PTCL’s Sullied Sale – May Value 1.4 Bln, Not 2.6 Bln

By Dr. Kamal A. Munir

It has been four years now since a 26 per cent stake in Pakistan Telecommunication Company Limited (PTCL) was sold to Etisalat through privatisation. On June 18, 2005 the United Arab Emirates (UAE)-based company, offering 2.6 billion dollars, beat China Mobile’s 1.4-billion-dollar and SingTel’s 1.2-billion-dollar bids for this highly regarded asset.

While the Etisalat’s offer sounds like a competitive one based on these numbers, the post-auction concessions that were made and the performance of PTCL since the privatisation indicate the process has been mismanaged at great loss to the national exchequer.

And since Etisalat was given full managerial control along with its 26 per cent economic stake, the government of Pakistan has very little ability to turn things around.

Before examining these issues, however, one wonders how this transaction can even be called a ‘privatisation’. The usual argument for privatisation is that the state has no business running a commercial enterprise. Private businesses, it is said, are more efficient and fare better because they are independent of political obligations and are accountable to
shareholders.

Etisalat, however, is itself a state-owned enterprise (SOE) and it is unclear how selling a Pakistani SOE to a UAE-based SOE makes sense under the privatisation theory. Furthermore, the UAE government, the majority shareholder in Etisalat, considers it to be a strategic asset and allows only UAE nationals to own shares in it.

A company with extremely restrictive shareholder laws, then, has been allowed to acquire a key strategic asset in Pakistan. More important is the issue of Etisalat’s ability to manage PTCL – the latter is a much bigger organisation and plays in a far more complex and competitive market than the former has ever experienced.

Pakistan’s telecom industry is a cut-throat one with some of the lowest consumer tariffs in the world, requiring a highlyexperienced and competent management team. Etisalat, on the other hand, was until 2004 the only entity in the UAE’s telecom market and operated as both a telecom regulatory body and a service provider.

It was only with that country’s accession to the World Trade Organisation (WTO) in 2004 that the government introduced an independent regulator and even then the UAE was the last country to liberalise its telecom market by doing so. And it was only in May 2005 that the UAE’s Telecommunications Supreme Committee awarded a license to a second company to end Etisalat’s monopoly.

This license was, however, also awarded to another SOE and Etisalat continued to operate without an aggressive, private-sector competitor. The company’s own profits are therefore largely explained by its exorbitant call charges, which are possible because of the lack of real competition, and its size is due to its near-constant acquisition spree of the last five years.

Even more serious are violations that took place during the privatisation. In contravention of international norms and Pakistan’s own public procurement rules, the terms of the sale were changed after the auction.

After winning the bid to buy PTCL and providing the initial 260 million dollars (10 per cent of the total amount owed to the government of Pakistan), Etisalat wanted to back out of the transaction. As this would have left Islamabad in an extremely embarrassing position, it decided to offer more concessions, which Etisalat readily accepted.

Some of Concessions were as following:

• Etisalat was allowed by the Privatisation Commission to spread its payment over five years. While 260 million dollars were paid in June 2005, 1.14 billion dollars were paid in April 2006 – six months after their due date – and it was agreed that the remaining 1.2 billion dollars would be paid in nine interest-free, semi-annual instalments of roughly 133 million dollars each.
  Assuming all payments have been made and will continue to be made on time, the opportunity cost to the government of not receiving the entire 2.6-billion-dollar amount in September 2005 is a whopping 351 million dollars (assuming a conservative cost of capital for Etisalat of 10 per cent; at 15 per cent the loss would be 488 million dollars).
  In other words, Etisalat paid anywhere between 350 to 488 million dollars less just by being allowed to stagger the payment, even if all payments are made on time (and there are some reports – neither accepted nor denied by the government – that only the first three instalments of 133 million dollars have been paid).
• Etisalat was also to receive a technical services fee from PTCL of 3.5 per cent of the organisation’s gross revenue up to a maximum of 50 million dollars per annum for a four-year period. While this fee, charged for providing management services, is not in itself unusual, the fact that it was added after the auction was concluded makes it an opportunistic revenue-generating scheme. At 15 per cent cost of capital for PTCL this has resulted in a loss of roughly 53 million dollars.
• Etisalat convinced the government of Pakistan to bear 50 per cent of the cost of the voluntary separation scheme, a downsizing programme under which employees could opt to leave the company in return for a payout. This scheme was implemented in 2008 with a total cost of 41 billion rupees, of which the government of Pakistan has so far paid 17.4 billion rupees (256.308 million dollars).
• Finally, Etisalat is now interested in acquiring greater control of PTCL properties, presumably to use them for purposes other than what they were acquired for. Privatisation agreements typically contain clauses meant to prevent the buyer from selling off pieces of the acquired entity. In post-auction negotiations, Etisalat seems to have persuaded the privatisation commission to remove this clause: it is no longer present in the latest share purchase agreement but PTCL officials concede in private that it was present in the original version.

PTCL owns thousands of properties that are not meant to be used for commercial purposes since many of them had been provided by the federal or provincial governments on subsidised rates for the specific purpose of building exchanges or other required facilities.

According to industry insiders as well as sources familiar with the company’s assets, the most conservative estimate of the value of these properties is two billion dollars. Etisalat has asked for permission to use them commercially with the implicit permission to sell them.

If the government agrees to this, it could result in a potential loss of 500 million dollars (since Etisalat owns 26 per cent shares, they will be entitled to roughly one fourth of the two-billion-dollar value). At the moment the issue is pending in the Sindh High Court.

Even leaving aside the real estate, a conservative estimate of the other costs the government has incurred due to concessions made after the bid was accepted (payment in instalments, the technical services fee and sharing the burden of the voluntary separation scheme) come to roughly 700 million dollars.

Adding the money Etisalat will earn if it is permitted to sell 26 per cent of the real estate owned by PTCL and deducting this total cost from the bid amount, the UAE based company will end up effectively purchasing the company for 1.4 billion rather than 2.6 billion — about the same as China Mobile’s bid.

Pakistanis would not be remiss to ask how the government can give away a competent and profitable organization such as PTCL for this meagre sum and that too to another SOE whose competence and experience is far from established.

This is an important issue not just because of what it means for PTCL but also becauseof the precedent it can set for future privatisations of state assets.

Articles continues here: Pre and Post Privatization Tale of PTCL’s Financials

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This Article was also Published in “The Herald”, December 2009 Issue.

Dr. Kamal Munir has been a Professor of Strategy and Policy at University of Cambridge from 2000-2009. Prior to that he taught at McGill University, Canada from 1996-2000. He obtained his PhD in Strategy and Policy from McGill University, Canada.

Dr Munir has published several articles in leading organizational and technology journals, including the Academy of Management Journal, Cambridge Journal of Economics, Industrial and Corporate Change, Organization Studies and Research Policy. In addition, he has written numerous articles for prominent newspapers and magazines such The Financial Times, The Guardian, Financial Express India, Dawn, Herald and World Business. His work has been quoted and cited in several forums, including BBC’s Hard Talk, and BusinessWeek.