October 2005

PRIVATIZING PAKISTAN (see report)

By Eric Ellis
 
President Pervez Musharraf’s government sees foreign investment as vital to the country’s growth prospects. The recent sale of telecom operator PTCL, the culmination of a seven-year saga, offers grounds for hope — and caution.

When Goldman, Sachs & Co. won a mandate to arrange the foreign sale of a big chunk of Pakistan Telecommunication Co. Ltd. in 1998, the job seemed like a tough but doable challenge. The government of then–prime minister Nawaz Sharif had identified the sale as a top priority in its efforts to modernize the country’s economy. And the global telecom industry was in the midst of an unprecedented boom. Goldman had led the $12 billion privatization of Deutsche Telekom in Germany two years earlier and would advise Vodafone on its record $200 billion takeover bid for Mannesmann the following year.

PTCL looked like an ideal candidate to feed investors’ seemingly insatiable appetite for telecom shares. “I imagined it would take about 15 months to put away — nine months for the preparation phase and six months to execute,” recalls Charles Manby, the London-based head of Goldman’s global telecom group.

Talk about optimistic. Manby couldn’t have foreseen the extraordinary series of incidents, from the financial to the geopolitical, that would not only delay the sale but at points make it seem nigh on impossible. Sharif was overthrown in October 1999 led by General Pervez Musharraf, convicted on charges of terrorism and corruption and sent into exile in Saudi Arabia. The telecom boom went bust in 2001 as part of the global collapse in technology stocks. Later that year the terrorist attacks of September 11 in New York and Washington unleashed war in neighboring Afghanistan and made Pakistan a frontline state in President George W. Bush’s crackdown on terrorism.

Throughout the turmoil Manby and his colleagues persevered. Acting closely with President Musharraf ’s technocratic government, notably Finance-Minister-turned-Prime-Minister Shaukat Aziz, the bankers worked to overcome turbulent markets, a recalcitrant Pakistani bureaucracy, truculent labor unions and daunting political risks. Their efforts were rewarded this summer when the government agreed to sell a 26 percent stake in PTCL to Emirates Telecommunications Corp., or Etisalat, a telecom group based in the United Arab Emirates, for $2.59 billion. Referring to his original estimate of the time it would take to execute the deal, Manby says, “I ended up being right, except there were six years in between.”

The privatization of PTCL is a landmark transaction that Musharraf and Aziz hope will transform Pakistan in the eyes of international investors. Already, the government’s pro-business, market-oriented reforms have revived the economy, boosting growth to 8.4 percent in the fiscal year ended June 30 from 6.4 percent a year earlier. Now the leaders hope to anchor those gains by privatizing a swath of properties, which they hope will raise as much as $20 billion over the next two years. The targets include Javedan Cement, Mustehkam Cement, Pakistan International Airlines, Pakistan Steel Mills and the country’s upstream and downstream oil companies, Pakistan Petroleum and Pakistan State Oil Co.

“The government has no business being in business,” Musharraf tells Institutional Investor in an interview at his heavily fortified residence, Army House, in the garrison city of Rawalpindi outside the capital, Islamabad (see box). “No one has been able to privatize PTCL, but now we have, this government has. We are delivering. The message this sends to Pakistanis is very powerful.”

For Musharraf, who seized power promising to rid Pakistan of graft and corruption, the privatization program is critically important. He and Aziz believe that the only way to eliminate corruption is by removing the vehicles of graft and influence-peddling from state control. They hope to show Pakistanis embittered by years of corruption, mismanagement and failed democracy that important deals can get done without civil servants dipping into the national purse. “The days of backroom government deals are over,” says Aziz, who before joining the government was an executive at Citigroup and helped to bring in Saudi Prince al-Waleed bin Talal as a major shareholder during the 1990s.

“The best way to fight corruption is to change the process. And we did,” Aziz says in an interview in Rome during a recent visit to Italy. “First, you privatize, so you reduce the role of the public sector. You create an environment where the policies and processes don’t allow discretion by the politicians and the civil service, and we have. Even our worst critics will tell you we practice total transparency. There is no corruption at the top. You can ask anybody. For six years!”

The importance of Pakistan’s economic reform efforts extends far beyond the country’s borders. Musharraf casts the government’s appeal to foreign investors in terms of the war on terror: The jobs and growth generated by foreign investment offer the best bulwark against the Islamist fanaticism preached in some of the country’s madrasahs, or religious schools. “If you invest here, creating jobs, that means poverty alleviation, which is to fight the root cause of extremism and terrorism. So I say, help me fight it by investing in Pakistan,” the president tells II.

