Hold-ups in the Privatisation Plans for Pakistan Reinsurance Company and Jinnah Convention Centre

Widely negative market sentiments subdued investor confidence and high volatility have been given as reasons

By Zunairah Qureshi

There are up to 21 Public Sector Entities (PSE) on the active privatisation list. This includes 10 energy sector entities consisting of 2 power plants and 8 regional electric supply companies. The rest belong to the real estate, financial, and industrial sectors, with the Heavy Electrical Complex’s (HEC) privatisation process having reached near completion in February.

Among these are a number of PSE’s that face frequent blockades to smooth sailing processes. At times, this has meant the delisting of certain entities which have been placed on the privatisation list and after months of work, progress comes to halt usually owing to bureaucratic entanglement.

The decades-long delay in the privatisation programme of the First Women’s Bank Limited (FWBL) was covered by Profit earlier and can be read here. In September 2021, the State Life insurance Company (SLIC), which was added to the privatisation list in 2016 was delisted in its final stages when the Senate Standing Committee on Commerce proposed some amendments. According to sources at the Privatisation Commission (PC), the divestment plan for 20 per cent shares of the Pakistan Reinsurance Company Limited (PRCL or PakRe) awaits a similar fate.

In addition, the Jinnah Convention Centre (JCC) in Islamabad has also come to an impasse after becoming close to its final stages in the privatisation process.

Pakistan Reinsurance Company Limited

Formerly called the Pakistan Insurance Corporation (PIC), Pakistan Reinsurance Company Limited was established in 1952 as Pakistan Insurance Corporation under PIC Act 1952 to facilitate the local insurance industry. It is a public sector company under the administrative control of the Ministry of Commerce and is the sole reinsurance organisation operating in Pakistan. By way of which, all insurance companies in Pakistan are mandated to offer 35 percent of its reinsurance business to PRCL.

In August 2019, Cabinet Committee on Privatisation (CCoP) approved the divestment of 20 percent shares of PRCL’s held by the government. By January 2020, HBL, Next Capital and Haidermota & Co. were appointed as financial advisors.

Then in August 2020, CCoP and Federal Cabinet further approved the transaction structure for the divestment of 60,000,000 ordinary shares through Secondary Public Offering (SPO) at the Pakistan Stock Exchange (PSX) to Institutional, High Net Worth Individuals (HNWI) and Retail Investors (RI). Out of these shares 75 per cent will be offered

to institutions and HNWIs and remaining 25 per cent to the general public which includes retail investors. Any remaining shares from this 25 per cent allocation to the public will be offered to institutions and HNWIs as well.

According to the PC, book building method has determined price per share at Rs 34 but the selling price came down to Rs 23 per share, which will equal to a total sale of Rs 1.2 billion. Sources told Profit that among the many issues raised against the privatisation process was the Ministry of Commerce’s objection to the discounted share price.

However, in October 2021, the Financial Advisory Consortium (FAC) wrote a letter to the PC communicating that, ‘…market sentiments are widely negative with subdued investor confidence and high volatility,’ and advising that the book building method for price determination should be deferred. This prompted the PC to recall the summary of valuation options that had been previously submitted to CCoP for approval.

Major shareholders of PRCL consist of the Ministry of Commerce with 44 percent shares, State Life Insurance Company with 24.4 per cent shares, and the National Bank of Pakistan (NBP) with 8 per cent shares. Once 20 percent of their shares are divested as per the privatisation plan, the government will no longer be a majority shareholder and the requirement for insurance companies to obtain 35 per cent reinsurance through PRCL will no longer be effective. Our source explained that, ‘This would mean that PRCL’s present business model will not remain the same and its shareholders obviously don’t favour this.’

The source further added that the matter was referred to a legal council which reaffirmed that government shares have to remain in the majority in order for PRCL’s current business model to remain as is. The NBP has already confirmed the retention of its shares in PRCL and confirmation from SLIC is yet to be received. If SLIC does choose to retain its shares – which is likely – this would pose an additional challenge for the FAC and further delay the transaction process.

‘The Ministry of Commerce is entirely against the privatisation and SLIC says it doesn’t have a Board of Directors in place yet so it cannot give a final decision,’ said the source. We reached out to SLIC for a comment multiple times but have not received a response.

