Privatization of Pakistan Telecommunication Corporation - a survey.
More than six months have passed since the floatation of the two massive public offerings of the PTC vouchers convertible to shares. The high state of euphoria which gripped the people in August and September 1994, is no longer there. The Privatization Commission is wondering why the shares of such a profitable company have failed to meet the expectations, and the people, particularly those who bought the vouchers/shares after the first offering, are worried about their investments. This article traces major developments in the privatization of the PTC and identifies some of the factors responsible for the poor performance of PTC shares in the local and international equity markets.The PTC privatization is being undertaken to realise multiple goals of achieving efficiency in the provision of telecommunications services, meeting growing demand, creating conducive environment to benefit from the technology revolution and to generate cash for the resource starved government. The government of Pakistan has been following gradual measures to involve private enterprise in the telecommunications sector for the last few years. As apart of this effort the Telephone and Telex department was granted further autonomy in 1990 to become Pakistan Telecommunication Corporation, and licences were granted to private companies to operate mobile telecoms, card phones and pager facilities. Other services such as facsimile, data, fixed and cellular mobile communications, global satellite services and fibre optics have changed the way telecom networks are developed, marketed and operated.
The decision in 1990 to convert T&T department to PTC was a significant step towards inculcating dynamism in the telecom sector. An ordinance was issued whereby the T&T department became a 100 per cent government owned corporation. The ordinance was converted into an act of parliament in 1991. PTC, as a legal entity, was given the mandate to plan, expand and operate telecom service in the country. Its Board of Directors had powers to enter into domestic and foreign loans from sources of its choice. The PTC authorities claim to have realised miracles after the reforms in 1990. The capacity of the corporation increased from 850,000 lines in 1990 to almost 2.5 million lines by June 1994, an increase of around 300 per cent.
Pakistan Telecommunication Corporation is one of the largest and the most profitable business entity. PTC's net annual profit of Rs. 14 billion for 1992-93 exceeds the accumulated profits of all the publicly traded companies in the country. The company's market value based on the share price at the time of second public offering was estimated at Rs. 204 billion amounting to 60 percent of the capitalisation of the entire Karachi Stock Exchange.
The sector reform process caught further momentum in early 1994 when government took a number of policy initiatives. In July 1994, a legal strength was imparted to the process by promulgating Pakistan Telecommunication Ordinance, that commenced the implementation of the privatization programme. The government decided to sell 26 per cent shares of the PTC to the domestic and foreign investors. The salient features of the telecommunications sector reform are as follows:-
i) To establish legal and regulatory framework within which providers of telecommunications equipment and services can make long-term plans for investments. The new regulatory regime will be administered by the Pakistan Telecommunications Authority (PTA) which will oversee the performance and regulate the telecommunications operators.
ii) To establish National Telecommunications Corporation for provision of telecommunications services for defence, federal and provincial governments and local authorities.
(iii) Pakistan Telecommunications Corporation will be privatized and the new company ("PCTL") will be granted a renewable 25 year licence, the first seven years of which will give the new company the exclusive right to provide basic telephone facilities. The new PTC will also be obligated, under this licence, to meet pre-assigned target for the expansion of its network and improvement in the quality of service.
iv) Telecommunications services in Pakistan, including basic telephony, after the seven year period of exclusivity, will be open to competition subject to the policies of the government.
v) To attract investment government has proceeded with:
a) Floatation of PTC vouchers of Rs. 3 billion exchangeable into shares of PTCL. The vouchers each of Rs. 3000 worth shall be converted into 100 ordinary shares of Rs. 30 each within two years of floatation.
b) International placement of 5 billion PTC vouchers, 9.8 per cent of PTC equity (worth US $ 900 million) and
c) The sale of 26 percent of stake to strategic investors, probably including one or more leading international operators. The government would undertake subsequent sale of a part of it remaining stake in one or more tranches, as market conditions permit, to both Pakistani and international investors.
