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PRIVATISATION THROUGH PUBLIC PRIVATE PARTNERSHIP (PPP): POLICY GUIDELINES AND PROGRAM

(AS APPROVED BY CABINET COMMITTEE ON PRIVATISATION ON 17TH FEBRUARY 2009
AND THEN RATIFIED BY THE CABINET ON 6TH JANUARY 2010)


In terms of the Privatisation Commission Ordinance 2000, Privatisation includes a transaction by virtue of which any property, right, interest, concession or management thereof is transferred to any person from the Federal Government or any enterprise owned or controlled, wholly or partially, directly or indirectly, by the Federal Government. The Privatisation Commission is, therefore, mandated to divest title, interests, rights, ownership and control in the SOEs by means of various modes of privatisation. Section 25 of the PC Ordinance stipulates that the Commission shall carry out privatisation, in accordance with the prescribed procedure, through any of the following modes:-
 

(a) sale of assets and business;
(b) sale of shares through public auction or tender;
(c) public offering of shares through a stock exchange;
(d) management or employee buyouts by management or employees of a SOE
(e) lease, management or concession contracts; or
(f) any other method as may be prescribed.

 
One of the models employed in the privatisation of large SOEs is the divestment of a minority strategic stake along with transfer of management control. For example sale of 26% shares with management control was used in the privatisation of Kot Addu Power Company, PTCL, MCB and Allied Bank. This strategy is based on the rationale that given the large size, a single offer for total divestment for some transactions would limit the interest of potential investors and consequently affect the level of competition. It also helps to sell the remaining equity in a phased manner so as to maximize the eventual sale proceeds once the private sector has had a chance to bring about substantial value addition to the SOE.

Lately, Ministry of Privatisation has been channeling most of its time and energy in devising an improved Privatisation Policy. This new policy was approved by the Cabinet Committee on Privatisation and then ratified by the Cabinet.
The New Privatisation Policy (Public Private Partnership (PPP) )

The main objective of Privatisation of 26 % equity stake with management rights through a PPP model is to put national resources and assets to optimal use and in particular to unleash the productive potential inherent in Pakistan’s SOEs. Government would continue to ensure that divestment does not result in alienation of national assets and reduction in quality of production and service to the detriment of its people. It would also ensure that divestment does not result in private monopolies and cartels.

Transactions will center on the sale of minority shareholding of the Government, subject to adequate residual equity of the Government. A sound contractual regime working under the enabling provisions of law would be put in place to accomplish cutting-edge innovative PPP structures reflecting best international industry practices in particular for utilities, tourism, retail, infrastructure, and services sectors. Where required, manner, methodology and machinations of the PPP structure will be framed following due consultative process after approvals of the Board of the Privatisation Commission. On case to case basis, the processes and documentation will, inter-alia includes the following:
 

1)

Stringent prequalification structure on the basis of evaluation of the technical and financial ‘Statements of Qualifications’ and contractually binding business plans.

2)

 Provisions with regard to management, default, termination, penalties, and dispute resolution.

3)

Where applicable provision for deliverables and time schedules.

4)

Protection against asset stripping/ shipping by the strategic partner.

5)

On a case to case basis, execution of Share Purchase Agreements, Shareholders’ Agreement, Implementation Agreements, Facilitation Agreement, Management Lease and Concession Agreements, Guarantees Agreements, Gas Sale Agreements, Fuel Supply Agreements, Power Purchase Agreements, etc.   

 6)

Protection to the employees post divestment.

 7)

Risk allocation and mandatory affirmative rights for the directors nominated by the GoP on matters set-forth in the reserved list in the Shareholders’ Agreement.  Additional subordinate layering through contractual arrangements providing oversight to joint consultative body comprising strategic investor and the nominees of the GoP.

 8)

Exit options for the residuary shares held by GoP.

 9)

Transfer restrictions and Lock-in periods on the strategic partner.

10)

Remedies to GoP, Right of First Refusals (ROFR), and Put options.

11)

Mechanisms for sale to third party and winding up.

The Privatisation Commission will divest residual shareholding of the GoP in the privatised entity at an appropriate time ensuring that such divestment will not unreasonably affect the strategic partner. The timing of such future divestments will vary depending on the post privatisation performance of the entity, agreements with the private partners, the market appetite reflected by the capital market conditions and approval of the relevant regulating agencies. To ensure that the project is implemented and operated in accordance with the agreed conditions post privatisation, representation of Government nominated Directors on the Boards of the entities will be ensured along with capacity enhancement of the Privatisation Commission to provide the Directors with compliance reports vis-à-vis the agreed benchmarks. Where found expedient, the particular entity will be listed before adoption of the PPP privatisation mode so as to benefit from the capital market price discovery mechanisms for optimum valuation and transparency purposes. The valuation exercise will be governed by the relevant rules and regulations.

This PPP model for privatisation will not apply to the capital market and asset sale transactions. The Privatisation Commission will put to consideration the practicability of bundling similar entities from the same sector for privatisation after consensus and consultations with all stakeholders.


In view of the foregoing the following policy outlines were approved by the Cabinet Committee on Privatisation (CCoP) on 17th February, 2009 and then ratified by the Cabinet on 6th January, 2010 :-

 

i)

As a policy, privatisation will be conducted in the PPP mode for 26% of the equity stake. The manner, methodology and mechanism of PPP structure will be framed after consultative process and due approval of the CCOP and the Board of the PC.

ii)


In cases where due process and investor feedback determines that the 26% PPP structure is not a practicable option, the Privatisation Commission will revert back to the CCOP with alternate structures.

iii)


 A stringent pre-qualification structure will be put in place that will include a contractually binding business plan and provisions with regard to management, default, termination, penalties and dispute resolution.

iv)

 The transactions would be structured to ensure that management control is transferred to the investor. It will be guaranteed through adequate safeguards/ agreements that this arrangement cannot be reversed. Agreements will also include exit options for GoP, remedies to GoP in case of right of first refusal, transfer restrictions and lock in period for the strategic investors.

v)

The Government would be appropriately represented on the Board of Directors of the privatised entities.

vi)

Post privatisation performance of the entities and market conditions will determine the timing and extent of future divestment of residual shareholding of the Government. Where found expedient, the entity will be listed before adoption of the PPP privatisation mode to benefit, from amongst others, capital market price discovery mechanism.

vii)

 At the Federal level the Privatisation Commission will have exclusivity to undertake Brown-field PPP transactions as envisaged in the PC Ordinance 2000. Any other Ministry / Department of the Federal Government will route its PPP transactions through the Privatisation Commission for implementation.

viii)

Twelve percent (12%) share will be reserved for workers in the privatised units. The new policy envisages workers share also in entities that are still in the public sector.