Pakistan plans to launch Rs 2.3 trillion Sovereign Wealth Fund but how will price determination take place?

Pakistan is looking to launch its own sovereign wealth fund and there are estimates that this fund will be worth Rs. 23 trillion in value. The recent pressures on the foreign reserves and with the country looking down the barrel in terms of facing a default, the government sees the need to liquidate some of its investments to keep the country afloat. The Abu Dhabi Investment Authority (ADIA) has been asked to provide technical assistance in setting up the fund.

Law passed to set up the fund

In the past, the government has faced constant criticism for perpetuating the existence of certain loss-making State Owned Enterprises (SOEs) and it is now felt that the best course of action is to sell off any and all government interest that is held. There have been examples in the past where assets have been sold and are now generating revenues for the government where they were making losses under the government’s control. 

Institutions like PIA, Pakistan Steel Mills and Railways are making losses currently and the government will be best served to sell them off states Parvaiz Shahid, co-founder Bank Alfalah. Companies that are running well are afloat as they enjoy monopoly in their industry rather than having a competent management. “Selling shareholding to international operators will stop the rot and bring in better management and technologies at the helm.” 

The purpose for establishing a fund is to bring these assets under one umbrella which will allow the fund to manage these assets and then sell them off to foreign investors. Currently, it takes months for such a transaction to go through and the aim of the fund is to expedite the process by cutting the red tape to facilitate foreign investment. This fund will allow the government to manage and sell the assets in accordance with international standards and policies and present a brave, new face for the country to the world. 

In line with this decision, a draft law has been finalised by the MInistry of Finance which will be presented in the assembly in the coming days. The decision to set up a fund was taken in a meeting chaired by Finance Minister Ishaq Dar. Experts like Asad Ali Shah, ex-Senior Partner at Deloitte feel that the Ministry of Finance should look to implement better public financial management in order to show that these companies can be valuable if they are run in a better manner. “At present, Pakistan Inc. is a huge loss making entity with its fiscal deficit at Rs 125 trillion or around 15% of GDP. Making a sovereign fund by such a country which is unable to pay its debts and obligations will be a public joke.”

In a series of foreign transactions being realized

All these moves are coming due to the economic hardship that the country is facing and is in line with the recent passing of the Inter-Governmental Commercial Transactions Ordinance 2022. This ordinance empowers the Centre to be able to issue binding instructions to the provincial governments for acquisition of companies. The ordinance allows for the center to negotiate sale of state’s assets to foreign countries and can bypass any and all procedures and regulatory checks that used to be applicable in such transactions. In addition to this, the ordinance also disbars any court of the country to entertain petitions against the sales of these assets. 

Yousuf Farooq, director of research at Chase Securities, says that “the government should sell assets that it owns. Privatization leads to companies becoming more efficient and pay higher taxes to the government.” He states that the government is not able to use capital efficiently and loss making SOEs have to be constantly recapitalized which are a burden on the resources of the country.

The companies being identified and IMF staff report

In terms of the fund being set up, currently seven state assets have been identified which will be transferred to the Pakistan Sovereign Wealth Fund. The new law is being passed to exempt the sale of the assets from the Privatization Commission Ordinance, Public Procurement Regulatory Authority Ordinance and the State Owned Enterprises Act of 2023. The companies identified are OGDCL, PPL, National Bank of Pakistan (NBP), Pakistan Development Fund, Government Holdings Private Limited and Neelum Jhelum Hydro Power Company Limited.

The recent staff level report of the IMF has hinted towards the fact that the government should look to sell some of its state owned assets to foreign investors and official bilateral creditors including foreign sovereign wealth funds. By using this avenue, the government can look to limit some of the losses that are a drain on the exchequer and also fetch a good amount of funds which can be used for future development and investment in the country

Concern of transparency and price discovery

At this point in time, there are concerns over the price discovery and transparency of any such transactions taking place. Companies like Oil & Gas Development Company Limited (OGDCL) and Pakistan Petroleum Limited (PPL) have huge government investment in them. Based on the interest by UAE in the oil and gas sector, these two companies can prove to be sold at good valuations. 

However, the stock market of the country is seeing low market prices currently as compared to the book values. This is due to the fact that the country has faced more than 15 months of uncertainty on the political and economic front. Due to this, the equity markets and valuations have been battered and the valuations being quoted are depressed. The industry feels that selling these national assets at depressed prices will be detrimental as these assets can bring in higher valuations.

“It would be difficult to sell companies through the stock market at this point as local interest rates are too high and the general market valuations are very low. Due to a lack of liquidity and market valuations being low, it is felt that the government should use avenues other than the stock market to get better price discovery.” added Farooq.