As triumphant as the sale of PTCL was, the exhausting seven-year process underscores the enormous obstacles that still threaten to impede Pakistan’s growth. The country’s reputation has improved dramatically since 1999, when Transparency International ranked Pakistan second only to Nigeria among corrupt countries, but it still lags far behind those of most other emerging-markets nations. The organization currently ranks Pakistan as 79th among 133 countries, on par with Russia and Ecuador.

It’s not just corruption that Musharraf and Aziz have to battle. Pakistan has one of the world’s most formidable and politicized bureaucracies, a product of decades of factional horse-trading. Many of the country’s roads, railways and other infrastructure have changed little since the British colonial era. In addition, many state-owned companies are outdated and burdened by heavy regulation. And notwithstanding the government’s success at selling off PTCL, the company failed to attract any bids from major Western telecom operators, and the two losing bidders — China Mobile Communications Corp. and Singapore Telecommunications — offered barely half the price paid by the UAE’s Etisalat. Even the sale itself is still plagued by doubt. As this magazine went to press, Etisalat, which paid a 10 percent deposit immediately after its winning bid, was delaying payment of the balance, claiming it had serious issues to resolve with Islamabad. People close to the deal believe the company may be seeking to knock down the price — its bid was nearly twice as high as that of the closest competitor, China Mobile Communications Corp., and easily exceeded the Aziz government’s expectations.

The story of PTCL’s privatization, if indeed it proceeds, is a saga of investment banking skill and stamina set against a backdrop of coups and terror attacks, war (in Afghanistan, on Pakistan’s western frontier) and threatened war (a nuclear showdown with India to the east). In the end, years of hard work by bankers and modernizing ministers overcame opposition by entrenched bureaucrats and labor unions, the entire process culminating in a 90-minute televised auction extravaganza that underscored the importance of the transaction for Pakistan’s future. “There has been a real sense of living through a lot of history,” says Ian Ferguson, a partner at Allen & Overy, a London law firm that acted as the senior legal adviser on the
Goldman team. “Sometimes we were never quite sure whether it would be safe for us to go there. It’s certainly the most protracted deal I’ve ever worked on.”

THE PRIVATIZATION OF PTCL BEGAN IN 1994, WHEN the government of then–prime minister Benazir Bhutto sold a 12 percent stake to international and Pakistani investors for $1.2 billion. The deal was led by Jardine Fleming, the Hong Kong–based firm that was later bought by Chase Manhattan Corp. before its merger with J.P. Morgan & Co. The Sharif government’s 1998 decision to sell an additional 26 percent stake to a strategic investor was much more significant. The winner would gain effective management control over the company and be in a position to apply a much-needed dose of modernization. PTCL had posted profits of $317 million in 1998, but its landlines reached only 1 to 2 percent of Pakistani households. The company’s Internet service was unreliable in the few places where it was available. Three mobile operators had been licensed and were threatening to steal away customers frustrated by years of shoddy service from the national monopoly. In short, PTCL’s future viability was at stake.

When Goldman Sachs won the mandate in March of that year, executives underscored the importance of the transaction by adopting the code name Project Indus, after the river that scythes 3,000 kilometers through the country. “For we Pakistanis, PTCL was a project as big and as great as the Indus,” says Reza Rahim, Pakistan country head for J.P. Morgan, which later joined Goldman as co–lead manager of the deal. “This was a make-or-break deal for Pakistan. It would transform my country.”

Goldman established a team of bankers in Islamabad to prepare PTCL for sale. They drafted an information memorandum for potential investors and advised the company to overhaul its pricing (PTCL then charged a standard fee per call, irrespective of its length) and to launch a mobile service, U-Fone. “We made quite a lot of progress then,” remembers Goldman’s Manby. “There was certainly a desire on our part to get it done.” Prime Minister Sharif, however, ran an administration widely regarded as incompetent and corrupt, and the government made little progress on the sale. In December 1998, Khawaja Asif, then chairman of the Privatization Commission and considered a Sharif ally, criticized progress on the PTCL sale as “pathetic” and
blamed the government for a lack of political will.

J.P. Morgan’s Rahim, a scion of one of Pakistan’s leading business dynasties, says the government showed lack of professionalism at a London conference organized by Jardine Fleming in February 1999. Sharif and his brother, Shahbaz, the Chief Minister of Punjab province, were meeting with senior British business executives to discuss the prospects for foreign investment in Pakistan when Rahim recalls that Sharif suddenly declared that “everything” in the country had to be privatized by June of that year. If anyone would have understood how unrealistic that target was, it was the British executives — many of whom had Raj-era family connections to Pakistan — who knew how slowly things moved on the subcontinent.