Progress on PTC Privatization
The process of PTC privatization was started in July 1994 with the promulgation of the Telecom Law which is now the legal base for sector reform. Later the government offered shares of the PTC to the public. However, it was discovered that the incorporation of the PTCL may take more than a year. It was, therefore, decided to offer PTC vouchers exchangeable into shares of PTCL (within two years).
First Public Offering
In August 1994, the government floated one million PTC vouchers in denominations of Rs. 3000, exchangeable into hundred shares of face value of Rs. 30 each. The issue represented 1.8 per cent of paid-up share capital. The floatation was managed by Khadim Ali Shah Bukhari (KASB) and Union Bank of Switzerland (UBS). The floatation had many distinct features. First, as a result of a very enthusiastic response from the people, the issue was heavily oversubscribed. Against the target of raising Rs. 3 billion, the government managed to generate Rs. 19.16 billion, 6.4 times more than the target. Second, 85 per cent of the amount generated came from foreign investors. This was an amazing figure for the government which had not anticipated that the PTC shares would generate such an overwhelming response from the foreign investors.
Third, 15 per cent of the amount generated came from various categories of Pakistani investors (General Public, PTC employees, Overseas Pakistanis). Given the massive advertisement campaign before the launch of the float, the relatively poor response from the Pakistani investors disappointed the government. However, the poor response also brought into light the limited capacity of the domestic capital market. But in a country where the stock ownership spread is very small and the people are not used to massive capital floatations, the poor response was understandable. Another explanation says that the people were reluctant to mobilize their hard earned savings because of huge financial scams in the recent past (Taj Company scandal, Coop scam, Mehran Bank scandal etc.). The poor response was a blessing in disguise for all the Pakistanis who had applied for the PTC vouchers. The planned ballot for the allotment of the vouchers was withdrawn and all the Pakistanis who had applied for the vouchers were declared successful winners of the vouchers.
Second Public Offering
When the heat of the issue was at Us peak and the PTC vouchers were selling like hotcakes among the foreign investors, the government of Pakistan decided to further capitalize on the prevailing conditions. The government decided to launch the second tranche of 5 million PTC vouchers in the international capital market. The government decision to go for an immediate second tranche created a considerable controversy. The basic issue was whether h was an appropriate time to go for floatation in the international market. The government was confident on the basis of the first tranche reception in the international capital market. Apprehensive of inflationary pressures, the critics observed that it was too early to go for floatation of second tranche when the heat of the first tranche was still there. A consortium of 11 institutions offered Rs. 15 more per share than the previous offer of Rs. 30 by the KASB and UBS. The consortium was headed by Jardine Flemming and MCB. The other members were: ABN AMRO, Citicorp International Ltd., Dresdner Bank A.G., Global securities Pvt. Ltd., international Securities Ltd., BMA Capital Management Ltd., Credit Lyonnais Securities, Faysal Islamic Bank of Behrain E.C., Indosuez Capital, Lehman Brothers and Nomura International.
The second tranche of PTC vouchers was offered for sale in the international capital market from September 13, 1994 for three days. On the very first day bids were recorded for $ 37 million which was quite unbelievable for many. The investors who forwarded their bid through Jardine Flemming had better chances of getting allocation of the vouchers. Within twenty minutes of the opening of the books, the orders for two million vouchers were booked, and by the afternoon the figure crossed the 5 million target sale. As the demand for the vouchers was steeply going up, so was the price.
The brokers working at the stock exchanges of London, New York, Hong Kong and many other parts of the world were continuously informing their clients about the rising bids which touched the strike price at Rs. 53 against the base price of Rs. 45. By the afternoon of the first day the final price wa fixed at Rs. 55. The final earning on the six million voucher is estimated at Rs. 29.6 billion. The demand for the PTC vouchers varied in different parts of the world. Final estimates suggest that 30 percent of the second tranche went to the UK, 26 per cent to USA, 23 per cent to Hong Kong and Far East and 21 percent to the rest of the world. The proceeds from the issue were approximately US $ 898 million. The issue was priced at Rs. 5500 at the foreign exchange rate of 30.6194 Rupees/US dollar, giving an issue price of US $ 179.62 per voucher. The offering represents the fourth largest equity offering ever from an Asian Issuer.
