Zardari Selling Pakistan's Assets

Pakistan considers asset sales to bolster economy
By Heather Timmons
Tuesday, September 9, 2008

NEW DELHI: Pakistan plans to sell valuable energy assets, beginning with a major gas field, as it tries to reap billions of dollars from deals with investors in industries like banking and farming.

The move comes as Asif Ali Zardari, the widower of former Prime Minister Benazir Bhutto, is stepping in as president.

Because of a hefty oil bill and a slowing economy, Pakistan is struggling under its biggest budget deficit in a decade, $21 billion; inflation that hit a 30-year high, 24.3 percent, in July; and fast-rising unemployment that is projected to reach 6.6 percent in 2009. Government leaders are eager to raise money, quickly.

"The government is going through all their funding options," a banker advising the Pakistani government said. Financial advisers to the government spoke on the condition of anonymity so as not to alienate their client.

The Qadirpur gas field in Pakistan, a natural gas reserve of 2.9 trillion cubic feet in the Indus River flood plain, may be one of the first big-ticket sales. The field, the second-largest in the country, is valued at about $3 billion.

Bids for the field, about 260 miles northeast of Karachi, may be submitted in the next week or so, bankers say. Likely bidders include foreign companies already involved in Pakistan's energy industry, like Kuwaiti state corporations and OMV, a private Austrian energy company.

"They're testing the market with an auction," said an energy banker who asked to remain anonymous because he was pricing the deal for a client.

The selling of the Qadirpur field could be controversial because it is considered a strategic asset. Pakistan imports more than three-quarters of its petroleum and is struggling to become less dependent on imports. But a person close to the deal said there were no guarantees that the field would be sold. He characterized the bid solicitation as an informal process. He asked not to be named because he was not authorized to speak publicly about the deal.

Some investors are questioning the wisdom of Pakistan's selling valuable assets and are wondering whether sales will be conducted transparently and fairly.

But there is no question that the country needs to raise money, analysts said.

Pakistan's economic situation is "a result of rising commodity and food prices, exacerbated by a lot of pre-election spending by the previous government," said Gareth Price, head of the Asia Program at Chatham House, a research center in London, referring to the general elections held in February.

In an effort to win votes, the previous government, led by Pervez Musharraf, kept subsidies high on food, electricity and oil, helping drive up the budget deficit.

The sale of the Qadirpur field is part of a full-scale review of the biggest energy company in Pakistan, Oil and Gas Development, which owns 75 percent of Qadirpur. The review is being led by Merrill Lynch.

Pakistan's privatization commission said in late August that it also planned to offer stakes in Kot Addu Power on international stock exchanges this year and to privatize Hazara Phosphate Fertilizers. It invited bidders for 51 percent of Jamshoro Power, a long-discussed privatization deal. Salt and coal mines are also scheduled to be privatized.

The list of state assets for sale may not necessarily be followed by deals, analysts warned. "Talk of investing huge sums of money doesn't always materialize, because people are put off by the political machinations" in Pakistan, Price said.

Pakistan's "economic curse" is that the ruling elite — civil servants, politicians and the military — have worked in their own interest, not that of the wider population, limiting how much capital the country can raise, he said.

One possible source of new investment is the Middle East.

"There is a cultural and long-term affinity between the two regions," said Youssef Nasr, the chief executive of HSBC in the Middle East. Saudi Arabia and Abu Dhabi, in particular, have been strong supporters of Pakistan.

Investors from the Middle East have already bought stakes in telecommunications, banking and industrial companies in Pakistan and have been pleased with the results, he said.

One area of cooperation between Pakistan and the Middle East may be agriculture. The arid climate of the Middle East, coupled with rising food prices, has ignited fears about food security. Pakistan, meanwhile, has swaths of arable land that is lying fallow. Government officials on both sides are exploring links that could lead to joint farming ventures, Nasr said.

"It's not going to be a huge industry, by international standards," he predicted, but it could be large enough to make a difference to Pakistan's economy.

The Pakistani government plans to raise money in ways besides asset sales and joint ventures. Pakistan's central bank said on Thursday that it would sell bonds compliant with Islamic law in the domestic market and that the World Bank would "fast track" $1 billion in planned investments in the country.

Attempts to privatize and sell some state-owned assets have proved contentious. The government's plans to sell Pakistan Steel to a group of investors in 2006 were overturned, in part because the agreed-upon price was deemed to be about a third of the $1 billion value. Other sales of equity stakes have gone through with less controversy. In June 2007, United Bank Limited of Pakistan raised $650 million on the London Stock Exchange.

One bright spot for the county's economy has been remittances, or money transferred home by Pakistanis working outside the country, which are on the rise, Price said. The government is lobbying to get more permits for workers to travel to the Gulf, from which most remittances are sent.

Source: International Herald Tribune