Since the government is not lately getting enough interest from banks on PIBs at low interest rates, the finance ministry and CCoP are mulling other options for fiscal deficit financing. One of the options is to sell government shares in E&P companies (OGDC and PPL) at throwaway prices. The Privatization Commission board has started working on it. No one has seen the merits or demerits of the transaction, and just to show performance, the leg work is in process. Market experts and government sources are saying that this transaction might not take place.
And for good reasons too. It makes no sense to sell OGDC and PPL shares at the prevailing market price (the transaction usually takes place at discount to market value). For clarity, it is not privatization by any stretch of imagination. It is not even a strategic sale. The objective to offload 7 percent of government share in OGDC and 10 percent of PPL in the secondary market is to merely fetch money. For that, price of offloading should be the key.
OGDC is currently trading at Rs112.7 per share. This is almost equal to its net liquid assets. This means government is effectively selling the core business at zero value. If that were happening for a loss-making disco with transfer of ownership, it would have made sense. In case of OGDC, going with the flow demonstrates Privatization Commission’s apparent lack of subject understanding.
In 2014, the government was selling 10 percent of its share in OGDC at a minimum price of Rs216/share ($2.1 per share). The issue was undersubscribed and shelved. Today, the scrip is at Rs112 ($0.67). Does it make sense to sell it at one third of the price six years ago?
The balance recoverable reserves of OGDC, as of June 2019, were 1,074 MMBOE. Applying a conservative value of $3/BOE, the reserves value comes out at Rs124.4 per share. Any new acquisition of reserves would not cost less than $5-6/BOE. And government is selling chunk of it for free. If government sells 250 million shares, it will be effectively selling Rs31 billion (at $3/BOE) worth of assets for free.
This deal is not likely to conclude. According to one frustrated board member, a few other members are going with the flow to have more board meetings. There are about 20-25 board meetings that take place for any such transactions. The members get money and perks for each meeting. The transaction advisory cost of $2-4 million is to be borne by the government for no use.
If the government wants to add value, it should sell to a strategic partner. Expert to get a seat on board and may transfer technology or other elements which are long term beneficial for the business. But that is not the case. It is a yield play to get some money. It is no brainier to not take this selling of ODGC and PPL shares seriously. Ministry of Finance also has this at the bottom of the funding list.
In case, Finance Ministry is worried that bond yields are not attractive, it should address the issue. The inflation numbers are suggesting that real interest rates are zero or in negative territory. Government had to pay premium on bonds in the past in days of low interest rates. Last year, government sold over trillion rupees bond at around 14 percent. In 2014, the then government sold over Rs2 trillion at around 12 percent when market rates were around 8 percent.
The other reason banks are not interested in bonds at 8 percent is because they get to park the excess liquidity overnight at 7 percent. The SBP should look at this. Ideally banks should be parking this at the bottom of the interest rate corridor (6% at current rates). Once that is done, there will be some interest in PIBs at prevailing rates.
Plus, there are other avenues to finance the deficit. The government should issue Euro Bonds. There were some legal glitches earlier and observations by AGPR – such as why over $1 billion were sold last time when the approvals were of $500 million. These should be dealt with.
In privatization, the Commission should focus on RLNG plants. It should be pushing the government to reset the ROE to bring this sale on front. Then government should look at non-tax revenues – there are pending telco auctions. Government can sell some prime land. Government can also ask multilaterals to fund the deficit. But there is no point selling good assets dirt cheap.
The other important element is bringing some spine to the Privatization Commission. The interference from Islamabad should be minimized. A few years ago, 80 percent of the work on privatization of three discos was done and $5-6 million were spent on the advisory. But one fine morning, the then finance minister Dar asked the PC to roll back the transaction. There was full stop on the deal thereafter. Having said that, spine cannot come without capacity. It is time to strengthen the Privatization Commission itself.
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