Post Floatation
Scenario
Having received a tremendous response from the national and international investors, the PTC shares started facing problems after the second floatation. The following table shows how the prices of the PTC vouchers per share have faced a steady decline at the Karachi Stock Exchange Index.
The performance of PTC vouchers in the stock markets has been quite unsatisfactory in the last four months. The price per share which struck Rs. 55 at the time of second floatation, has been gradually declining. Given the massive amount of the PTC issue, combined with the floatation of other big issues (such as Hubco, Al-Faysal Investment Bank, Lucky Cement) around the same time period, the domestic capital market has been facing severe liquidity crunch. Consequently he stock markets faced a slump in January and February, 1995. There are a number of factors (internal as well as external) which have been held responsible for the deteriorating performance of the PTC issue.
First, it was claimed that maximum information had been provided to the investors at the time of the two floatations. it transpired, however, that some of the information was manipulative. The PTC documents showed the number of lines in operation as 2.43 lines whereas in actual the figure stood around 1.8 million. Privatization Commission (PC) reports suggest that the discrepancy occurred because of the misinterpretation of the figures. The PC perhaps gave the figures taking into account some future projections. No matter what the actual state of affairs was, but the impression from the press reports was creating doubts on the validity of the official figures.
Second, the report that the government had used a major portion of the PTC proceeds to meet the budgetary deficit, is also believed to have negative effect on the PTC share price. According to the reports, the government had used or earmarked Rs.18 billion out of the total PTIC proceeds of Rs. 29 billion, to set the budgetary deficits. It is interesting to note that a strong impression was created at the time of the two floatations that the PTC proceeds would not be used to meet the budgetary deficits of the government. Most of the investors were under the impression that the PTC proceeds would mainly be used to upgrade the telecommunications facilities in the country and hence add value to their investments. But once the investors realised that major portion of the proceeds was being diverted to meet the budgetary deficits, the investments started declining.
Third, are port by the Senate's Standing Committee on Finance in Dec. 1994 expressed some doubts on the methodology of the PTC privatization. The report charges that the "advice of the Corporate Law Authority as to the timing of the new offer was not appropriate" and also that the purchasers of the first offering were not informed of the government's intention of the second offering. The report sent a strong impression that the privatization of PTC was grossly mismanaged. Though the major conclusion of the report was that the Privatization Commission should move wIth caution and not to offload assets like the PTC at throw-away prices and protect national interests". Even though the conclusion was without sufficient theoretical and empirical support, it did create reservations in the minds of the investors.
Fourth, the Auditor General's report on PTC financial affairs pointed out some serious pitfalls in the financial management of the corporation. The PTC, under the rules is required to prepare its annual statement of accounts including the profit and loss account and the balance sheet for the year in terms of Subsection 1 of Section 18 of the Pakistan Telecommunications Corporation Act. The same act obligates the corporation to have its accounts audited by chartered accountants (Subsection 2 of Section 18). The corporation, however, acted upon these legal requirements by only breaching them as it neither finalised its commercial accounts for the year 1991-92, nor had them audited by the chartered accountants', the report said. The report further quotes many instances of financial indiscipline, overstepping of authority, administrative inefficiency and undertaking of unauthorised expenditures.
Fifth, PTC's decision to change its auditors for the year 1993-94 brought about some misgivings. Press reports suggest that A.F. Ferguson & Co., Chartered Accountants' contract with the PTC was called off because of the former's opinion expressed in its report regarding unverifiable estimates made by the management. Ferguson had audited PTC's accounts for the previous two years. in accordance with the generally accepted auditing standards, reasonable assurance had to be obtained by the auditor as to whether the financial statements were free of any mis-statements. The PTC management on the other hand did not agree that any unverifiable estimates were given to the auditors. According to the PTC management, the reason for changing the auditors was the fee asked for the year 1993-94 as well as the time frame they required to complete the audit.
