A flying start to the government’s reform agenda

The completion of two capital market transactions within a span of a few weeks augur well for the economic restructuring and reform agenda of the government. The privatisation programme is part of the economic and structural reforms agenda of the government that along with deregulation and good governance, seeks to enhance the economy’s growth and productivity by harnessing the private sector as the primary source of growth. It takes an integrated approach towards enhancing the private sector’s role and goes beyond just transferring public assets to the private sector by identifying the linkages and role of regulation, good governance and market competition in fostering conditions that provide incentives for the private sector to invest further in providing goods and services efficiently.

The sale of UBL and PPL shares were the first significant privatisation-related transactions in nearly seven years. While the focus of the PPL transaction was domestic institutions and high-net-worth individuals (HNWI), foreign investors were primarily targeted for UBL’s transaction.

The successful nature of the PPL sale is apparent from the offer being fully subscribed at a strike price of Rs219 (2.4 per cent premium to the stock’s prevailing market price and 6.8 per cent premium to the floor price of Rs205). The PPL sale is also commendable given that it took place in the backdrop of a somewhat politically-charged environment.

It should be noted that privatisation is not a science. Various factors, such as the time value of money, competing opportunities, investor sentiment, availability of financing, etc. affect a transaction. In this regard, the following key points should be noted: 1) it is standard practice across the globe to offer large issues at a discount. In order to incentivise investors who can otherwise buy from the market, a discount market price needs to be offered; 2) oversubscription does not necessarily mean a large premium to floor price. It provides a gauge of the amount of bids received; 3) the government can only ensure a fair and transparent process. The quantity and quality of the issue determines demand from the market. For example, in UBL’s case, approximately 20 per cent of the issue was subscribed by locals while over 80 per cent was bought by foreign institutions, including reputable names like Morgan Stanley, Templeton, Everest, Lazard and Wellington. On the other hand, in PPL’s case, 64 per cent of the offer was purchased by domestic institutional investors, 24 per cent by HNWI and nine per cent by reputable foreign investors; 4) the government had publicised the programme well in advance. The process of appointment of advisers for the transaction was started in March, while the transactions’ structures were approved in May. The transactions were executed in record time of two months. It should be emphasised that there is no required or advised time frame to execute a transaction as long as adequate time is given for all participants to analyse the investment opportunity. This aspect was demonstrated by the oversubscription of offers in case of both UBL and PPL; 5) important considerations such as the size, depth and appetite of the markets need to be kept in view. The market plays an important role in the devising of marketing and implementation strategies of a transaction.

The successful start of a stalled privatisation programme should send a strong message to both international and domestic investors on the state of the economy and investment opportunities available in Pakistan. There is a need to capitalise on the momentum and continue on the reform agenda.

Published in The Express Tribune, July 10^th, 2014.

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