Telecommunication Gap

Revisiting the privatisation of PTCL...

By Amjad Bhatti

The recent upsurge of PTCL workers across the country has brought the contentious privatisation of PTCL into limelight. Though currently the focus of debate is on the negative implications of privatisation on the labour force -- being pushed or induced to accept the Unified Pay Scale, Voluntary Separation Scheme and retrenchment moves -- introduced by the PTCL management, this is only one dimension of the aftershocks of privatisation.

A closer look into the process, intent and dividends of the privatisation of Pakistan's backbone of telecommunication sector would help clarify many things.

The background

In March 2005, an 'Information Memorandum' -- labelled as 'confidential top secret' -- jointly developed by the PTCL and the Privatisation Commission of Pakistan (PC) built a case for the privatisation of PTCL. It observed: "The appointment of Mr. Shaukat Aziz, a prominent banker, as prime minister has helped improve investor's confidence in Pakistan both domestically and internationally. Continuity in the political hierarchy under the stewardship of President Pervez Musharraf continues to play a significant role in maintaining consistency of economic policies thereby creating a strong growth momentum."

Against this backdrop, a policy decision was taken by the government to divest up to 26 percent of its shareholding in PTCL, along with a transfer of management control. The PC initiated a formal marketing process for the privatisation of PTCL by inviting expression of interest (EoI) in November 2004.

In response to the PC's advertisement, 18 parties -- four of which were Pakistani firms -- submitted their EoI by Jan 28, 2005. 12 parties submitted their statement of qualification (SoQ), of which eight parties were declared fully pre-qualified. The PC held pre-bid conference on May 25, 2005, when the final documents were provided to pre-qualified bidders.

Finally, three qualified bidders participated in the decisive bidding after having deposited $ 40 million each: i) Consortium of Emirates Telecommunication Corporation (Etisalat) and Dubai Islamic Bank: Etisalat International Pakistan (EIP) from the UAE; ii) China Mobile from China; and iii) Singapore Telecom (Singtel) from Singapore. The EIP gave the highest bid $1.96 per share (equal to Rs117.01 per share), which translates into $2.599 billion for 26 percent shares of the PTCL..

The Cabinet Committee on Privatisation approved the EIP as the highest bidder on June 6, 2005. Subsequently, the letter of acceptance of the bid was issued to the EIP. The first installment of 10 percent of the bid price was paid and the share purchase agreement (SPA) was signed on June 30, 2005.

Drifting towards a 'negotiated transaction'

The rest of the amount of the final bid was supposed to be remitted by the Etisalat at the prescribed date -- Aug 18, 2005 -- but it could not furnish the same amount by the deadline. The SPA, in principle, got lapsed in Sept 2005 on account of default.

According to the Privatisation Commission (Modes and Procedures), Rules 2001, the mode of 'negotiation' (as opposed to open bidding) is to be adopted when sufficient interest for a privatisation has not been received. In such situations, the Board of Privatisation Commission has to recommend this process to the Cabinet, which has to authorise the negotiated sale process.

However, sources in the Cabinet Division revealed that, in the case of PTCL, a revised proposal was placed before the Cabinet Committee on Privatisation (CCOP), which sent it to the Cabinet for ratification, thus revising a transaction that had already been finalised. Advocate Sajid Tanoli, who has reviewed the PTCL deal, terms as a "sheer violation" of the prescribed procedures of privatisation. It is also indicated that the revised deal on PTCL with new concessions was not cleared by the Council of Common Interest.

Sources revealed that the PC started defying its own rules and procedures, and started negotiations with Etisalat for continuation of the deal.

According to news reports, a series of meetings were held between Etisalat and government officials in February / March 2006 and "external pressure for additional concessions and modifications of the structure of the transaction was exerted". As a result, various concessions and changes in the structure of transaction were reportedly agreed to, and a new SPA and SA was signed between the Government of Pakistan and Etisalat on April 14, 2006.

"Yes, I agree the deal was delayed but when the other two bidders -- Singtel and China Mobile -- were contacted, they did not show any interest to follow up their EoI," Ali Qadar Gilani, official spokesperson of the PTCL, explained.

According to the revised deal, the price of PTCL share was reduced from $1.96 per share to $1.66, which caused the PTCL a loss of $ 384 million. According to the official claim, the total amount receivable from the share sale of PTCL was $2.599 billion, but it is never revealed that this payment would not be in 'one go' as originally envisaged. The payment is spread over a period of five years, which according to financial analysts "reduces the effective price on the basis of present value analysis." Etisalat, reportedly, has been given the unique advantage of paying the remaining amount on 'pay as you earn' model.

Additionally, a technical services agreement was also signed for which services shall be paid to Etisalat at the rate of 3.5 percent of the total gross consolidated revenue for a period of five years subject to the annual maximum amount of $50 million, within 30 days of the approval of the Group Consolidated Financial Statement by the Board of the company.

When asked whether it was 'competitive bidding' or 'negotiated sale' through which the PTCL was privatised, Gilani contended: "This question should be asked from the government and the Privatisation Commission as how the deal was struck and what process was employed. Being a buyer, Etisalat cannot divulge the details of the transaction."

