WHETHER Privatization Minister Abdul Hafeez Shaikh’s last minute dash to Dubai last weekend succeeds in salvaging the sale of Pakistan Telecommunications Company (PTCL) to Emirates Telecommunications Corporation (Etisalat) or not, the damage done to the country’s privatization programme by this botched transaction is now likely to be irrevocable.

On October 28, despite the extension granted by the Pakistan government, Etisalat failed to deposit the funds required to complete a deal to buy a 26 per cent stake along with management control in the state-owned telecom operator.

In June, Etisalat had bid $2.6 billion for 1.3 billion shares of PTCL and the terms of the agreement required Etisalat to pay 25 per cent of the total within 14 days and the rest within 60 days, or by August 28.

Then, there appeared to be a host of post-bidding activity during which Etisalat was reported to be seeking concessions of various kinds. Soon after, the Privatization Commission reduced from 36 to 18 months the time after which 26 per cent of PTCL Class B shares could be pledged to raise funds.

Analysts say the bidding company also wanted to list 15 per cent of PTCL’s shares on the Dubai Financial Market although this was not part of the original agreement with the Pakistan government.

In any case, the Privatization Commission extended the date by which the full payment was to be received to October 28. When this date passed without the receipt of funds, the assumption was that the deal would be called off. But then the privatization minister was dispatched at the last moment with a delegation to persuade Etisalat to follow through on the deal. The outcome is further negotiations.

The immediate reaction to the chaos was clear: In share trade on October 31, the first trading day after the deposit deadline expired, PTCL’s shares shed three rupees or almost five per cent falling to Rs57.20 from Rs60.20. That brought the share market down 70 points. Backing out: Debate then began to rage about why Etisalat would back out of the deal. Several theories abounded. The most commonly cited was the price of the bid. Since Etisalat’s hesitation in smoothly completing the transaction became apparent very soon after the bidding, analysts and market watchers said the management of Etisalat realized they had bid too high.

When PTCL was trading at around Rs60 per share, Etisalat bid the equivalent Rs117 per share ($1.96) while China Mobile bid Rs63.48 ($1.06) and SingTel bid Rs52.54 per share (88 cents). In other words, Etisalat bid over $1 billion more than the second highest bidder.

The questions remains of why Etisalat offered such a high price to begin with. Why would any investor overpay for an asset in Pakistan given the country risk associated with the investment?

Another reason ascribed to Etisalat’s hesitation by analysts has been PTCL’s sudden although not unexpected deterioration in financial performance. For the first quarter of 2004-05, PTCL’s net profit declined 12 per cent to Rs5.53 billion on account of rising competition post-deregulation.

Revenue also fell 2.7 per cent to Rs17.7 billion. Prior to this, the company had announced an 8.8 per cent decline in net profit for the full year 2004-05 to Rs26.6 billion and analysts estimate this year’s revenues to be no higher than Rs25 billion.

Although the company’s revenue and profit were expected to take a hit on account of rising competition from new private sector operators and fierce price cuts, perhaps Etisalat had readily believed the management of PTCL which had vociferously claimed that they were well-prepared to fight the competition. Then, some analysts say in the period after the bidding, Etisalat may have been discouraged by the complexity of obsolete labour laws which virtually prevent the firing of employees. This could be true since most companies have to offer expensive voluntary handshake schemes post-privatization. But then Etisalat witnessed the severe strife that took place between the management and the unions of PTCL which had gone on a prolonged strike prior to bidding.

Why didn’t Etisalat take a hint about brewing labour issues then and refrain from putting in a highly priced bid for the telecom operator? Others say that international acquisition transactions of this type typically come with staggered payment schedules rather than large single or two-time payments and this heavy financing requirement discouraged Etisalat. This has little credibility since the bidders were aware of the terms and conditions of the transaction beforehand, the logic of a staggered payment schedule notwithstanding.

Moreover, they must have had the required funding available before they made the heavy bid. But even if they didn’t, it would be a fair assumption that a company like Etisalat would hold good standing in the borrowing markets and be able to raise the funds with ease. Expensive errors:

This botched transaction raises complex questions. First, despite expensive errors in the past, even during the union crisis that preceded the sale of PTCL, why is the Privatization Commission reluctant to be more open and clear about the changing status of transactions? Undoubtedly they will take the plea that statements about listed companies can only be issued with care since share prices are affected by related news.

But the very fact that PTCL is a listed company and a volume leader at that, makes it imperative that the PC provide factual updates and let the market take its natural course rather than obscure information and let the speculators run wild. As it is, fund managers are predicting that the chaos surrounding PTCL will be a significant blow to the market.

More broadly, there is also the wider question of the role of Middle East investors in the privatization and investment drive. So far, the government and analysts alike have relied heavily on the Middle East as becoming the largest source of both foreign direct investment, foreign portfolio investment and privatization interest. This is based on the assumption that Middle East investors have, since 9/11, pulled money out of US and European markets and are on the hunt for opportunities closer to home.

The belief that Pakistan would benefit was further buttressed when Etisalaat’s generous bid for PTCL came through. Indeed after the earthquake, most experts were even predicting that the largest aid receipts would come from the Middle East. Now, perceptions will undoubtedly alter. Etisalat’s bid going sour is the second broken deal coming out of the Middle East after the Saudi group Kanooz Al-Watan also failed to deposit the funds after winning the bid to buy a 73 per cent stake in Karachi Electric Supply Corporation.

So what’s next? If the government offers a lower bid price to Etisalat to entice them to complete the transaction, that will do plenty to hurt the government’s credibility, especially since Islamabad had loudly trumpeted the high bid price received for PTCL, ascribing it to the improvements brought about by changes in economic policy.

If instead, the Privatization Commission ultiametly decides to end the Etisalat deal and offer the stake in PTCL to the second highest bidder China Mobile, that will raise fresh questions. China Mobile and the third bidder Singapore Telecom (SingTel) had offered significantly lower bids for PTCL and were reported to have been more than surprised by Etisalat’s bid.

But even if their lower bids are acceptable to the Pakistan government, the question still remains as to whether the other bidders will return to the PTCL transaction. It is not certain by any measure that they will return especially now that they have had plenty of time to observe the way the transaction has moved with Etisalat and the chaos.

A third option could be to restart the process altogether and reconsider how to sell PTCL, perhaps by reconsidering the decision to break up the company. But this will also raise serious questions of credibility for the Privatization Commission by sending a clear signal that their original plan was flawed and even the sale of one of the country’s most important companies was not carefully thought through.

Another option would be to reconsider altogether the plan to sell PTCL and decide instead that the government will continue to own the company but it will be run by independent management governed by an independent board. As has been the case with National Bank and Habib Bank prior to its privatization, this could work if implemented well. But of course, the government would then have to back down from its clearly and repeatedly stated position that the government should not own or run companies.

Either way, it’s a tough call. Clearly, the government is rattled by Etisalat’s backing out. Enough for the Prime Minister to dispatch the privatization minister to Dubai on an urgent mission. That in itself hardly appears fitting: a government pursuing with such vigour a defaulting company and that too one that has bid for supposedly one of the country’s most prime assets? But nonetheless, now that it’s been done, how the minister succeeds in his mission, if he does, will be as important as whether he succeeds in determining the future of Pakistan’s privatization programme.