Audit report on PTCL privatisation: Rs 57.5 billion property not included for company''s reserve price

Special Audit Report on privatisation of Pakistan Telecommunication Company Limited (PTCL) has shown that valuation of property worth Rs 57.5 billion was not included for valuation purposes in determination of PTCL''s reserve price by the Financial Advisor.
According to Audit Report of Auditor General of Pakistan (AGP), out of total sale proceeds of $2.599 billion, Etisalat has paid only $1.799 billion, whereas $799.3 million is still payable. As of June 30, 2009, three instalments of $133.218 million each, totalling $399.6 million have been withheld by Etisalat due to non-transfer of titles of properties to PTCL.
The report says that although the privatisation of PTCL was done on competitive basis, the main objective of ending the monopoly of PTCL could not be achieved. The profits of PTCL and income tax paid to public exchequer declined after privatisation. The Report says that overall strategy adopted for the privatisation of PTCL was appropriate, notwithstanding the fact that management control was granted to Etisalat by selling only 26 percent of PTCL shares and management control premium was not taken into account while calculating the reference price.
The Report says that privatisation of PTCL was not well managed because the transaction took more than a decade to complete. Undue concessions were given to Etisalat when the revised agreement was signed in 2006. For instance, Etisalat was allowed to make remaining payments in instalments contingent upon transfer of title of properties, and sell costly PTCL property without any limit, and the GOP agreed to bear half of the cost of Voluntary Scheme offered to surplus employees. Further, Privatisation Commission (PC) management did not provide due diligence report and final valuation report prepared by the Financial Advisor (FA) to Audit.
The report says that Audit noted that out of the property of Rs 63.5 billion, only vacant land worth Rs 6 billion was taken into account by the FA for determining the reserve price. The Draft presentation (June 2005) on valuation given by the FA stated that PTCL (property) had estimated potential sale value (in 2005 terms) of Rs 63.5 billion ($1.065 billion) and ''only vacant land can be expected to be divested in near term and reserve price should reflect Rs 6 billion. Therefore, Final presentation (June 2005) on valuation given by the FA included only value of vacant land amounting to Rs 6 billion, thus undervaluing PTCL properties by Rs 57.5 billion.
Audit is of the view that if the property had been valued at Rs 63.5 billion by FA, the reference price would have increased by Rs 11.5 per share as compared to the final approved reference price. The management replied that the value of an ongoing business was essentially measured by its profitability and its future growth prospects. Therefore, valuing properties or assets separately was not an appropriate measure. Valuing assets (such as land) on individual basis to arrive at a consolidated value was relevant only if the intention was to break up the Company and liquidate its assets. The bid price received from Etisalat was much higher than reference price; hence the valuation of property had no adverse impact on the actual sale price.
The Audit commented that management has not responded to the observation that the reference price was negatively affected by not factoring in the value of PTCL properties. The management also did not respond to one of the most important issues regarding accuracy and completeness in the calculation of the reference price, which incorporates the valuation of properties in the calculation. Furthermore, PC management responded that "Valuing assets (such as land) on an individual basis to arrive at a consolidated value was relevant only if the intention was to break up the Company and liquidate its assets", whereas the FA had calculated the value to vacant land on the basis of "divested in near term" which related to liquidation of vacant land.
In the DAC meeting held on March 19, 2009, management provided a letter from PTCL to PC consultant, which stated that the properties were operational assets of PTCL and should not be considered surplus, but no justification was provided to Audit for including only vacant land for valuation purposes.
Audit maintained that operational assets, besides vacant land, were integral to the operations of PTCL and form a part of its valuation for privatisation purposes. In fact, privatisation proceeds had been directly linked to transfer of titles of PTCL properties. Audit holds that the reference price was undervalued by not taking into account properties worth Rs 57.5 billion. The report further showed that the nation faced loss of Rs 2.65 billion on account of dividend for the period January-June 2005 given to Etisalat in good faith. The audit recommended that on the Privatisation of PTCL that the PC needs to:
1) Have a policy of securing and storing important documents like Due Diligence and Final Valuation Reports, and investigation for fixing responsibility if these reports are lost.
2) Ensure that privatisation transactions are completed within a reasonable timeframe.
3) Adhere to the Share Purchase Agreement (SPA) as agreed in the pre-bid meeting, and should not negotiate on the terms of the SPA.
4) Adopt an appropriate strategy to ensure that sale proceeds are timely made to the Government of Pakistan.
5) Develop in-house capacity to assess the work carried out by the FA, including due diligence and valuation.