The government's privatization programme is gathering steam. The next public sector enterprise to come under the gavel of the Privatization Commission (PC) is the Sui Southern Gas Company Limited (SSGCL).
The government presently holds 70 per cent of the company's equity directly, while its total holding including holdings through institutions is almost 93 per cent.
It has been decided by the government to offer 5 per cent of the shares, or 33.55 million shares, to the general public at the rate of Rs26 per share. In case the offer is oversubscribed, as is expected, the government will allot further shares upto another 33.55 million to subscribers. In other words the government will exercise the "greenshoe" option
The SSGCL is guaranteed annual earnings before interest and taxation (EBIT) of 17 per cent on the written-down value of its net fixed assets in operation. In the present environment of declining borrowing costs to their lowest levels in more than almost four decades, and a planned reduction in corporate taxation, the guaranteed annual return of 17 per cent promises attractive and increasing earnings for shareholders.
However in the roadshow presented jointly by the SSGCL, the PC and their financial advisors at a local hotel in Lahore on 12th January the managing director informed those present that the annual return of 17 per cent would no longer be guaranteed by the government after 31 December 2005.
Thereafter the return allowed to the company would be determined by the Oil and Gas Regulatory Authority (OGRA), and would vary from year to year.
The basis to be employed by OGRA was not explained but it will, in all likelihood, be on the pattern in vogue in the US and Canada. The regulatory authorities there allow a risk premium over the utilities' weighted average cost of capital in a typical capital structure with a debt-equity ratio of 70:30. After December 2005 there is therefore no firm expectation of shareholders' earnings.
They will more closely mirror movements in borrowing costs, which in the foreseeable future point to a downward trend. In the next two years shareholders though can expect to enjoy "windfall" earnings.
The message thus unwittingly and unintentionally conveyed by the managing director, SSGCL, is that investors should move out of the share once the period of government-guaranteed return expires by the end of 2005.
However this aspect is not likely to figure to any significant extent in the public response to the share offer which most analysts believe will be overwhelming.
The offer price of Rs 26 per share represents a discount to the prevailing market price of Rs 6 per share. The disinvestment of OGDCL through public offering of shares last November has netted successful applicants a capital gain of Rs 6 per share, or more than 60 per cent of the issue price.
This represents a whopping Rs1.6 billion, which has been termed a "gift" to the small investor.
The question that arises is why are state assets being disposed at throwaway prices? Why was Rs1.6 billion given away to stock market savvy speculators with the means to invest a minimum of Rs32,000 apiece.
During the Thatcher years in the UK British Telecom was the first public sector entity to be privatized. The offer price was set too low apparently to ensure the success of the offer.
But as in the case of OGDCL the investors made a great deal of money at the expense of the government. Subsequent disinvestment of UK public sector entities by the Thatcher government were on the basis of the tender method, where there is no fixed offer price.
Instead investors offer a bid price, on the basis of which a "striking" price is determined with reference to the weighted average of the bids received. In this way the government does not lose out to the investors looking to benefit from under-priced public offering of shares.
This is all the more important because the public sector enterprises privatized in the recent past have received massive injections of capital from the government to shore up their financial positions so as to make them sufficiently attractive propositions for prospective investors especially those seeking a strategic management stake.
Nawaz Sharif, during his second tenure in government, poured almost Rs50 billion into the United Bank Limited, 50 per cent of which was sold in an extremely non-transparent manner for only Rs12 billion.
Another inexplicable obsession that successive governments have displayed is with transferring strategic stakes in public sector enterprises to foreign investors. Why should these foreign investors benefit from the rescue packages designed for them by the government at the expense of the Pakistani taxpayers?
It is true that what the country needs are non-repayable foreign currency inflows, which are provided by the foreign investors in consideration for acquiring sizable equity stakes in the disinvested entities. Foreign currency loans have to be repaid and serviced.
However this too places a burden on the foreign currency reserves of the country. The new owners pursue extremely liberal dividend policies. The HUBCO, the KAPCO, the Shell et al have been excessively generous to shareholders: profit retention has been minimal.
As a result the entire amount paid by these strategic foreign investors in consideration for their equity stakes is repatriated in the form of dividends within a period of two to three years.
Operational efficiencies which the foreign managements are expected to introduce never materialize because most of the entities privatized continue to be the recipients of government-guaranteed returns as well as reimbursement of all operating expenses.
Therefore there is no incentive for these entities even after privatization, to seek operational efficiencies, since they do not benefit from the consequent reductions in operating costs. Technology transfer, which the foreign investors promise also, remains a mirage.