Apart from SLIC’s delay in giving a confirmation, other issues identified by PC include the Sindh Revenue Board sales tax case against SLIC, which amounts to an approximated sum of Rs 15.116 billion. While SLIC has argued in the past that sales tax does not apply to its insurance services, the pending case negatively impacts the share price of PRCL. Since the last three years, the maximum share price was Rs 35.5 but has now fallen to Rs 22.36.

In the case that SLIC is ultimately charged with sales tax avoidance for an amount above Rs 15 billion, the fate of PRCL will end in the shallows. It is then, no wonder that the finance ministry proposed to delist the divestment of PRCL’s shares.

Jinnah Convention Centre

Jinnah Convention Centre (JCC) was developed by the Habib Rafique Group in 1997 and is located in a prime area near Constitution Avenue, Islamabad, with a total land measuring up to 7.59 acres and a built-up area of 4.13 acres. The Capital Development Authority (CDA) has been maintaining the convention centre by renting out its facilities to public and private sector organisations.

The CCI approved privatisation of JCC in August 2006. However, it wasn’t until October 2018 that the Cabinet Committe on Privatisation (CCoP) included Jinnah Convention Centre in the active privatisation list. By May 2019, the Prime Minister had approved the transfer of ownership of the plot measuring 7.59 acres from CDA to the Ministry of Interior (MOI) for Rs 1.14 billion, which was the payment to be made to CDA.

Following thorough consultation with CDA and other stakeholders, CCoP approved the JCC’s transaction structure which addressed a number of observations raised by CDA. This includes agreement upon sale of the entirety of the 7.59 acres land for the purpose of which the said area of land is to be converted from ‘amenity’ status to commercial area status. In simple terms amenity area is the area of land set aside for purposes of visual improvement or relaxation and can be used for shared recreational purposes like parks, playgrounds, masjids, etc.

The transaction structure included further details regarding land use after privatisation, establishing that the buyer will have rights to flexible use of the land whether to build a hotel, or office spaces and/or apartments and also the right to sell built-up units. Other specific details required by the CDA regarding the maximum allowable height for structures, floor area ratio and vehicle car parking area were also finalised. Approval for height clearance was also taken from Civil Aviation Authority (CAA) and Pakistan Air Force (PAF).

Subsequent to the approval of the transaction structure in August 2020, in October of the same year, CDA issued a non-objection certificate (NOC). Since then the PC has pre-qualified 12 investors. While specifics could not be shared, sources from PC told Profit that the investors include HNWIs such as business owners, TV channel owners, and insurance sector parties among others.

In July 2021, complications arose when the CDA board raised objections to the commercialisation of all 7.59 acres of land and instead stated that ‘…for the purpose of commercialisation only the existing footprint of JCC may be considered.’ This was contrary to the transaction structure that had previously been approved and against which CDA had already issued the NOC.

Profit contacted various members at CDA, including the Member (Estate) who was in charge of moving the action on the transaction of JCC in board meetings and the Director General Services but was ultimately told to refer to the PC as they are the ‘dealing ministry’. However, according to the source at PC, ‘CDA has now decided to forgo discussion with the Privatisation Commission and intend to take up the matter with the Federal Cabinet directly.’

This can also be inferred from the meeting minutes of the CDA Board Meeting, where it states, ‘Almost all the board had strong reservations regarding this project,’ and ‘we should make the cabinet aware that they have not been presented a clear picture of the implications of their decision.’ The CDA Board said this out of fear that the privitasation plan would turn the land in question into a ‘concrete jungle’.

There were serious observations raised by board members within the meeting which included the decision to add a lease agreement of 99 years for the sale of the land within the transaction structure as per CDA by-laws. The CDA further raised the point that it would require an undertaking from the buyer or Privatisation that they will bear all costs of such services as the sewage treatment plant, water supply system traffic impact, and others. This information is present within the minute of the board meeting held in November 2021. While the PC communicated that CDA maintained its observations in the December 2021 meeting, the minutes of this session are not available and the minutes for the January 2022 board meeting has no mention of the JCC privatisation matter.

The latest development, as learned from the PC, was on 20th January when chairman CDA met with minister of privatisation and secretary privatisation commission to resolve the deadlock regarding JCC’s sale. During this meeting CDA promised to hand over the allotment letter and all necessary documents. The PC is yet to receive these. The source at PC dejectedly expressed that, ‘At the rate things are going, I don’t see the process reaching completion by the 22nd June deadline.’ n