About us

How We Privatise

1.    The privatisation process
2.    Treatment of Employees

The privatisation process

The  privatisation process is aimed at balancing the interests of the major stakeholders, namely consumers, taxpayers, investors, and employees. It is also aimed at ensuring transparency in the sale process, which will, in turn, maximise sale proceeds subject to decisions relating to balancing stakeholder interests. For this reason there are many checks and balances in the system, making it extremely difficult for any individual or group to influence decisions. Independent firms are appointed to estimate the value of the property being privatised. All bids are conducted publicly, with the media invited to witness the proceedings.

The Privatisation Commission Ordinance enshrines into law many of the processes that were already being followed such as valuating the property being privatised and advertising widely before all privatisations. To ensure that the management of the entity being privatised does not jeopardise the privatisation, the law requires the entity being privatised not to perform any action that would result in assets being lost or wasted and not to incur any liability other than in the normal course of business without the written approval of the PC. Not only does the law serve as a checklist, it clarifies the Commission's mandate and ensures adherence to the process.

The Ordinance also subjects the privatisation process to greater accountability and transparency. For example, it requires the publication of the PC's annual report, which must include audited financial statements. It also requires the PC to publish in the official Gazette within 30 days of the completion of the transaction, a summary of the transaction including the name and address of the purchaser(s) and the consultants advising on the transactions. Board and Commission members are required to disclose any conflict of interest and to remove themselves from the proceedings of a given privatisation unless otherwise directed by the Board.

Steps in Privatisation

The privatisation process varies somewhat depending on the nature of the asset being privatised, on the proportion of shares being offered for privatisation, and on whether a transfer of management is involved. The Board of the Privatisation Commission decides as to what kind of process will be followed. 

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Flow chart detailing steps in capital markets transaction with minority share offering

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Flow chart detailing steps in a transaction with transfer of management or sale of assets or business

A brief description of some of the steps common to all transactions is provided below:

Identification: The privatisation process begins with the identification of the entity or list of entities to be privatised. In a typical transaction, the Privatisation Commission, in consultation with the relevant ministry, submits a Summary of the proposed transaction to its Board. The Summary justifies the need for privatising the property, outlines the likely mode of privatisation, and sometimes seeks guidance on issues relating to such matters as pricing, restructuring, legal considerations, and the regulatory framework. Once endorsed by the Board, it is submitted to the CCOP and/or Cabinet for approval. The Cabinet or CCOP may also, in some cases, initiate the process and direct the PC to undertake privatisation of an entity. 

Modes of Privatisation

The Privatisation Ordinance specifies the following modes of privatisation:

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sale of assets or business;

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sale of shares through public auction or tender (known as a strategic sale when management transfer is involved);

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public offering through a stock exchange (usually a minority share);

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management or employee buyouts;

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lease, management or concession contracts; or

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any other means as may be prescribed.

Due Diligence: The next step is to carry out the legal, technical, and financial due diligence. This is aimed at identifying any legal encumbrances, evaluating the condition of the assets, and examining the accounts of the company. For most industrial units and some small transactions, this is done using in-house consultants and staff, or by sub-contracting out part of the work to a domestic legal, technical, or accounting firm. However, for privatisations in banking, infrastructure, or the utilities sectors, the Commission, with the concurrence of the Board, typically hires a Financial Advisor or Lead Manager for this purpose. A Financial Advisor (FA) is normally required in non-industrial transactions, such as banking, telecommunications, oil and gas, or power, whenever a transfer of management control is envisaged. If no transfer of management control is envisaged in a non-industrial transaction, the Consultant to advise on a privatisation is called a Lead Manager (LM). The FA is typically a consortium led by an investment bank and comprising an accounting firm, a legal firm, and a technical firm specializing in the business of the entity being privatised. 

Valuation of Property: In order to obtain an independent assessment of the value of the property being privatised, the Commission relies primarily on external firms for this purpose. The Financial Advisor or Lead Manager, where there is one, carries out the valuation. In other cases, the Commission contracts with an external valuation firm or accounting firm. The methods used for the valuation vary with the type of business and often more than one method is used in determining the value. These include the discounted cash flow method, asset valuation at book or market value, and stock market valuation. Despite using scientific methods, valuation remains more an art than a science. The true value is dependent on many difficult to quantify variables such as country risk, corporate psychology and strategy, and perceptions of future macroeconomic performance. Only the market can determine the true value. Therefore it is important to focus on designing appropriate transaction structures, on advertising in relevant media, in choosing appropriate pre-qualification criteria for bidders, and in following an appropriate bidding process to obtain a fair price for the privatisation. Upon the recommendation of the PC Board, the CCOP approves the reference price for the unit being privatised. 

Pre-bid and Bid Process: Expressions of Interest (EOI) are invited by advertising in the relevant media. The PC Ordinance 2000 spells out some of the advertising procedures. The EOI describes the broad qualifications that potential bidders must possess, if any. Those submitting an EOI and meeting the broad qualifications are provided with the Request for Proposals (RFP) package containing the detailed pre-qualification criteria, instructions to bidders, draft sale agreement, and other relevant documents. Interested parties then submit a Statement of Qualifications, which is evaluated to determine whether an interested party meets the requisite qualifications. Pre-qualified bidders are then given a specified period, usually one or two months, to conduct their own due diligence, following which they are invited to a pre-bid conference where their questions and concerns can be addressed. The meeting is useful in determining the bidding procedure to be followed (for example, open auction, sealed bids, or some combination) and could even determine the proportion of shares that the Government may want to offload. The bidding itself is done openly, with all bidders and the media invited.

