The privatisation process is aimed at selling government property in an open and transparent manner with a view to obtaining the best possible price. It 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 PC decides what kind of process will be followed. Approval of Council of Common Interests is also obtained. Following are typical steps in the privatisation process of a major unit:
Identification of an entity for privatisation
CCOP / Cabinet approval
Approval of CCI
Appointment of Financial Advisor (FA) for major transaction(s) with approval of PC Board
Appointment of Valuator where FA is not hired
Due diligence by FA / Valuator
Restructuring, sectoral / regulatory reforms if required
Expressions of Interest (EOI)
Screening - Statement of Qualification (SOQ)
Due diligence by potential bidder(s)
Valuation approved by PC Board and CCOP
Bidding process approval by Board and CCOP
Open bidding: media invited to observe
Board and CCOP approve price and bidder
Letter of Acceptance to successful bidder
Management transfer (through execution of Share Purchase Agreement / Asset Sale Agreement) after 100% receipt of payment
A brief description of some of the steps common to major transactions is given below:
The first step is the identification of the entity or list of entities to be privatised. In a typical transaction the PC, 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 Cabinet Committee on Privatisation for approval or Cabinet, if necessary.
In major transactions, the process to hire a financial advisor is carried out by the transaction manager with the approval of the Board. Terms of reference for the FA are finalized, expressions of interest from prospective FAs are solicited and short listed firms are invited to submit technical and financial proposals in a common format. A Transaction Committee generally headed by a member of the PC Board is constituted (through submission of the transaction to the PC Board). The Transaction Manager prepares summary of the technical offers received from the potential FAs. The Transaction Committee scores the technical proposals and the highest ranked firm based on both technical and financial scores is invited for contract negotiations and signing. In November 2001, the Board approved regulations for hiring a financial advisor in order to make the procedures more transparent. An amendment was made in the PC regulations for hiring FAs in 2007. A copy of these regulations can be obtained from the PC website at http://www.privatisation.gov.pk.
Hiring of Valuers
In other transactions a Valuator is hired according to the Hiring of Valuers, Regulations, 2001. This regulation was amended by PC in 2007.
The next step
is to carry out the legal, technical, financial and human resource due
diligence for presentation to the bidders. This is aimed at identifying
any legal encumbrances, evaluating the condition of the assets, and
examining the accounts of the company in order to place a value on the
company. For most industrial units and some small transactions, this is
done using in-house transaction managers and staff, or by sub-contracting
some part of the work to a domestic legal, technical, or chartered
accounting firm. However, for major privatisations in banking,
infrastructure, or utilities, the FA carries out this function. Following
due diligence, the FA finalizes the privatisation plan. This may include
recommendations on any needed restructuring, in addition to specifying the
amount of shares or assets to be privatised. For industrial sector
privatisations it is customary to offer 90% shares and reserve 10% shares
for the employees who do not opt for GHS/VSS. Shares not purchased by
employees are offered to the successful bidder at the price of his
offering. For major privatisations or when the proposed privatisation mode
is different from the initial plan, the plan is submitted to the Board,
the CCOP, or the full Cabinet for approval.
For many major transactions, the ability to privatise and the amount of
proceeds realizable depend critically on the level of regulated prices of
inputs or outputs and sectoral or regulatory policies. For many monopolies
or quasi-monopolies, the “rules of the game” specifying the competition
framework post-privatisation, the manner and type of regulation, and the
institutions regulating them are key to investor interest. In addition to
rules determining prices or tariffs, there may be rules determining
standards, penalties for non-compliance, the extent, form and timing of
any proposed deregulation, and the evolving structure of the market
following liberalization. Clarification of these rules and passage of
needed laws and regulations will often be necessary before taking the
transaction to market.
In order to obtain an independent assessment of the value of the property being privatised, the Commission relies primarily on external firms. The Financial Advisor, where engaged, carries out the valuation to obtain a “reference price” for the property. In other cases, the Commission contracts with an external valuation firm or accounting firm as specified in the rules on the valuation of property, which can be obtained from the PC website. 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, transaction multiple 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 variables such as country risk, corporate psychology and strategy, investor specific synergies 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 and implementing appropriate pre-qualification criteria for bidders, and in following an appropriate bidding process to obtain a fair price for privatisation.
Expressions of Interest (EOI) are invited by advertising in the relevant
media. The PC Ordinance 2000 spells out some of the advertising
procedures. Depending on the kind of transaction, the EOI describes the
broad qualifications that potential bidders must possess. Those submitting
an EOI are provided with Request for Statement of Qualification (RSOQ)
document which is evaluated to determine whether an interested party meets
the requisite qualifications on the basis of Statement of Qualification (SOQ)
submitted by interested parties. The pre-qualified parties are then
provided with the instructions to bidders, draft sale agreement, and other
Pre-qualified bidders are then given a specified period to conduct their own due diligence, following which they are invited to pre-bid meeting(s) where their questions and concerns can be addressed. The meetings are useful in determining the bidding procedure to be followed and could in some cases determine the proportion of shares that the Government may want to offload. The bidding itself is done openly, with all bidders and media invited.
Following bidding and 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 reference price is a major determinant in the recommendation, although the Board may recommend the sale even if the offer price is below the reference price. However, bids received, which are lower by more than 10% of reference price, are not accepted. Once the bid price and bidder are approved, the PC issues a letter of acceptance (LOA) to the successful bidder, indicating the terms and conditions of the payment. Once sale proceeds have been collected, on the same day or immediately thereafter PC executes the share purchase agreement (SPA) or asset sale agreement (ASA) which results in transfer of the property to the successful bidder. Under PC’s current policy, privatisation proceeds are generally required to be paid upfront rather than over time, however, transaction specific exceptions are possible as had been the case for many earlier transactions. Within 30 days of the sale, the PC is required to publish the summary details of the transaction in the official gazette.
summary, the privatisation process is lengthy for major transactions, mainly
to ensure transparency in the process. After receiving CCOP approval for the
privatisation, it typically takes about 12 months to close a major
transaction, even when no major restructuring of the company is required. This
includes about three to four months to appoint a Financial Advisor and another
five to six months for the FA to complete its legal, technical, financial and
human resource due diligence and to propose a privatisation strategy.
Following approval of the strategy, the marketing and bidding process may take
four to five months (valuation efforts proceed in parallel), while it may take
another two months after bidding to obtain approvals, finalize sale documents,
and close the transaction. Delays in privatisation are often caused due to
non-availability of clear land titles, absence of necessary regulatory
framework and sectoral policies and any needed restructuring of the entity. In
addition, resolution of transactional and inter-ministerial issues often
results in causing delays in the bidding process.