The Privatisation Commission (PC) board has approved new rules to sell state entities through direct negotiations to foreign nations after setting their minimum price under a competitive process – in a move that will help fast-track the sale of Pakistan International Airlines (PIA).
The privatisation ministry announced this week that the board had approved draft of the Privatisation Commission (Government to Government Agreement Mode – Manner and Procedure) Rules, 2023. The new rules minimise procedural requirements for selling any entity.
Under the existing competitive route, it takes about 462 days on average to privatise an asset – a long time for an entity like PIA that is losing billions of rupees. The estimated annual losses of PIA are Rs153 billion.
The interim government wants to privatise PIA but the PC route will not help to achieve the objective soon.
The Government to Government Agreement Mode – Manner and Procedure Rules 2023 has created a bridge between the Privatisation Ordinance 2000 and the Intergovernmental Commercial Transactions Act of 2022. The Privatisation Ordinance authorises sale of state assets through a competitive and open bidding process but the 2023 law allows the sale of assets under a negotiated deal with foreign nations.
The new arrangement, if endorsed by the Cabinet Committee on Legislative Cases (CCLC), will create a bridge to toss an entity picked for privatisation to a cabinet committee authorised to negotiate a deal instead of holding open bidding.
The government has already hired a financial adviser to privatise PIA that is expected to submit an amalgamation report by next month. The privatisation ministry is also keen to issue Expressions of Interest (EOIs) next month to invite investors to take part in PIA privatisation.
The financial adviser has been hired at a price of less than $7 million and it will get 30% of fee after privatisation.
In order to save time, PIA’s case can be sent to the Intergovernmental Transactions Committee, according to sources in the Ministry of Privatisation.
It is the second major move that the privatisation ministry has made after promulgation of the Privatisation Ordinance to end the role of high courts in privatisation transactions aimed at avoiding legal hitches.
The approved rules showed that a financial adviser would be hired under the 2000 ordinance and the procedure for a government-to-government agreement mode of privatisation for legal, technical and financial due diligence of the property being privatised.
Read Financial strain hits PIA employees hard
The financial adviser will identify the obstacles to privatisation and suggest, where possible, ways to remove them. The new rules will allow a fair and independent valuation of the property being privatised and provide a reference price for the property based on a price discovery mechanism.
Importantly, the financial advisers have been empowered to use any of the following methods for working out the price of an entity.
The rules stated that the financial adviser could discover the price by using the Discounted Cash Flow (DCF) method, Discounted Dividend Model for valuation of banks, balance sheet method, transaction multiple methodologies, asset valuation methodologies and any other methodology as per international best practices.
After discovery of the reference price, the financial adviser will secure approval from the PC board and the Cabinet Committee on Privatisation (CCOP). Fawad Hasan Fawad is the chairman of the PC board and the chairman of CCOP.
Once approved by the CCOP, the matter will land before the federal government.
The fresh rules state that then the federal cabinet may either refer the matter back to the PC for continuing the process through open bidding or refer it to another cabinet body to conclude it under a negotiated deal.
“The federal government while approving the reference price may direct the Commission to proceed with the bidding process; or refer the transaction, along with the reference price and price discovery mechanism, as approved by the federal government, to the Cabinet Committee” (on Intergovernmental Transactions).
“The Cabinet Committee may approve and adopt the price discovery mechanism and the reference price and constitute a negotiation committee to negotiate for a government-to-government agreement between the federal government and government of a foreign state as per provisions of the Act,” said the rules. The second option that the cabinet committee would have is to refer the matter back to the federal government, for reasons to be recorded in writing, and the federal government shall then return it to the commission, read the rules.
The fresh rules would have precedent over Privatisation Modes and Procedures Rules of 2001 and Privatisation Commission Valuation of Property Rules, 2007.
Published in The Express Tribune, December 17th, 2023.
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