Post-bid Matters: Following the bidding and the identification of the highest bidder, the Board of the PC makes a recommendation to the CCOP as to whether or not to accept the bid. The offer price is a major determinant in the recommendation. In some cases, the Board may recommend the sale even if the offer price is below the reference price, which itself is based on the valuation estimate provided by an independent firm. This may be the case when, for example, the Board believes the advertising and pre-qualification process was satisfactory and when calling for re-bidding was unlikely to result in a higher price, while delaying the likely benefits from the privatisation. In other cases, the Board, or the CCOP, may decide to call for re-bidding, on the premise that market conditions will improve. Once the bid price and bidder are approved by the CCOP, the PC issue a letter of acceptance or a letter of intent to the successful bidder, indicating the terms and conditions of the sale. Following negotiations with the bidder, the PC then finalises the sale purchase agreement, collects the sale proceeds, and transfers the property. Within 30 days of the sale, the PC is required to publish the summary details of the transaction in the official gazette.

For major transactions in the non-industrial sectors, the process of privatisation is lengthy. After receiving CCOP approval for the privatisation of a unit, it typically takes about 18 months to close the transaction, even when no major restructuring of the company is required. This includes about six or seven months to appoint a Financial Advisor and another three or four months for the FA to complete its legal, technical and financial due diligence and to propose a privatisation strategy. Following approval of the strategy, the marketing process may take six months (valuation efforts proceed in parallel), while it may take another two months to close the transaction after the bidding. Additional delays in privatisation are often caused by waiting for the necessary regulatory framework and sectoral policies to be put in place and for any needed restructuring to take place. To see a typical time table please click here.

Treatment of Employees

Treatment of Employees
The interests of employees of state-owned entities on the privatisation list have to be balanced with the interests of consumers, taxpayers, and investors. While there are some well-run SOEs, the majority have many more employees than are needed for efficient operation of the company. Essentially, taxpayers and consumers have been paying the salaries of those with little or no productivity through a combination of one or more of the following: higher prices, SOE losses, lower profits on taxpayer investments, and reduced quality and coverage of services.

Surplus employees at a publicly owned bank, for example, results in lower returns to depositors, higher costs to borrowers, and lower profits. In fact, public sector banks have made substantial losses and required sizeable equity injections from the Government to prevent bankruptcy or to meet the State Bank of Pakistan's prudential regulations. The losses stem largely from overstaffing, mismanagement, and from being pressured to lend to SOEs that are not creditworthy. Similarly, the costs of overstaffing and mismanagement in electricity companies are passed on to consumers through higher tariffs and unreliable services. Even so, the WAPDA power companies and KESC make huge losses, which result in the Government having to inject massive amounts of equity into these companies or to provide loans and bonds to keep them afloat. Again, consumers and taxpayers end up paying the bill. The costs of overstaffing in profitable firms show up in the form of higher consumer prices and lower profits than would otherwise be the case. In short, retaining unproductive employees in SOEs is socially very costly.

Even though employment in a particular enterprise may decrease, the privatisation program as a whole, by injecting better management and additional capital and by improving the investment climate, is likely to result in increased employment opportunities, especially in the long-run. At the same time, the Government recognises that labour released from rightsizing exercises may be unable to be absorbed into productive jobs in the private sector quickly enough. It also recognises that overstaffing is sometimes so high, and the labour force so politicised, that without upfront rightsizing measures, privatisation efforts are unlikely to generate much investor interest. To facilitate privatisation as well as provide relief to employees who may otherwise be laid off, the Government has developed a policy of offering generous voluntary retirement schemes.

A different voluntary retirement scheme is used for unionised workers and for managerial and supervisory staff. The voluntary retirement scheme for workers, called the Golden Handshake Scheme (GHS), was originally negotiated with APSEWAC for use in industrial transactions but is now being offered more generally. Under this scheme, workers are offered four months of the last basic pay for every year of service, in addition to the standard legal dues. The legal dues cover amounts due from the provident fund, gratuities and pensions, encashment of earned leave, reimbursement of medical expenses, and any arrears of pay and allowances. The gratuity equals one month of last basic pay for every year of service. For managerial and supervisory staff, the voluntary retirement scheme is known as the Voluntary Separation Scheme (VSS), under which the staff receives two months of last basic pay for every year of service, in addition to the standard legal dues as described above. 

Employees have a limited time to exercise these options. They are free to take the funds as a lump sum amount to use for receiving additional training, starting a new business, or simply as a cushion until suitable new jobs open up. Those who do not avail of the voluntary retirement scheme will continue to enjoy those terms and conditions of service as were enjoyed by them at the time of transfer of the enterprise to the buyer. The sale agreement also typically specifies that employees who do not avail of the GHS or VSS may not be laid off for at least one year after the sale. The costs of the GHS and VSS are typically shared between the buyer and the Government. Between 1991 and 2000, the Privatisation Commission paid out Rs 5.3 billion in voluntary retirement schemes.