Sell-off of 8 SOEs lacks transparency
WASIM IQBAL
ISLAMABAD: Auditor General of Pakistan (AGP) has identified in its Report for 2010-11 that privatization of eight state-owned enterprises (SOEs) was not done in a transparent manner. In its report, AGP states that a special audit of the accounts of eight privatization transactions in the month of April-May 2011 was conducted. These include Pak America Fertilizer Company Ltd. (PFCL), Pak Arab Fertilizer Company Ltd. (PFL), Pakistan Oil Field Ltd (POL)., Attock Refinery Ltd. (ARL), Faletti’s Hotel Lahore, Kot Addu Power Company (Escrow account) (KAPCO), Javedan Cement Ltd. (JCL) and Mustehkum Cement Ltd. (MCL).
The scope of special audit was to assess whether a strategy was followed for privatisation; to access whether privatization transaction was well managed; to access whether the best price was obtained and to determine whether the privatization process was a good deal.
In its observations, the audit department states that privatization of eight SOEs was not done in transparent manner. Privatization (mode and procedure) rules 2001 were not followed in letter and spirit. In many cases pre-qualification of bidders and appointments of financial advisors were not made in accordance with rules and due diligence report was not carried out, which resulted in undervaluation of privatized assets.
It observed, “Privatization Commission did not forfeit earnest money in some cases which resulted in loss to the government”. Moreover, a detailed record of many transactions and expenditure was not produced to determine the authenticity of these payments. Privatization Commission did not deposit sale proceeds timely into the government account and also utilized interest earned on the amounts retained in unauthorized manner.
In March 2006, Cabinet Committee on Privatization (CCoP) allowed PC to issue letter of acceptance (LoA) to M/s Ibrahim Fibers which was successful bidder of PFCL privatization. M/s Ibrahim Fibers did not pay the bid price and informed the PC of their inability to continue with the transaction. Audit observed that PC management did not recover liquidated damages form M/s Ibrahim Fiber Ltd. being differential between the amount to be actually received and the bid price despite a lapse of more than five years.
The PC sold PFL against a payment of Rs 14.1 billion on July 2005 to a Consortium of Reliance Exports Ltd., Nichemin Corporation, Haji Muhammad Younus and Haji Muhammad Usman.
Audit reviewed the financial statements of PFL for the year 2009 and noted that freehold land (302 acres) had been valued by M/s Projects pvt Ltd., at Rs 911.94 million at the time of amalgamation, which was further revalued at Rs 3.3 billion in November 2007. On comparison between value assessed by M/s Iqbal Nanjee &Co. and M/s Projects Pvt. Ltd., it was noted that freehold land was undervalued by Rs 379 million at the time of privatization by M/s Iqbal Nanjee &Co.
The audit report has objected offloading of shares of POL and ARL through open market instead of public offering and termed it a violation of rule 5 (a) of Privatization (Modes and Procedure) Rules, 2001.
The audit observed that CCoP’s approval for divestment of 9 percent POL shares in March 2002, through open market instead of public offering was not covered under the PC Ordinance.
The CCoP in its meeting held on January 2002 considered the summary submitted by the PC with modification of 9 percent shares to be sold through an offer for sale to the general public. The CCoP in its meeting held on March 2002 approved the divestment of 9 percent POL shares through open market instead of public offering. Similarly, CCoP in its meeting held on September 2002 also approved the divestment of remaining 26 percent shares of POL through open market. “The process for the sale of POL shares amounting to Rs 5,138 million through open market was not covered under PC Ordinance,” the audit report observed.
The CCoP in its meeting held in September 2002 approved the recommendations of PC for divestment of 100 percent GoP owned shares of ARL in open market in violation of rules. Audit observed that PC hired the services of a valuator under section 24 of the PC Ordinance 2000 at 0.25 percent of actual sale proceeds for block sale and book building process, but all the divestment of ARL shares was made in violation of the PC Ordinance through open market.
A review of the Faletti’s Hotel transaction revealed that no financial advisor was appointed. However, M/s Hamid Mukhtar & Co was appointed for valuation of land of Faletti’s Hotel while M/s M. Yousaf Adil Saleem &Co and Resources and Engineering Management Corporation were appointed to carry out assessment of properties of the hotel but no record pertaining to the appointment of competitive firm, agreement, TORs, payment of valuation fee was available.
The Privatisation Commission sold 36 percent shares (291 million) of KAPCO to M/s International Power in 1996. The bid of International Power was unconditional. However, at a later stage PC accepted the four conditions imposed by International Power and signed an Escrow agreement of $43 million of 45773166 number of KAPCO shares certificate on June 1996. After completion of three conditions $28 million were released by M/s Citibank but the remaining $15 million in the Escrow Account were associated till the completion of IDC tests. However, M/s Citibank Karachi released $17,108,919 to PC including an interest on April 2002 after deducting $95,000 against a forward cover fee on foreign currency deposits over and above the fees fixed in the agreement in violation of its specific financial obligations under clause 4 of the Escrow agreement.
The PC disposed of Javedan Cement Ltd to M/s Haji Ghani Usman & Group on August 2006 against Rs 80 per share. The audit observed that while assessing the value of land, the encroached land measuring 329.66 acres amounting Rs 1.054 billion was not included in the assessment of land, whereas, no restriction on sale, transfer of land was placed at the time of privatization of JCL. The commission also did not appoint a financial advisor for the transaction and there was no summary or decision available on record whether or not it falls under the ambit of a major transaction.
The audit observed that the PC did not appoint a financial advisor on the privatization of MCL. In addition, audit pointed out the detailed valuation report regarding valuation of assets and liabilities and estimation of break-up value missing from the record of PC.