“If you make a statement like that, how serious is your privatization program?” Rahim says. “It was a stupid remark, and you don’t make that type of remark to that audience.” The investment climate quickly went from bad to worse. In May 1999, Pakistan successfully tested its first nuclear weapon, a response to India’s test a year earlier. The nuclear saber-rattling bolstered Pakistan’s national pride but sent foreign business running for the exits. Between May and July long-simmering tensions over Kashmir erupted into clashes between Pakistani and Indian forces near the border town of Kargil. Then in October came the Musharraf coup. The little-known general seized power with a platform that to many Pakistanis seemed remarkably sensible. “We only knew him as the chief of army staff, then all of a sudden, he comes up with this speech that talked about reforms,” recalls Rahim.

Economic reform took a backseat, however, as Musharraf concentrated on urgent foreign policy issues and on securing his power base at home. He handpicked his ministers, including then–Finance minister Shaukat Aziz, then gradually transformed his cabinet from appointed ministers to elected ones. (Aziz won election to the upper house of Parliament in October 2002; he won a lower house seat and was appointed prime minister in August 2004.) The process was time-consuming, resulting in repeated postponements of the privatization. As Islamabad dithered, the global telecom market was entering a free fall. Carriers were retrenching after having splurged more than $100 billion on third-generation mobile licenses in Europe, while a glut of fiber-optic cables was putting pressure on the high prices telecom operators had traditionally charged on fixed-line traffic.

“There was just this coincidence of negativity conspiring against us,” recalls Goldman’s Manby. “The process just went on hold. The Americans were going home from Europe, so they certainly weren’t going to suddenly decide on Pakistan. There was zero point in ringing people up.” Allen & Overy’s Ferguson calls this “the grim period. I thought this deal would never happen.” In an effort to spur the process, Goldman decided in 2000 to add a new member to its team. It chose Jardine Fleming — then being amalgamated into J.P. Morgan Chase — over ABN Amro and Citibank. For a country whose elite still tilts strongly toward London, Jardine Fleming’s British colonial roots and strong presence in Asia and the Middle East were vital assets.

Rahim, then head of investment banking at Jardine, comes from a prominent Pakistani family. His Cambridge University–educated mother was born in the former East Pakistan, which would gain independence as Bangladesh as a result of the 1971 Indo-Pakistani war. Her father, industrialist-politician Mirza Abul Hassan Ispahani, effectively gifted the first planes to what is today Pakistan International Airlines, the state-owned flag carrier. Ispahani was a confidant of Pakistan’s founder, Mohamed Ali Jinnah, during the country’s turbulent birth in 1947.

Jamsheed Rezaur Rahim, the banker’s father, also was educated at Cambridge and was the first Pakistani chairman of the local subsidiary of the U.K.’s Imperial Chemical Industries. Reza Rahim recalls how his father unsuccessfully lobbied the government in the 1960s and ’70s for approval to build a polyester-fiber plant in Punjab that would have employed tens of thousands in the impoverished province. Then, while the Rahims were on a family vacation in Spain in 1977, news came that there had been a coup back home and that a military junta led by General Muhammad Zia-ul-Haq had agreed to authorize the plant. ICI Pakistan finally opened the facility in 1982, 14 years after the elder Rahim first began seeking approval.

“It was a very good lesson in persistence,” Rahim recounts as he takes afternoon tea with his father, now 78 and retired, in the garden of the family’s sprawling Karachi villa. “My father’s constant selling of Pakistani potential and possibility inspired me to become an investment banker. My mission is to bring foreign capital into Pakistan and advance the country, as was my father’s.” As Rahim went to work on the PTCL privatization, a few foreign companies showed interest, but their approaches were very tentative. Saudi Oger, a Saudi-Lebanese group owned by billionaire Rafiq Hariri, the former prime minister of Lebanon who was assassinated in February, was among those that looked at the company. The group’s Oger Telecom unit ran private networks for the Saudi royal family as well as Cyberia, the biggest Internet service provider in Saudi Arabia. Other expressions of interest came from South Africa’s Cell C, Turkey’s Çukurova Telecom Holdings and the big Egyptian carrier Orascom Telecom, which owns one of Pakistan’s emerging mobile operators, Mobilink GSM.

