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ADB seeks policy for privatisation of SOEs

The policy is supposed to take into account market conditions and investor demand and the need to achieve a balance between shares offered in international financial centres and shares offered domestically. The ADB will assist the government in taking the experiences of other countries into account, specifically China, Malaysia and Vietnam, the bank's Board of Directors (BoD) has maintained in ts internal report sent to the bank's president recently.

The multilateral lender has made the demand during one of its many conditions linked by its BoD to the release of $400 million loan for the implementation of the second generation capital market reforms in Pakistan in the near future. The government has already made a request for the release of the loan and the bank has shown its willingness to provide the money. The policy will be disclosed to the public to ensure transparency.

Policy

The new capital market-oriented privatisation policy is expected to pick higher prices for shares of the state-owned enterprises. This is supposed to create higher budget revenue since investors may tend to pay more for shares if they have a credible expectation that additional packages will be offered in the foreseeable future up to a specified minimum total of shares.

The new policy is also aimed at increasing the much-needed market liquidity and lowering volatility through a significant increase in supply of shares, which would facilitate overall capital market development, an ADB report containing recommendations for the Pakistan capital market second generation reforms shows. The lack of liquidity has been haunting the Pakistan market despite an average 50 per cent annual increase since 2001. The reason is clear: ten largest companies alone account for more

than half of the stock market capitalisation. However, only an average of 20 per cent of their shares has been floated on the stock market, a sign of the presence of anything but liquidity.

The new policy will be aimed at introducing market discipline to companies even if they are still partly state owned and will improve the performance of the enterprise managers. The policy has to achieve another some-what very difficult target. It has to limit the scope for corruption by increasing transparency of privatisation and reducing discretion of civil servants involved in the process.

Recommendation

The policy will also allow the Privatisation Commission (PC) to offer SOE shares through a book building process by keeping the record of bids for shares -in line with international best practices to domestic institutional buyers. The PC will also allow the use of shelf-registrations procedures to make the process further efficient.

For the protection of the investors and to facilitate capital formation, the ADB has recommended that the Securities Ordinance of 1969 needed to be replaced with a new substantive law that provided a legal framework for modern securities markets.