A cabinet body on Friday approved the shelving of a plan of all-out sale of 10 power distribution companies and also cancelled two capital market transactions of blue-chip companies, marking a third major shift in privatisation policy of the government.
Headed by Finance Minister Shaukat Tarin, the Cabinet Committee on Privatisation (CCOP) approved two separate summaries to give effect to these decisions.
The CCOP agreed to drop the plan of divestment of shares in Pakistan Petroleum Limited (PPL) and Oil and Gas Development Company Limited (OGDCL) due to their depressed stock prices.
Instead of privatising the 10 power distribution companies, the CCOP decided to either give these companies on concession or give their management control to the private sector.
The CCOP approved the proposal of the energy ministry, indicating that the divestment of shares in OGDCL and PPL “is not feasible at this stage and should be considered only once issues like circular debt are resolved, even partially,” stated the Ministry of Finance after the meeting.
It added that the strategic sale to a reputable exploration and production (E&P) company would be a preferred option.
After coming to power, the Pakistan Tehreek-e-Insaf (PTI) had largely abandoned the privatisation programme and instead decided to focus on restructuring of these lossmaking enterprises.
However, after the exit of Asad Umar, the next finance minister Dr Abdul Hafeez Shaikh revived the privatization agenda, but could not complete even a single transaction in two years.
Now, Tarin has given the third turn to the privatization programme by approving proposals that were already in the field, but could not win the endorsement of Shaikh.
In August last year, the government had decided to divest 10% shares in PPL and 7% shares in OGDCL through public offering to foreign and domestic institutional investors, high net-worth individuals and general public through the Pakistan Stock Exchange (PSX).
But the Petroleum Division had maintained that both PPL and OGDCL were profitable companies and the current depressed share prices did not reflect the real worth of these companies.
The Petroleum Division said that share prices of the two companies were depressed due to the circular debt issue. A significant amount of current assets is stuck in the circular debt, which is increasing over the years and restricts the ability of the companies to pay dividends, thereby undervaluing the shares.
As of January 31, 2021, the total receivables of OGDCL stood at Rs653.8 billion while the receivables of PPL were Rs408 billion. Price-to-earnings ratio of both the companies was also very low as compared to previous years.
The price-to-earnings ratio at the time of secondary public offering of PPL in 2014 was around 8.5, which slipped to 4.8. Price-to-book ratio was also less than one, indicating that the current market value of the companies was less than their book value.
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The finance ministry said that the Privatisation Division tabled a summary, based on recommendations of the Privatisation Commission (PC) board, regarding provision of funds for hiring a financial advisory consortium (FAC) of international repute having pertinent experience in technical, financial, legal and regulatory fields to conduct the transaction of distribution companies and for carrying out an effective communication strategy effectively. The committee considered and approved the summary.
In its summary, the privatization ministry stated that a working group having representation of all the stakeholders had recommended the signing of concession agreements for eight power distribution companies and giving management control of two companies - Quetta and Tribal Areas to the private sector.
The working group was of the view that the concession or management contracts were the most optimal options for private sector participation.
PC has been allowed to hire financial advisers for working out financial, legal and regulatory modalities to hand over these companies to the private sector.
Under the concession agreement, the party that will acquire a company for 10 years will have to invest from its own resources to improve the distribution and transmission infrastructure.