Top officials of the PC, when contacted by The News on Sunday, refused to comment on the role of commission in the deal, saying: "The role of PC was over when privatisation transactions were completed. The company is run under the Companies Ordinance and the Ministry of Information Technology and Telecom takes care of issues pertaining to the PTCL and any other service providers in the telecom sector in Pakistan."

Monopolising management

The SA between the Government of Pakistan and Etisalat is believed to be heavily tilted towards the latter. Despite the fact that the investor holds only 26 percent of the total shares of the company, it has been allowed to monopolise the management and strategic decision-making unilaterally.

For instance, the clause 4.3 of the SA stipulates that a majority of the Directors of the Board would be the nominees of Etisalat. The government shall be entitled to nominate four directors to the board and the investor shall be entitled to appoint five directors. Also, according to the agreement, the appointment of the chairperson shall be made by the Government of Pakistan in consultation with the investor. However, the chairperson shall not be entitled to a second or casting vote either in general meeting of the company or meeting of the board.

Surrendering all management decisions to Etisalat, the Government of Pakistan has agreed that the CEO shall have the power and authority to determine and implement day-to-day operations of the company's business and s/he would be the representative of Etisalat.

The voting rights of the government in the company's affairs seems to have been limited only to agree with the Etisalat management, as is clearly reflected in clause 7.9 of the agreement that reads: "The GoP shall exercise its voting rights to ensure that support is given to the sale of any property owned by the company on a commercial arm's length basis." It resorts further that the GoP should ensure that: "Support is given to the distribution of up to 100 percent of net profit per year, including capital gains arising from a disposal of property owned by the company."

Another relevant clause reads: "Approval is given in respect of any acquisition of telecommunication companies in any jurisdiction, any investment, acquisition or venture in respect of or relating to telecommunication acquisition, investment or joint venture proposal introduced by the directors nominated by the investor."

The PTCL spokesperson, Gilani, while talking to TNS termed it a "mere perception" that Etisalat has unilateral management control over the company's affairs. "We work in close coordination with government representatives and make decisions collectively," he said.

However, when Gilani's attention was drawn to clause 4.3 of the SPA which gives supremacy of decision-making to the Etisalat representatives, he replied: "This particular clause is not in my knowledge at the moment. If there are some contentious clauses, please ask the government," he suggested.

Access to assets and 'reserved shares'

By virtue of the SPA, the titles of land assets in the possession of PTCL were to be shifted to the new management. There are about 1,535 enlisted property units in the form of exchanges, residential colonies, flats and customer services that have higher value than the net proceeds of privatisation. However, the official pre-bid evaluation documents show that no comprehensive value assessment was carried out for this valuable real estate; and historical book value has been made basis instead of market value of national assets.

It may be noted that all PTCL property is situated in the prime commercial areas of major cities. A petition filed in the Supreme Court against the privatisation of PTCL noted that Etisalat had already conveyed its intention that multi-storeyed buildings, plazas, commercial centres, hostels, etc shall be constructed on these properties.

In a bid to further appease the influential investor, the Government of Pakistan has granted to Etisalat the right to acquire the 'reserved shares' of 25 percent, and pledged that it shall not sell the 'reserved shares' to any person other than Etisalat. Some analysts have termed this move as an attempt to shift the PTCL from state-monopoly to Etisalat-monopoly.

Responding to a question on the legitimacy of 'reserved shared', Gilani said: "This is a premature question; you can ask this only when Etisalat would buy these 25 percent shares. At the moment, I don't see any intention on the part of Etisalat to go for any further transaction with the Government of Pakistan."

PTCL -- a profile

After 1947 partition of the subcontinent, the telecommunication assets within Pakistan were separated from the Indian Post and Telegraph Department and renamed Pakistan Post and Telegraph Department. In 1962, the operations of PP&T Department were streamlined to create the Pakistan Telephone and Telegraph. In 1991, this department was included as part of the government's privatisation agenda and several measures were taken to prepare the department for eventual privatisation, including the initial corporatisation of the department into Pakistan Telecommunication Corporation (PTC) and its subsequent full corporatisation into PTCL in 1996, when PTCL was granted a 25 year license, which also granted PTCL exclusive rights to provide basic telephony for 7 years ending December 31, 2002.

With an employee strength of 65,000 and 5.7 million customers, PTCL is the largest telecommunications provider in Pakistan offering fixed line services throughout the country as well as providing cellular and internet services.

The company maintains a leading position in Pakistan as an infrastructure provider to other telecom operators and corporate customers of the country. PTCL has laid an Optical Fibre Access Network in the major metropolitan centres of Pakistan and local loop services have started to be modernised and upgraded from copper to an optical network.

On the Long Distance and International infrastructure side, the capacity of two SEA-ME-WE submarine cable is being expanded to meet the increasing demand of International traffic.

Etisalat: An overview

• Leading telecommunication operator based in UAE. Also present in Saudi Arabia, Sudan and Tanzania through affiliates and subsidiaries

• First to introduce mobile telecommunications in the Middle East in 1982 and GSM service in September 1884

• Business segments include: fixed line, mobile, internet and multimedia, data centre and data service

• Shareholding structure: 40 percent UAE nationals, 60 per cent Federal Government of UAE

Courtesy: The News Pakistan