AN economic turnaround can be brought about by unlocking value from assets that are presently under-performing.
Basically, to instigate economic growth would require a jump in the output of goods and services that the economy produces. That impetus can come from the privatisation of the 200 or so state-owned enterprises (SOEs).
Whilst the exact amount of losses being incurred by these enterprises would depend on what you count and how you count, the final figure would probably be in the ballpark of the annual defence budget. Even then, this is the smaller issue. The larger one being the opportunity cost of not taking action, a theme we will return to in a moment.
When approaching an acquisition, financiers and businesspeople are looking more at its cash flow potential and less at its assets (land, buildings, and machinery). We gain a better perspective by viewing these SOEs (businesses) as going concerns rather than as a garage sale of assets.
Often these assets have greater countervailing liabilities leaving many of our SOEs with negative net worth. To ensure a smooth privatisation journey, the government’s policy planners would do well to explain these differentiations to the general public, the media and to the legal fraternity.
The infamous Steel Mills case of 2006 ran into snags when it was felt that the price being offered was less than the cost of the land. This could have been avoided if the deal had been structured for the going concern. Nevertheless the Pakistan Steel judgment does bring some lessons on the need to improve transparency and to ensure that a level playing field is maintained at all times.
Sprawling units like Pakistan Steel and Pakistan Railways (after restructuring and corporatisation) can be offered on the basis of leasehold land (granting temporary and conditional rights on the land) instead of freehold (which grants property rights in perpetuity).
For the investor, this would bring down the capital outlay while the government would retain title to all its properties. In a going concern the real value is created from satisfied customers, improved business performance and increased cash flows. From the point of view of efficient business operations, it matters little whether the land underneath is leased or owned.
It would be advisable to offer additional incentives to privatised businesses that also undertake to list on the stock market. Apart from broad basing ownership this would increase the size, and arguably the depth, of our capital markets. At present, 23 majority state-owned enterprises — led by the OGDC, the national oil and gas company — account for over a third of the total market capitalisation of the Karachi Stock Exchange.
It is also critical to have a pro-privatisation management in the entity being sold. Nothing can be more discouraging than for a bidder to meet the management of the company only to be told what a bad decision it would be to buy the asset.
An unwilling management can also stall the process by not providing the correct data or withholding data until the last moment. In worst cases it can incite employees to demonstrate against the sale — and you have all the ingredients of a failed transaction. Taking management and employees along not only smoothes the process, it is also the fair way to proceed. Another key determinant of success is the visible commitment on part of the government. The National Power Construction Company has been taken to the bidding stage on a number of occasions, by a number of governments. Then the process has been abandoned. This has left bidders completely disillusioned (having spent thousands of dollars in due diligence) and now they refuse to take the process seriously.
The moral of the story is that when the decision to sell has been taken, then market forces should be allowed to take over. Investors are astute people and if the government ensures full disclosure and a fair and competitive bidding process, they will arrive at a fair market-based price. Once you approve the successful bidder, the transfer process should be mechanical.
On a priority, the government must undertake the long delayed policy reforms — particularly in the energy sector — and other sectoral and regulatory strengthening centred on key entities being privatised. In tandem it should launch a communication programme to explain the merits of the privatisation and reform agenda to the public.
According to a recent report in the Telegraph, 100 shares of British Gas bought during its privatisation in 1986 for £135 would today be worth £1,682. Compared to the FTSE 100 which has trebled over the same time period, British Gas has increased 12 times. These forgone profits represent the opportunity cost of not taking
action — which we had alluded to earlier.
Pakistan too has a reasonably good track record of privatisation. Since 1991, 167 entities — banks, energy companies, telecom operators, fertiliser plants, ghee mills, cement factories, automotive plants, chemical and light engineering industries — have been privatised to yield $9 billion to the exchequer. Most of the entities have fared well under private management and their share price valuations have contributed to creating national wealth.
In several of these, notably Kapco and PTCL, the government retains its majority shareholding and earns dividends on their profits. In many of these entities, private owners have injected technology and management practices and enhanced these government assets to blue chip grade.
Lastly they continue to pay taxes at the corporate income tax rate of 35pc. The path to prosperity has seldom been more visible, illuminated as it is on both sides.
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