ON June 18, 1.36 billion shares or a 26 per cent stake of Pakistan Telecommunications Company was successfully sold to the UAE-based Emirates Telecommunications Corporation, Etisalat, for $2.598 billion.

The winning bid of $1.96 per share far outstripped the second highest bid from China Mobile of $1.06 per share and the third bid from Singapore Telecom of 88 cents per share.

In rupee terms, the total value of the transaction amounted to Rs155 billion or Rs117.01 per share putting the aggregate value of the company at Rs596.76 billion. Prime Minister Shaukat Aziz has said the funds will be used to finance the fiscal deficit.

Etisalat’s bid which was accepted by the Cabinet Committee on Privatization was 40 per cent above the average share price of PTCL for the last six months. The stock market, which had been trapped in uncertainty in the weeks leading up to the bidding, received the news with enthusiasm gaining 264 points or 3.6 per cent on the first day of trading post-bidding. PTCL’s share gained Rs3.35 to close at Rs70.65

This successful transaction, the largest in Pakistan’s 14-year privatization history, will pave the way not only for strong growth in the now deregulated telecom sector but will also help push through the remaining privatization transactions including Pakistan State Oil, National Investment Trust, Pakistan Petroleum Limited and Pakistan Steel Mills.

The weeks leading up to the strategic sale of PTCL were marked by employee strikes and protests, hectic negotiations between the government and management of PTCL with the employee unions, the deployment of army at the offices of PTCL and a round of conspiracy theories. Those chaotic weeks had led to large-scale speculation that PTCL’s sell-off would not go through at all.

The backlash from the unions also gave opposition politicians the opportunity to leap into the picture and oppose privatization per se. All this was not altogether too surprising given that world over, privatization is never easily achieved. In India, for example, privatization took off in 2002 when Arun Shourie was appointed the “disinvestment” minister because the word “privatization” came with too many negative connotations.

The first big privatization was in the telecom sector when VSNL, the state-owned international long distance player was bought by the Tata Group. Since then, many state owned companies were privatized, like Aluminium maker Balco, which was bought by the Sterlite Group and smartly turned around, and Indian Oil Company which was bought by Reliance Industries.

With these successes notched up, other big privatizations were firmly in the pipeline, such as the oil companies, the engineering giants and the chemical companies. Then the Congress coalition came to power in 2004 and pushed by the left, they shut down the privatization ministry, and wiped out the website overnight.

For pro-business lobbies, this was a rude shock. But Congress had a massive programme for healthcare, education and poverty-related spending and to raise funds for this without raising taxes, privatization was the only option. So instead of resorting to strategic sales, they started selling stakes through the local stock market and that process is successfully ongoing.

This process of disinvesting through the share markets began in Pakistan more than a decade ago when PTCL’s shares were first offered at the stock exchanges. Since then, the strategic sale of the telecom incumbent was planned and repeatedly delayed as environment and external factors continued to hurt investor perception.

The government could now not be more pleased that the winning bidder was Etisalat, a cash-rich company with the powerful backing of the UAE government. Under current management, the company has expanded beyond the UAE to Saudi Arabia and six West African states. As a Middle Eastern company Etisalat would have a lower risk perception of Pakistan and therefore was able to offer a higher bid price despite the fact that risk premiums were higher on account of the employee strikes and army deployment. This chaos is probably what led to other major bidders dropping out of the process, leaving just three which deposited the $40 million in earnest money before bidding. Singtel is a major global telecom player and this was China Mobile’s first bid outside the country.

After winning the bidding, Etisalat’s chief said that no PTCL employees would be relieved and some may be sent to West Africa for training. He said his priorities would be to improve quality at PTCL, reorganize and extend services to new areas. Also, he expects the investment to pay off within five years.

He has the stage well set for this plan. Since telecom deregulation began, although cellular penetration has multiplied rapidly over the past year, fixed-line telecom penetration has been slower to rise. The number of fixed line subscribers has grown from 2.1 per 100 Pakistanis in 1999 to 2.9 per 100 today.

Prior to PTCL’s sell-off, the telecom ministry had forecast that this figure would double by mid-2006. Since the onset of telecom deregulation, more than 200 fixed, mobile and long-distance licenses have been handed out to some 50 companies. Since then, PTCL has cut rates and made plans to invest in technology and customer service.

Analysts expect the number of fixed lines to rise from 4.2 million to 12 million by 2009 and with very low rates of rural penetration, Etisalat will see major potential for rapid growth. The company is also likely to undertake extensive investments in technology and modernization which will improve customer service and quality at PTCL.

Given Etisalat’s solid reputation and financial strength, it is unlikely there would be problems in the transaction being finalized as has been the case with Karachi Electric Supply Corporation where the sell-off failed when the Saudi company Kanooz Al-Watan did not deposit the first round of funds despite extensions by the government.

The Cabinet Committee on Privatization directed the Privatization Commission to issue a letter of acceptance to Etisalat which has been done to enable the company to deposit 25 per cent of the amount within 14 days and the rest in 60 days. After two months, the handing over will take place.

The fact that the bidding was successfully held despite great turmoil in the run-up to the sale holds several lessons for all the stakeholders concerned.

For the critics of privatization are several lessons. It is now clear that major international corporations are interested in offering high values for state-run corporations and that the government does have the muscle to push transactions through despite resistance.

The critics of privatization typically argue that profitable entities such as PTCL should not be privatized at all but held by the government in order to reap the benefits of profits. These critics hold that these profitable state assets are sold at throw-away prices and bring more harm and good to the country. The PTCL case proves adequately that profitable assets will attract high value bids, despite the fact that some aspects of the transaction are badly managed.

Moreover, since the government still holds 62 per cent of PTCL, at least for now, it will still benefit from the company’s profitability. Also, it is clearly evident that even when state-owned corporations such as PTCL are profitable (which is largely only because they operate as monopolies), their potential for greater profitability is not fully explored under government management.

Additionally, other aspects of commercial management remain poor such as customer service and innovation. These are usually tackled forcefully under private ownership since they are the tools of competitive advantage in a deregulated environment.

Then, there are lessons for the unions and workers who suddenly, in the weeks prior to the first set bidding date of June 10, resorted to strikes and protests and then once negotiations began, it was seen that several unions came forth and argued on individual platforms. In the end, negotiations with the government and PTCL’s management were successful when packages offered were accepted. If unions are to establish any credibility as voices that truly represent the interests of common workers, then they must work through a truly genuine and united platform.

Finally, there are also critical lessons for the government to learn from this transaction. First, employee resistance and unions must be dealt with well in advance and in clear and unambiguous terms with the full involvement of the management of the company. Preferably this should be done even before expressions of interest are invited.

The experience of banking sector reform and privatization should have taught the government this lesson much earlier on. In the case of Habib Bank, for example, extensive reform including rounds of voluntary retirement schemes took place much before privatization.

The key to making privatization a success, however, lies more in post-privatization monitoring, stringent regulatory oversight and close market surveillance than the transaction itself. These are the areas where the government will now have to focus to ensure the successes of this privatization does not go to waste.