Pakistan has scrapped the sale of 7.5% stake in the Oil and Gas Development Company Limited (OGDCL) after investors subscribed to only half of the total shares on offer, dealing the first blow to the government’s ambitious privatisation agenda.
Of the 311 million shares put up for sale for a minimum price of Rs216 per share, the government received offers for only 162 million shares at the conclusion of a three-day bidding process, Privatisation Commission Chairman Muhammad Zubair said on Saturday.
The decision to scrap the transaction was taken by the Cabinet Committee on Privatisation (CCOP) in a meeting held the same day. The meeting was chaired by Finance Minister Ishaq Dar via video link from Dubai.
“Under the circumstances, it was not appropriate and feasible to go ahead with the divestment plan of the OGDCL,” Dar said. “Pakistan’s economy is resilient enough to pass through this difficult phase… there is no need to go ahead with the deal in an unfavourable atmosphere.”
The minister added that the shares would be offered for sale when the situation in the international market favours Pakistan.
The government initially hoped to generate $830 million by selling 7.5% stake in the OGDCL. It lowered its expectations to $696 million last week when the CCOP approved the minimum share price of Rs216.
Authorities sustained a blow following the closure of the book- building process when it came to light that investors were offering $342 million for just 52% of the shares put up for sale.
“The OGDCL is an important asset of Pakistan and the government cannot sell the stake at such a low rate,” Zubair told The Express Tribune. “Had all 311 million shares been fully subscribed, the government would still have given the go ahead for selling the stake at Rs216 per share.”
He, too, said the cancellation of the sale would not affect the country’s economy in a big way.
According to Zubair, the fall in global oil prices was the most important factor behind the cold response from investors. The share prices of the British Petroleum had dropped by as much as 25%, he said. “In the eyes of investors, the price of Rs216 per share was too high,” Zubair said. “The 6% discount we offered to them was probably not sufficient in the given circumstances.”
He said other Asian countries had offered an average discount of 7.7% on similar transactions.
Zubair added that the financial advisers hired by the government had suggested setting the price at Rs206 per share. “We rejected this advice because of the losses it would have inflicted on the exchequer.” At the same time, Zubair said, “We expect the share prices will soon bounce back to Rs250 to Rs260 per share.”
Although the decision to scrap the deal will save the national exchequer from losses worth at least Rs15 billion, the move may serve a blow to the expectations of the government and investors. For the current fiscal year, the government anticipates receipts worth $4.5 billion from privatisation proceeds, $380 million of which would have been generated by the OGDCL transaction.
Analysts said the government may have to increase the size of Sukuk bonds to offset the impact of the cancelled OGDCL transaction on the country’s foreign reserves. The government currently plans to raise $1 billion by floating Sukuk bonds.
The next big upcoming privatisation transaction is that of Habib Bank Limited (HBL), expected to be undertaken early next year. The government hopes to get $1.2 billion by offloading its remaining 42% shares in the bank.
Published in The Express Tribune, November 9th, 2014.
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