Irrational HBL disinvestment plan?

The finance ministry is to make a quick buck without much concern for whether government's decisions make economic sense. The disinvestment of high growth companies in the name of privatization is manifest of government efforts to improve macro optics in short to medium term without carefully computing its opportunity cost. Non tax revenues will boost and the fiscal deficit will be low on accounting books in immediate years followed by forgone dividend in years to come.
The PMLN government has so far offloaded shares of blue chips companies including UBL, ABL and PPL. Now it has its eyes on the goodies from HBL ($1.2bn) and OGDC ($700-800mn) with OGDC being postponed due to unfavourable conditions in oil and gas businesses. In all these transactions, either the entities have already been transferred to private hands or kept under government ownership - hence no gains from the change in management from public to private sector which is the core argument for privatization.
The argument for privatization to gain efficiencies is also contested by various critics as many economies have reformed while big companies are run by the public sector. Majority of large corporations in China are owned by the government and are performing competitively to any big globally privately-run company in the same business. Success of Dubai is all due to a visionary leader and Emirates, world's biggest air carrier, a publicly owned company and the list goes on.
Even in Pakistan, the biggest company by size; OGDC, is owned by the government and no private investor has come with big money in the sector. However, the after taste of nationalization from the 1970s is bitter due to poor governance and political patronage. The bad governance is demonstrated by poor public service delivery in various social sectors; so the solution should be to have better governance after giving everything in private hands.
In the absence of strong regulatory regime, a few power hubs may become too strong to the likes of 22 families in the pre-nationalization era and create monopolistic structures through cartelization practices and owning big service delivery firms. But that is another debate.
The question to raise here is that why government is in a haste to sell shares of profitable companies. If the objective is to build reserves that can be done by borrowing through international capital markets; an equally good option to reduce pressure on domestic banking sector for fiscal financing. The only difference is on the deficit number as borrowing does not reduce fiscal gap but disinvestment does. Do we really need to improve mere optics? Why?
The return on equity of HBL is much more than the cost of money borrowed from the issue of Euro bond. For instance, if we borrow $1.2 billion from issuing 10-year bonds in the global market it may cost 6-7 percent per annum while we can easily be financed through the dividend stream of HBL. How can a smart finance director make such a decision, one may wonder why Dar is not understanding it.
Lets do simple math, the government is earning approximately $63 million from HBLs dividends in CY14 and it gained $46 million last year. The cumulative annual growth rate of HBLs dividend from 2008-14 is 23 percent. Lets assume dividend income grows by 18 percent in dollars in the next ten years after adjusting five percent for rupee depreciation every year.
By this standard, government would earn $1.75 billion in dividends from HBL in the next ten years without any reinvestment. Now if we go for a Euro bond of $1.2 billion at six percent, the debt servicing would be $72 million each year and $1.2 billion principal repayment in the tenth year. This would make total repayment of $1.9 billion which is not much different from $1.75 billion earnings of HBL. Hence, instead of HBL disinvestment issuing a bond is a better option as its debt servicing would be financed by the dividend streams and yet governments holding in profitable company will remain intact. Isn't selling HBL an irrational decision? We have made a bad decision of selling governments shares in UBL, let us not repeat the same mistake for HBL.
Despite knowing all these facts and figures, government is seemingly desperate to sell HBLs stake outside the country and especially in the US. The desire is to have all the American investors to participate in it. To do so, HBL has to adhere to rule 144A of the US Securities Act of 1993 for sale of securities by a non-US issuer. This is to protect ordinary US investor potentially holding stake in HBL. The government has forwarded the requirement of US securities law to HBL board and management. But the legal advisors of HBL have asked board not to sign this as conditions are stringent with a possibility of HBL (or its management) to abide by US civil and criminal laws.
An alternate option could be to comply with a less complicated Regulations of US Securities Act in which only qualified institutional buyers in US can invest in the company. This leaves institutional investors to buy at least $100 million in the company or a dealer buying $10 million. But the government of Pakistan wants ordinary small investor to invest in HBL as well. And under 144A HBL has to change its accounting standards in accordance with international financial reporting standards (IFRS) and HBL cannot do that prior to June.
Will the HBL disinvestment be delayed? The pressure is more on the Privatization Commission and Dar on HBLs deal as despite strong ground work, falling oil prices made the OGDC transaction unviable. Will the government forgo, the opportunity of luring US investors that brings stringent foreign rules?
If government is adamant on its irrational decision to sell HBL, it would be most advisable to not sell the whole 43 percent.
Rather it should sell in smaller chunks. The PC has the nod of IMF to sell it in two tranches, the wiser decision is to further shrink the size of disinvestment and avoid the adventure of finding new investors at the cost of stringent foreign requirements.