Amidst a lot of fanfare and publicity the PML (N)’s government last week concluded the first privatization transaction in the country after a gap of more than eight years. It sealed a deal to sell its remaining 19.8% shareholding in the United Bank Limited (UBL) for $387 million or about Rs38 billion. Perhaps calling it privatization may be somewhat misleading since the exercise more appropriately reflects a portfolio disinvestment by the government in an organization that was already under private sector management and theoretically the government’s position was that of a large shareholder. The government after going through a book building process had set a floor price at Rs155, giving 9% discount over the previous day’s trading (a level in excess of Rs170/share), but in the end, the Cabinet Committee on Privatization (CCOP) approved the sale at Rs158 per share to off-load the government’s remaining 241 million shares in UBL. The sell-off deal was oversubscribed by almost two times. The government naturally has been terming this deal as a great success in its endeavor for further privatization/disinvestments, as according to the finance ministry the deal has not only boosted the confidence of international and domestic investors in governmental policies, but has also paved the way for off-loading public stakes in the remaining blue chip institutions of Pakistan, namely HBL (Habib Bank Limited), ABL (Allied Bank Limited), OGDCL (Oil and Gas Development Company Limited) and PPL (Pakistan Petroleum Limited). Let’s try and analyze how successful this transaction has actually been and if it really is a step in the right direction.

The Minister of Privatization himself concedes that UBL has been the best enterprise for the government and that the deal to sell UBL stakes is part of the IMF program. Both these aspects by themselves make the very rationale of even selecting this transaction for disinvestment quite controversial. A perception that the government takes its privatization dictation from the IMF in itself reflects very poorly on them as it gives the impression that economic decision-making is donor driven instead of being people driven. Further, one of the reasons assigned by the privatization ministry for the selling of UBL shares is that though it was their best dividend yielding entity, the earning from it was a modest yearly dividend of Rs28 million. Now any good brokerage house or investment company advising on portfolio investment will tell you that dividend is just one of many factors used in determining the real worth of a stock. After all, the strong interest displayed by the private and institutional investors in acquiring this stock has not been without reason. And this in-turn brings us to the question: has the transaction been optimally managed? To begin with, the book building exercise in principle is designed to gauge through an institutional consultancy process the optimal price a stock is likely to fetch and then based on the response of the potential buyers a floor price is set accordingly. While generally this may be a good tool to arrive at an optimal price for the intended sell-off or for an initial public offering (IPO), it has many weaknesses. For example, in this age of information technology news travels quickly. If the premier potential buyers set a conservative price, then the same, more or less becomes the norm.

The order of assessment-seeking in implementing a book building process can sometimes be critical and quite often investors who are likely to pay the most are deliberately approached first to set the tone. It has not been transparently shared how exactly the process unfolded and how the floor price was arrived at and on what basis the subsequent allocations made.

The reality is that, a) the UBL share prices started going up when the government announced this proposal and a rise to nearly Rs172/share represents a trend stretching over more than six months; b) In blue chip offers like that of UBL, there is a premium. After all, how many banks can possibly come on offer where investors can take such significant stock position? c) A high chunk of stock also comes with certain management rights and that this has its own premium. The local selling process turned out to be as opaque and confusing as the international one and it is rumored that in the end the real beneficiaries were ironically the other large banking sector players like ABL who cross invested heavily in the UBL sell off; d) if the domestic investor is already paying a certain price for a stock, then the involvement of the global investor and that too through an international stock exchange should drive the price up and not down; e) Post sell-off, the UBL stock continues to be bullish and not bearish.

Another detraction of the book building process, especially when it comes to the selling of state’s assets is that it favors the big institutional investors at the expense of the individual investor or the common man (public). The very structure, options and complexity of the built-in benchmarks take the offering away from the understanding and reach of the public in general and the transaction primarily gets limited to large institutional investors. Further, from what it appears the government comes across as being partisan in favor of the foreign buyers who picked up 81% of the stakes (worth $311 million) whereas only 19% got sold locally and this too not to the average individual investors; so much for watching out for the interest of the public at large. An even more disturbing element is the sheer course this government is chartering; that of hurriedly disposing off family silver. From what we are told, 90% of sale proceeds go to the retiring of national debt and 10% to poverty alleviation, but the details on related head of accounts is conveniently missing. Also, one fails to understand why profit making liquid portfolios should be sold before disposing off loss making entities? Post Breton Woods, a country’s credit worthiness is directly correlated to the quality of assets it holds, but we on the other hand seem to be hell bent on doing away with our irreplaceable blue chip portfolios.

Institutions like UBL, HBL, ABL, apart from being ideal investment portfolios and perfect models of the state’s partnership with private-sector professionalism, also serve as incubators of parting professional management training to governmental human resource - the long term effects of which tend to be very far reaching in the entire chain of governance. And finally when it comes to the financial sector, we see that post 2008 financial crisis, countries have become very sensitive about who controls their financial institutions and in-turn their financial markets. The Indian State, for example, still jealously guards its control over its banking industry and by virtue of this also its power to be able to intervene in domestic financial markets, as and when necessary. Even today, the state’s equity in key banks of India cannot be diluted below 51%. In contrast, we seem determined to repeat our old mistakes!

 The writer is an entrepreneur and economic analyst.

kamal.monnoo@gmail.com