Confusing privatisation goals
BY S H A H I D K A R D A R | 4/28/2015

THE sale of 609.3 million shares of HBL has been billed as the biggest capital market transaction and second biggest privatisation deal after the PTCL and yet more evidence of the government`s reliance on the private sector to stimulate growth and improve the economy`s efficiency and productivity.

After the government sold a significant percentage of its remaining shares in UBL Dr Nadeem ul Haque and this writer wrote a piece challenging the government`s assertions regarding its overall economic strategy. We argued that while both of us have been the most vocal proponents of a deregulated, open market-based management of the Pakistan economy, privatisation was simply one of the instruments with which to achieve this objective. We argued that greater clarity was needed on the objectives underlying the disposal of these shares and the fundamental issues that the government was hoping to resolve, going forward, through similar deals and that ambiguities driving a privatisation programme could lead to undesirable outcomes.

We raised the following questions on this approach and pleaded for a more informed debate on the wisdom of the government`s privatisation policy. We are confident that the reservations we had expressed on the strategy would be supported by most analysts of public policies: The dilution of the government`s stake in the equity of a business should result in improving the entity`s efficiency and the bottom line in its profit and loss account.

The transaction should assist in improving competitiveness in the sector and in the economy as a whole.

The method adopted to sell the unit or a proportion of its shares should not result in the augmentation of the wealth of those already well-endowed.

The proceeds from such an operation should not become a revenue-generating measure for funding the government`s short-term fiscal requirements, for example by meeting some magical fiscal budget deficit number agreed with the IMF, resulting in the further postponement of much-needed urgent fiscal and associated reforms. In other words, the disposal of these shares should not simply become a substitute for government failure to mobilise adequate revenues through serious fiscal adjustments.

When outcomes of such privatisation-related transactions are judged and assessed against these criteria we are at a loss to understand what has, or is likely to, be/have been achieved.

HBL is already in private hands and is a thriving enterprise. A sale of additional HBL shares cannot by any stretch of logic lead to improvement in the efficiency of its operations and to an increase in its profitability.

The government claims that domestic and international response to its offer to sell these shares was overwhelming. But such a reaction from potential investors was hardly surprising given that they were sold at a price lower than what they were being traded at in the stock market, with expectation of a rewarding dividend yield on these holdings currently 7pc and on a rising trend.

The HBL shares have been sold at an unexplained discount, whereas if the subscription was oversold, as was the case, the price should have been bid up, a method and mode not amended even after the lessons learnt from the divestment of UBL`s shares.

Moreover, as argued by us in the case of the UBL transaction, considering that the shares of HBL are already being transacted in the stock market why did the government opt for an off-floor transaction? Even if one were to, for a moment, concede that the domestic market may not have been in a position to fund such a large transaction the shares could have been sold steadily in small lots, thereby raising more funds for the government.

Domestic legislation requires the proceeds to be earmarked for retiring debt. But it is not patently evident from the available information that these receipts are either being, or going to be, used for this purpose. There is every reason to fear that these funds will not be used to retire debt. And if these receipts are employed for funding the budget deficit for this year and ease the financing of the deficit on our external account or build up the foreign exchange reserves, they can at best provide temporary relief.

Not much has been done to address, in a sustainable manner, the issues pertaining to these two perennially chronic, lingering, imbalances.

The reason for doubting the government`s intentions is not just the lack of evidence on how they treated the proceeds from the disposal of UBL`s shares but also because the profit that will be made on the disposal of these shares will be booked as capital gain by the State Bank. This will eventually get distributed to government as State Bank profits, getting reflected as non-tax revenues for this year and reducing this year`s budget deficit by roughly 0.3pc.

The Business Recorder has estimated that the cumulative annual growth of HBL`s dividend since 2004-05 has been 25pc and even if this rate of growth in dividend income declines to 18pc over the next eight years (and there was to be a rupee depreciation of 5pc per annum) the combined dividend income for this period would be higher than the money collected from the sale of these shares.

Moreover, even if these proceeds were to be used for retiring the government`s growing debt liabilities, it is not that obvious the loss of dividend income in future years will be recouped by the savings on reduced costs of debt servicing.

So asset stripping is taking place while debt obligations are building up simultaneously; its servicing will be an arduous undertaking in the future, especially if a significant percentage of the dividend stream gets remitted abroad to foreign investors like the IFC, with its future impacts on the current account and its financing. Nor will the investment of these receipts in public-sector projects being pursued by the government generate a level of return higher than the loss of dividend income from these shares had they continued to be owned by the government. Most such projects are poorly selected and designed and result in leakages owing to bad governance and incompetence.

Finally, those with deeper pockets have been favoured, thereby increasing the wealth of the richer segments, a result which should not have been one of the objectives of the disposal of these shares.•
The writer is a former governor of the State Bank of Pakistan.

Published in Dawn