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THE outcome of
the recent sale of Habib Bank is that neither its timing nor
price is seen to be favourable for the Government of Pakistan
and there is the possibility that this acquisition may become
an unwelcome burden for the purchaser also. Whether as a
result of excessive zeal or intrigue, both principals appear
to have received inadequate analyses in regard to their
respective situations, with the only gainers being those
involved in advising on and arranging this transaction.
Therefore, the clarification by the Federal Privatization
Minister that “nothing was hidden, everything was transparent”
in the agreement to sell controlling interest in Habib Bank (HBL)
and another by the Secretary of this Ministry that it was
under ”no pressure to sell the Bank to the Aga Khan Fund for
Economic Development (AKFD)” fail to shed light on the doubts
surrounding this transaction. Public concern does not centre
on the modalities of the bidding but on the propriety of the
sale itself, on why it was done in such a hurry, whether the
accepted price was a fair price and, importantly, whether the
purchaser will make a successful manager of this national
asset.
The timing of this transaction remains perplexing. Was there
no co-ordination with the Finance Ministry, which was known to
be launching a Eurobonds issue less than two months after the
Bank was put up for auction? No harm, but much gain, could
have come from waiting. If the bonds issue turned out to be
successful, then the confidence reposed in Pakistan’s economy
would have enabled the Privatization Ministry to demand, and
reasonably expect, a considerably higher price than merely the
book value it was offered for Pakistan’s second largest
commercial bank.
Surely, the haste could not have been motivated by any urgent
cash need in government for budgetary support. In such an
eventuality, the Ministry would at least have insisted that
the AKFD pay the full price of Rupees 22 billion up front,
instead of accepting only half that amount in cash. And if
there was a need to raise cash for other reasons, a better
option would have been to off-load Habib Bank’s shares in the
capital market, bearing in mind the successful experiences
with OGDC and National Bank, both of which issues were heavily
over-subscribed by a public starved of opportunities and eager
to invest in well-managed companies.
Nor can one be convinced that there was IMF or World Bank
pressure that the Bank should be sold by a particular date
because even if there was a prior commitment, these financing
agencies would not hold Pakistan to a promise that was no
longer relevant. Any earlier agreement must have been made
when the nationalized Banks were merely instruments for the
institutionalized and politicized large scale bad lending and
the catalyst for the country’s overall economic and corporate
decline. That such a situation no longer exists is a fact
acknowledged not only by Pakistan’s international creditors
but also, significantly, the new ownership itself, which has
confirmed it has “no plans to change the Bank’s management.”
Consequently, it is mystifying why continued profitable
management by the same team for state ownership should be
considered undesirable.
And, if all else failed, the government always had the option
of applying sovereign priorities to delay the sale of the
Bank, which exercises a strategic role in Pakistan’s economy,
no less perhaps than that of Pakistan State Oil, the
privatization of which has been repeatedly deferred, and
rightly so, for reasons of its strategic importance.
Could it be that the sale was approved because the AKFD bid
represented exceptional value? Not so, says former Finance
Minister Ishaq Dar, who, speaking in the Senate, valued HBL at
between Rs100-Rs150 billion. Even allowing that Mr. Dar’s
figure may be a politically-motivated over-estimation, it
cannot be ignored that, by selling the bank for only its net
book worth, the Privatization Ministry has failed to recover
any value for the enormous goodwill that can be attached to an
expanding, efficiently-managed and profitable 1700-branch
banking company, with a cleaned-up balance sheet, that holds
market share of more than twenty percent banking deposits and
credit in an expanding market economy of a hundred and fifty
million people.
In any case, the net result of the “restructuring” by the
Privatization Ministry’s financial advisors leaves the people
of Pakistan out-of-pocket by Rs14 billion, when it is recalled
that 18 billion Rupees of public money was injected by the
State Bank to “fill a hole” in HBL’s balance sheet and,
further, in December 2003, just weeks before the bidding, the
Finance Ministry first authorized transfer of 9 billion rupees
of HBL’s bad debts to the CIRC and then issued another nine
billion rupees worth of bonds to cover a tax liability to the
CBR.
