Another setback: NA panel blocks issuance of OGDCL bonds

Committee says sale proceeds cannot be used for budget financing.

ISLAMABAD:

In another setback to the government’s plan to finance the budget deficit through non-traditional means, a National Assembly panel has opposed the issuance of bonds in the international market, by a state-run company and has questioned the legality and rationale for the transaction.

The National Assembly Standing Committee on Privatisation on Tuesday rejected the plan of floating exchangeable bonds worth over $500 million in the international market backed by 10 per cent shares of the Oil and Gas Development Company (OGDCL). The government owns around 75 per cent shares of OGDCL, and it is considered a blue chip company on the local bourses.

It was the second setback to the finance ministry’s efforts to bridge the widening gap between national income and spending through sale of shares. Earlier, Etisalat – the buyer of 26 per cent shares of Pakistan Telecommunication Company (PTCL) – refused to release $800 million due to differences over interpretation of the sale agreement.

The government is struggling to float bonds before June 30 and it has already appointed a consortium of financial advisers, led by Citibank. The government will pay almost 0.8 per cent of the deal or $2.25 million advisory charges to the consortium, according to Privatisation Commission statistics.

Under the law, 90 per cent of privatisation proceeds will be used for debt retirement and the remaining 10 per cent for poverty alleviation, thus legally the proceeds cannot be used for budget financing. However, Secretary Privatisation Imtiaz Kazi said “the money will be used for budget financing.”

“There is no rationale for selling shares of a profitable entity for financing the budget deficit and what is the legality of the deal as the Privatisation Commission under the law cannot handle debt-related transactions,” observed the standing committee.

$90m to be paid in
interest

A senior consultant of the Privatisation Commission told the NA panel the government intends to raise money at indicative interest rates of 5.27 to 7.25 per cent for three years with an option for the investor to either encash the bonds or receive OGDCL shares after three years. He said the government will pay a minimum $30 million in interest annually that comes to $90 million in three years. He said the government can also call back the bonds after three years.

There are expectations that bond buyers will pay up to 30 per cent more than the present price of shares that will push up OGDCL share prices in domestic markets, said the consultant. On Tuesday, OGDCL shares closed at Rs151.05, up 1.1 per cent, on the Karachi Stock Exchange.

The committee has summoned secretary petroleum, secretary finance and secretary cabinet in the next meeting to explain the rationale behind the plan to sell shares of a profitable company for budget financing.

Will the bonds whiten black money?

A member of the standing committee alleged that the bonds are being floated to whiten black money. He said a Dubai-based company has been buying OGDCL shares in the stock market for the last two years and it has planned the transaction. He said when the bonds will mature the company will convert them into shares – a novel way to whiten the money pooled through illegal means.

Published in The Express Tribune, May 25^th, 2011.