GOP FORMS PRIVITIZATION PLAN WITH OVERLY AMBITIOUS

UNCLAS SECTION 01 OF 02 ISLAMABAD 002867

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON ETRD EAID EFIN ENGY PK
SUBJECT: GOP FORMS PRIVITIZATION PLAN WITH OVERLY AMBITIOUS
TIMEFRAMES


1. (SBU) Summary. Faced with a mounting financial crunch, Syed
Naveed Qamar, Federal Minister for Privatization and Investment as
well as Finance, recently chaired a meeting to finalize an overly
ambitious schedule for privatization of a few low level public
sector entities during September-October 2008. Earlier the GOP put
on hold a number of important privatization deals, which illustrates
the current government's lack of commitment to the privatization
process. End Summary.


2. (SBU) The current financial crunch encouraged the GOP to revisit
its privatization policy. Minister Qamar directed the Privatization
Commission (PC) to expedite the sale of various public sector
entities. Noting that all relevant rules and regulations should be
strictly observed and the privatization process should be carried
out in an open, fair and transparent manner, Qamar instructed the PC
to begin the valuation process for the following entities:


3. (SBU) Small and Medium Enterprise (SME) Bank: SME Bank is a
public limited company which has approximately 630 permanent and
contractual employees and is operating through a diverse network of
27 branches. The Privatization Commission has identified
pre-qualified bidders for SME Bank and September is targeted for
completion of this privatization.


4. (SBU) National Power Construction Company (NPCC): NPCC has paid
up capital of Rs 20 million. It is a public sector company under the
Federal Ministry of Water and Power. The Privatization Commission
has identified pre-qualified bidders for the NPCC.


5. (SBU) Kot Addu Power Company (KAPCO): Qamar specifically directed
the PC to ensure timely completion of the listing process,
regulatory approvals and international marketing for floating the
global depository receipts of KAPCO in October 2008. Initially
privatized in 1996, KAPCO is a large independent power producer with
a power generation capacity of 1600 mega-watts. The government
transferred management control and thirty six percent of the total
shares to International Power. The government now holds 64 percent
of KAPCO's total 880 million issued shares.


6. (SBU) Hazara Phosphate Fertilizers Limited (HPFL): Bidding for
the privatization of a 90 percent share in HPFL with a targeted
management control transfer during September 2008 for an authorized
share value of Rs. 200 million.


7. (SBU) Heavy Electrical Complex (HEC): Qamar directed expeditious
processing of Heavy Electrical Complex in order to complete this
transaction in September 2008. HEC is one of the industrial units of
the State Engineering Corporation engaged in the manufacturing of
power transformers and with a total annual capacity of 3000
megawatts (MW) per year. In addition, the HEC undertakes repair and
refurbishment of old and damaged power transformers up to 500 KW.


8. (SBU) Jamshoro Power Company (JP): On August 27, the PC also
decided to invite fresh Expressions of Interests for the
privatization of Jamshoro Power Company (JP) located in Sindh
Province. JP was established as a result of the unbundling of
Pakistan Water and Power Development Authority (WAPDA) and was
organized to take over all the properties, rights, assets,
obligations and liabilities of three thermal power stations namely
Jamshoro, Kotri and Lakhra with a total nameplate capacity of 1204
MW. The GOP intends to sell a majority 51 percent interest in JP
including management control to a strategic investor or a consortium
while maintaining 49 percent of the equity. JP facilities are
located near Hyderabad with key connections to the national grid for
supply to Karachi.


9. (SBU) Tourism Sector: The sale of 26 motels and restaurants
owned and operated throughout Pakistan by the Pakistan Tourism
Development Corporation was also directed.


10. (SBU) The Privatization Commission Ordinance of 2000 mandates
that 10 percent of all shares of the state owned enterprises slated
for privatization should be transferred to its workers. While
addressing the meeting Qamar said that the government was in the
process of making the privatization process as "pro-worker and
pro-people as possible" and directed the PC to accelerate the
transfer of shares to employees for the above mentioned enterprises.



ISLAMABAD 00002867 002 OF 002



11. (SBU) The ruling government has put on hold a number of
privatization deals which were previously authorized. A year ago the
Musharraf government decided to offload non-strategic shares of the
National Bank of Pakistan (NBP) in the international stock market
through global depository receipt; this deal was stopped by the now
ruling government. Privatization Ministry sources told ECON that
since the Government largely conducts its financial transactions
through NBP the present Government wanted to rethink strategic
advantages of privatizing any part of the National Bank. The
Finance Ministry was also negotiating the block sale of Habib Bank
shares, which was also shelved.


12. (SBU) On August 27, the Privatization Board meeting chaired by
Qamar decided that the financial advisor for the Oil and Gas
Development Corporation Limited (OGDCL) should work out all the
options for privatization of OGDCL, noting that analysis is needed
on whether a sale of shares, a strategic sale with management
control or an assets sale, including Qadirpur Gas field, on fast
track basis would be the best method. The previous government
planned for a strategic sale of 51 percent of shares along with
management control of OGDCL. J.P Morgan, Barclay and ABN Amro Bank
were appointed as lead managers for floating an exchangeable bond of
OGDCL shares, however this bond was also put on hold by the new
Government. A final determination on privatization will now be
decided after the financial advisory consortium led by Merrill Lynch
International and KASB Securities submits recommendations.


13. (SBU) Comment. The GOP Finance Minster is trying to revive the
stalled privatization process however there does not seem to be an
actual plan for how to move forward with such efforts, particularly
with such an ambitious timeframe. With the exception of OGDCL, the
companies nominated for privatization are not big ticket
privatization items. The GOP still has not taken any decision to
privatize some obvious choices such as Pakistan State Oil Company,
Pakistan Petroleum Limited or to float the global depository
receipts of National Bank of Pakistan or Oil and Gas Development
Company. As investor confidence has ebbed and the rupee has
depreciated the value and price of state owned enterprises has been
negatively impacted. Post has learned that some members of the GOP
leadership are rumored to be advocating for postponing privatization
efforts until the rupee appreciates. While specifics on
privatization plans are very difficult to obtain, Post continues to
track down details to sort the myths from possible realities. End
Comment.

PATTERSON