Sixth, the government's failure to find a strategic investor(s) who could buy 26 per cent of the PTC capital, is yet another gray spot. The Chairman Privatization Commission had aired statements time and again that a strategic investor would shortly be found. But the developments so far suggest that the government is facing problems to find the strategic investor.
Seventh, the sharp decline in the price of PTC vouchers in January is also attributed to peculiar conditions in the international capital markets. The drastic devaluation of the Mexican Peso by 30 per cent in December 1994 had a far reaching impact on the equity markets all over the world. The worst hit were the emerging markets, as the foreign fund managers immediately started loading off their holdings because of sudden inherent risks involved. Moreover, the US interest rates also went up by 0.5 per cent in the second week of January which also impelled foreign fund managers in the emerging markets to suddenly change their investment portfolios.
Eighth, the ability of the government fund managers to deal with the modern international capital markets which are increasingly becoming sophisticated supported by vast data bases electronically connected to all parts of the world. Empirical evidence of this paucity of knowledge was the bungle bearer certificate floatation advertised in the US a few years ago which brought a great embarrassment for the government. Such incidents show old mind sets which still look towards the World Bank and the IFC whereas the new mind set should look towards institutions like Goldman Sachs, Smith Barney, Merrel Lynch, Baring Bros, Nomura etc, dominating the world of international finance.
CONCLUSION
The privatization of Pakistan Telecommunication Corporation has marked a fresh phase to involve private sector in maximum spheres of economic activity. in the last few years the telecommunications sector in Pakistan has seen a clear change in the service mix (change from a homogeneous telephone service to a variety of services such as card phones, mobile phones, facsimile and data communications). To keep pace with the rapidly changing technological scene and realise other conventional goals of privatisation, the Government of Pakistan decided in July 1994 to privatise the PTC. in a quick succession in August and September 1994, the Privatization Commission offered for sale 11.8 per cent shares of PTC in the form of vouchers in the national and international capital markets. The government was able to generate Rs. 29.8 billion in the two public offerings. Contrary to the expectations the PTC voucher/share prices have seen a steady decline since September, 1994. The reasons for the decline are complex and many but some of the important ones are the controversy on auditing the PTC accounts, poor maintenance and dissemination of information to the investors, poor expertise of the government to manage such a massive capital issue and problems in finding a strategic investor(s). The PTC, by far one of the most profitable business entities in the country, has a great potential to grow. There is a need to have greater transparency of the affairs of the PTC. Moreover, an up-to-date information on the PTC needs to be properly maintained and efficiently disseminated to the current and prospective investors.
Second Public
Offering Highlights
of the Transactions
* US $ 2 billion of bids was received at the strike price of Rs. 5,500 * 2.1 over subscription at the strike price * Geographical origin of the bids are approximately:
- 30 per cent of the demand from the UK
- 26 per cent of the demand from the USA
- 23 per cent of the demand Hong Kong and the Far East
- 21 per cent of the demand from the Middle East & the rest of the World. * 602 institutions participated from 21 countries worldwide. All participants are financial institutions or individual investors. * The proceeds from the issue were approximately US $ 898 million. The issue was priced at Rs. 5,500 at the foreign exchange rate of 30.6194 Rs./ US $, giving an issue price of US $ 179.62 per voucher. * The offering represents the fourth largest equity offering ever from an Asian Issuer.
[TABULAR DATA NOT REPRODUCIBLE IN ASCII]
Time Series of PTC Share Price Price of PTC Voucher Share Date (In Rupees) 15.08.1994 55.00 02.12.1994 46.80 09.12.1994 45.40 16.12.1994 40.10 23.12.1994 38.75 06.01.1995 43.65 12.01.1995 38.20 20.01.1995 38.75 27.01.1995 34.10 03.01.1995 33.60
[TABULAR DATA NOT REPRODUCIBLE IN ASCII]
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| Author: | Ahmad, Naeem |
|---|---|
| Publication: | Economic Review |
| Date: | Aug 1, 1995 |
| Words: | 3214 |
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