactions with a gap. With full subscribed floated bonds, the positive market sentiments will be a great foundation for pitching privatization transactions too.

Similarly, circumstances surrounding an entity are also critical in timing the privatization. For example, RLNG plants with receivables of approx. Rs. 50 billion in 2018 got 18 parties interested as compared to 2023 when its receivables had mounted to Rs 250 billion. There is a huge cost of delay. Similarly, for SME Bank, HBFC and FWBL timing will inter-alia depend on prevailing policy rates.

Lastly, once an entity has been placed on active list it should be kept on high pedestal to be sold as a ‘going concern’. The typical approach by administrative ministries to lose interest badly impacts its valuation. Presently, it is great to see that resumption of PIA flights to international destinations is high on both the diplomatic and economic agenda as these landing right with amplify PIAs valuation.

Summarising the above, it is time not to repeat mistakes but to capitalise on lessons learnt. The economy, consumers and taxpayers have already borne huge cost. We owe a progressive economy to our next generations.

Copyright Business Recorder, 2024