In defending the sale, the Finance Ministry has made two
points that require correction. Firstly, its belief that this
privatization will upgrade the potential of Pakistan as an
investment destination is not tenable. The reality is that the
Privatization Ministry, having received no offers from any
serious international banking interests, was restricted to
short-listing only two bidders, neither with any experience of
owning or managing an operation with the spread of HBL. In
such a situation, the prudent course would have been to
postpone the sale, so as to analyze and ascertain the reasons
behind this lack of interest and to implement the corrective
measures needed to make the Bank, and Pakistan’s investment
climate, an attractive proposition. Instead, by processing
this complex transaction within forty-eight hours on the
strength of only two bids, there is the impression not only of
a distress sale, but one that may not have been completely
above board.
Secondly, by saying that it finds comfort in the fact that HBL
will be efficiently run now that it has become
“international,” the Finance Ministry not only undervalues the
capabilities of Pakistani banking professionals but also
ignores the several recent instances in the developed world of
incidents of financial fraud by large corporations in
connivance with major Banks. These tell us that corporate
governance and business ethics are no better overseas than
here in Pakistan.
Of course, the fact that the main interested party was the
AKFD no doubt placed the decision-makers in a quandary. There
is not a better friend of this country or a more welcome
investor than the Aga Khan, who is held in the greatest
esteem, by both government and people, for his sincere and
unselfish services to this country. The successful track
record of the non-profit Aga Khan Foundation in the areas of
rural and community development and its efficient management
in the delivery of education, health and social services are
well known and much appreciated.
But these qualities may not suffice for the management of a
complex, trans-national institution such as Habib Bank, in
light of the fact that the AKFD does not possess successful
banking, even commercial, experience, whether in its home base
of Europe or in any other major financial markets. In Pakistan
too its several industrial ventures under the umbrella of IPS
have been shut down for not being managed properly.
This is not surprising, because the AKFD’s core competence is
that of a non-profit deliverer of social services. But such an
ethos is the very opposite of commercial banking and it would
be interesting to learn what arguments were used by the
financial advisors to convince the AKFD into committing its
reputation and funds towards an enterprise that represents
uncharted territory for the AKFD.
It is possible that this organizational ethos of the AKFD may
become the major cause of problems when it manages HBL. For
example, since the AKFD functions primarily as the welfare
driver for a specific community, its staffing,
management-employment, out-sourcing, procurement and lending
priorities are heavily biased in favour of that community, a
fact that extends to its many subsidiary organizations,
operating with public funds, that are said to be top-heavy in
overhead costs through sustaining overpaid expatriate
management.
Apart from this, there is reason for concern on two other
counts. First, the new Board may not be able to successfully
resist political pressures or stay aloof from “crony
capitalism.” Already there are ethical problems with the AKFD
nominees on the Board, one being closely connected with a
securities brokerage firm that is a financial advisor to the
Privatization Commission and another being a legal advisor to
several corporate borrowers of HBL. Nor is confidence gained
in the knowledge (from the Swiss Magistrate’s judgement
delivered against Benazir Bhutto) that the meeting of Jens
Schlegelmilch with Asif Zardari, which led to the Cotecna-SGS
connection, was facilitated at the residence of a personage
close to the very top of the AKF hierarchy.
Second, in Pakistan the AKF is known to be deeply involved in
executing the education-changing reform agenda of foreign
governments, for some of whom it also implements and monitors
many other social-objective programs. Post 9/11, it has been
entrusted by the Pakistan government with the task of
preparing a new syllabus and conducting examinations for an
alternate secondary level education. Through its control of a
major insurer, the AKF already has a substantial presence in
Pakistan’s urban financial sector. It’s wide spread at the
grass-roots level is strengthened by the AKF Micro-finance
Bank, which is one of the agencies responsible for
administering US AID small business loans in Pakistan, and
which also operates in Afghanistan, where HBL was issued a
banking licence a few days after the announcement of its sale
to AKF.
With control of Habib Bank, in selected geographical areas the
AKFD will be in possession of a combination of financial power
and mind-control influence not equalled in South Asia by any
private enterprise since the East India Company. Without for a
moment doubting the AKFD’s good intentions, the fault-lines
inherent in such a situation should not be underestimated,
especially the possibility that other interested actors can
infiltrate and misuse this organization for non-commercial
objectives. Importantly, as experienced in many other
underdeveloped societies, perhaps also in the charged
political atmosphere of Pakistan the perception that any
particular community or organization exercises financial power
disproportionate to its size may result in its becoming the
focus of envy and unwelcome attention.
The writer is a Karachi-based freelance Business and
Commerce Analyst.
© 2004 Shahid Scheik
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