Auditors question PTCL privatisation

A post-privatisation decline in financial performance and service delivery of PTCL has been witnessed. Auditor General of Pakistan’s special audit report reveals Pakistan Telecommunication Company Limited (PTCL) was privatised even without the preparation of Due Diligence and Final Valuation Reports.
The special audit report on the privatisation of PTCL exclusively available with Pakistan Today points out that as of June 30, 2009, three installments of $133.218 million each, totaling $399.6 million have been withheld by Etisalat due to non-transfer of titles of properties to PTCL. “Valuation of property worth Rs57.5 billion was not included for valuation purposes in determination of PTCL’s service price by the Financial Advisor,” the report further reveals. Audit officials have also pointed out the loss of Rs2.65 billion to national exchequer on account of dividends for the period from January to June 2005 given to Etisalat in good faith.
It is pertinent to mention that the Privatisation Commission (PC) had approached the Auditor General of Pakistan (AGP) office in March 2010, requesting to arrange a special audit of 12 major privatisation transactions including PTCL.
Audit officials say that the factor of management control of PTCL was significant to its strategic sale to Etisalat. “The Shareholders Agreement (SHA) between the Government of Pakistan (GoP) and Etisalat was heavily tilted in favour of the investor which is evident from the fact that the management control and strategic decision-making had been handed over to the investor on the basis of only 26 percent of the total shares of the company,” says the report.
Moreover, Etisalat had also been given B class shares that each carry a voting right, which clearly meant that in the Annual General Meeting (AGM), Etisalat would have the decision making powers, the report adds.
The report says that the privatisation of PTCL was not well managed as the transaction took more than a decade to complete. “Undue concessions were given to Etisalat when the revised agreement was signed in 2006. For instance, Etisalat was allowed to make remaining payments in installations contingent upon transfer of title of properties, and sell costly PTCL property without any limit and the Government of Pakistan agreed to bear half the cost of Voluntary Separation Scheme offered to surplus employees,” reveals the report
In the chapter, ‘Was the privatisation process well-managed?’ the AGP has pointed out that the management did not provide the Due Diligence Report prepared by the FA to audit authorities. “A document provided as Due Diligence Report to audit authorities contained only questions and answers with respect to certain areas and was not an appropriate report. The Due Diligence Report (questions and answers) provided to the audit was dated July 29, 2005, which was one month after the date of the sale agreement with Etisalat,” audit officials have revealed.
“Audit was not provided with the Final Valuation Report of PTCL. PC management informed that no such report existed and this information was contained only in the presentation delivered by the FA to the PC on the bidding day. Furthermore, audit noted that the valuation presentation provided to authorities was of June 2005, which was also on the date of bidding of PTCL. Audit is of the view that the valuation report should have been prepared by the FA and submitted to the PC management before the start of the formal bidding process i.e. issuance of EOIs and Request for Statement of Qualification (RSOQs), as per the TORs of FA,” the report says.
The officials observed in the report that the privatisation plan of PTCL was not properly managed and the milestones set out by the Financial Advisor were not achieved on time. Keeping in view the current position till finalisation of Audit Report, three installments from Etisalat amounting to $399.6 million were still pending due to non-transfer of titles of properties to PTCL, the report exposes.
The report reveals that GoP gave undue concessions to Etisalat in the revised agreement. “Etisalat had been authorised to sell out costly PTCL property worth billions of Pakistani rupees. As per the original agreement which lapsed in September 2005 after non-payment of dues by Etisalat, the buyer could sell property worth $ 5 million in any year, but as per the revised agreement of March 12, 2006, the buyer had been given the right to sell property limitlessly. The government agreed that PTCL would pay up to $50 million annually for a period of five years to Etisalat under a technical service agreement (TSA). On one hand, the Etisalat charged technical fees from PTCL for rendering technical services and on the other hand, experienced staff of PTCL was laid off through VSS,” the report reveals while citing few examples of undue concessions.
The important aspects to be considered for the Best Price Achieved include delayed transfer of funds from Etisalat and valuation of PTCL properties. “Audit observed that Etisalat had paid a total of $1.799 billion and a balance of $799.3 million was payable by them, which they intended to adjust against the outstanding properties awaiting transfer of title. The issue of transfer of titles of properties to PTCL in accordance with the SPA remained unresolved and titles of 157 properties were yet to be transferred in the name of PTCL. Therefore, the installments due on March 12, 2008, September 12, 2008 and March 12, 2009 (amounting to $133.218 million each totalling $399.6 million) had been withheld by Etisalat with the transfer of titles remaining pending. Valuation of property worth Rs57.5 billion was not included for valuation purposes in determination of PTCL’s service price by the FA,” the special audit report reveals.
It highlights that the main objective of ending PTCL’s monopoly status could not be achieved through its privatisation. The profits of PTCL and income tax paid to public exchequer were declined after privatisation, it adds. “Audit tried to assess the impact of privatization on financial performance and service delivery of PTCL. It was observed that the group revenue of PTCL (based on consolidated accounts) had not substantially increased during the last five years (2005-09). Net profit after tax and Earnings per Share (EPS) declined when compared with pre-privatisation figures (for year 2005) of net profit and EPS. Moreover, income tax paid substantially decreased in the financial years 2007-08 and 2008-09,” the report pointed out.
It further adds that, “Impact on service delivery of PTCL after privatisation was reviewed in terms of number of subscribers and tele-density (defined as numbers of telephone lines per 100 people) on the basis of information obtained from the PTA website. Audit noted that the number of fixed line subscribers decreased from 5.190 million in June 2005 to 3.378 million subscribers in March 2009.”