ISLAMABAD: Pakistan’s two leading free market advocates have cast serious doubts on the recently concluded divestment of the 19.8% shares by the government that yielded $387 million.
Their co-authored article, published by the same paper on 21st June, deserves serious attention as they have been key proponents of privatisation in the past.
The analysis of the free market duo of Pakistan is basically built on these lines. The UBL transaction was rushed and thus it was riddled with a lack of transparency.
The shares were sold at a discount which was used by the respected economists as a clue of bad intentions. For them, the selling by block strategy brought about sub-optimal results.
The divestment will not increase the efficiency of UBL, which is already privately managed. Finally, they believe, this transaction may increase the dominance of existing shareholders.
Someone has said that what you find depends upon where you stand, in other words interpretations are driven by perspectives. Let me offer a completely different interpretation, which will show that the duo might have arrived at wrong conclusions.
I build my argument on the assumption that as any other entity with shareholders rights, the GoP has the right of adopting a strategy to suit its objectives while respecting the fundamental principle of transparency.
An understanding of fiscal situation and government priorities to generate funds coupled with a more nuanced understanding of what is called ‘Book Building’ in the financial markets will be helpful.
It is obvious that the government has not been able to generate additional resources through taxation, thus leaving it with the choices the previous government heavily relied on: money printing and domestic borrowing from banks, and external financing through debt and equity markets.
It is admirable that the present government has started decreasing its reliance on both money printing and domestic borrowing. Thus a shift towards external markets, whether through Euro bonds or equity transactions like the UBL deal is a welcome step. The positive response of international capital markets to bank on Pakistan’s commercial institutions is a very good omen.
I am positive that if this context is considered, then the overall conclusions being drawn from the UBL transaction will be very different.
Now, let me explain, for a general reader, the process by which an underwriter attempts to determine at what price to offer an IPO based on demand from institutional investors, commonly known as Book Building.
In simplest terms, Book Building offers a trade-off between the volume of shares sold and price of these shares. If a seller is interested in volume maximisation, for want of large money in present, rather than an expected high price in the future, then the block sale strategy will be preferred. It may compromise on the price somewhat, however it will yield optimal sales volumes.
In other words, the government preferred an outright sale of its block of shares, yielding a healthy sum of $387 million, on a future price. The government did it to fetch greater amount of foreign exchange revenue, and it is very difficult to dispute the sagacity of this choice.
In fact, if the recent history is any guide, where the share price of UBL has fallen in last seven years, then this strategy of a block sale today reveals actually a very smart strategy.
The apprehension about lack of transparency on account of ‘discount’ and ‘overnight sale’ is misplaced. The ‘discount’ on the UBL share which was priced at Rs. 170.38/- at the time of privatisation transaction was 7% as it was sold at Rs. 158/.
This is consistent with the average range of discounts prevalent in the Asian markets for Book Building. The relatively high risk profile of Pakistan also increases the discount rate, for e.g. in Malaysia, it is between 3-4%.
As a rule, the Book Building exercise is always done after a market is closed to avoid giving mixed signals to the trading floor. Thus, it was a strategic move on behalf of the seller to sell the shares to the institutional investors on an overnight basis also considering the time zone differences where the Book Building exercise was done, in Singapore.
One must also note that 81% of these government divested shares were bought by well-known international funds, such as Morgan Stanley, Templeton, Wellington, Everest, Lazard and Blackrock, thus opening up Pakistan’s equity market to the world after eight years.
This also means that fear of dominance by existing buyers is misplaced too. In fact, the re-entry of international institutional investors will bring a qualititative improvement in the portfolio of equity markets in general, and those of the UBL in particular. Moreover, about 240 Pakistani institutional buyers also participated.
Finally, as to the use of the privatisation proceeds, the rules are very clear about this. 90% of privatisation proceeds are used for debt retirement and 10% for poverty reduction. The qualms over this are unnecessary.
It is true that not all privatisation transactions will generate the desirable state of market competitiveness, but then there are hundreds of other factors at work, and only government divestment cannot be held responsible.
The writer is the founder and Executive Director of PRIME Institute, a market-economy think tank based in Islamabad
Published in The Express Tribune, June 30th, 2014.
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