“A lot of them said, ‘We’re interested, but unless you fix the regulatory regime, we are not willing to kick off this transaction,’ ” Rahim recalls. “We told the government, ‘Unless you get your regulatory environment sacrosanct and correct, you are not going to get anyone to bite, because there were too many risks.’ ” The government, advised by bankers and lawyers from the Goldman–J.P. Morgan team, began creating a new regulatory regime aimed at promoting competition and guarding against abuse of PTCL’s dominant position. It established a new telecom regulator, imposed caps on PTCL’s tariffs, drew up transparent rules for licensing new entrants and setting interconnection prices and set out universal service objectives. This was detailed work requiring several pieces of legislation, and the regulatory overhaul wasn’t completed until early 2005.

In July 2001 the Privatization Commission put out a statement asserting that ten firms had expressed an interest in PTCL, which it insisted “indicates investors’ confidence in the government’s economic policies.” One banker associated with the deal dismissed that statement as “cloud-cuckoo-land. A couple of people had rung up or sent an e-mail, and this was sold as a possible bidder. We were a very long way from that.” Rahim says that only one of the ten companies cited — the Hariri family’s Saudi Oger — could be regarded as serious.

Then came September 11. Rahim was in his office in Karachi just before 7:00 p.m., working on the PTCL project, when his wife, Sadia, called and told him to turn on the television. The first plane had just crashed into the north tower of New York’s World Trade Center. “I said to myself, ‘My God, there go my deals.’ I knew immediately,” Rahim recalls. “That was my first reaction. My second reaction was, ‘I hope to God that a Pakistani is not involved.’ ” No Pakistanis were directly involved in the attacks, but the country immediately found itself on the front line of the global war on terror. The U.S. attacked neighboring Afghanistan to overturn the Taliban regime, many of whose leaders had been nurtured in Pakistani madrasahs during the 13-year Soviet occupation of their country. Terror attacks increased inside Pakistan after Musharraf closely allied himself with Bush. Islamic extremists kidnapped and killed Wall Street Journal reporter Daniel Pearl in Karachi in one of the most grisly incidents of violence. Even today Osama bin-Laden is presumed to be hiding in the mountainous region of western Pakistan, near the border with Afghanistan, while Musharraf has been the target of at least six assassination attempts.

“From that day onward I knew security would become an issue,” says Allen & Overy’s Ferguson. “One was never quite sure where Pakistan’s loyalties lay.” At Goldman, Manby’s assessment was bleaker: The September 11 attacks were “another complication to something that wasn’t happening anyway.” With the privatization program effectively on hold, Rahim was transferred in January 2002 to Singapore, where one of the key clients he courted was Temasek Holdings, the government investment arm that controls Singapore Telecom. SingTel is run by Lee Hsien Yang, 45, the youngest son of Lee Kuan Yew, Singapore’s feisty founder, and brother of Prime Minister Lee Hsien Loong. The company had been on a major acquisition spree, buying assets in Australia, India, Indonesia, the Philippines and Thailand. Although Rahim would return to Pakistan to keep tabs on PTCL, the deal remained dormant.

Then in September 2003, Rahim got a call from a contact in the Privatization Commission office telling him that a consortium led by Zia Chishti, a U.S.-born entrepreneur of Pakistani descent, had made a direct proposal to Musharraf to break up PTCL. The plan called for selling off the U-Fone mobile subsidiary and the ISP businesses and breaking PTCL’s fixed-line business into five regional operators. “Ours was quite an aggressive platform, quite radical for Pakistan, but we believed necessary if the government wanted to enhance competition,” Chishti, who runs Pakistan call-center operator Resource Group, tells II in an interview.

Manby, Rahim and their colleagues lobbied strongly against the breakup proposal, citing the disastrous case of PT Telekomunikasi in Indonesia. That monopoly was broken into five regional carriers in the mid-1990s but was put back together again after ventures between the regionals and foreign partners collapsed in acrimony. “We had to tell them that the government was not going to get what it wanted out of this — increased penetration — because in every country it had been proven that when you split up telecom operators, they don’t go after the underpenetrated areas,” says Rahim. “Everyone concentrates on the urban areas where the margins are, and in Pakistan that leads to rural discord.”

The bankers also advanced a more sensitive argument: President Musharraf and Prime Minister Aziz had spent years trying to convince Pakistanis and foreigners that theirs was a clean and transparent administration. Any perception that Musharraf was privately negotiating with one bidder for the state’s most-prized strategic asset would reek of a return to old-style politics and enrichment. “We made exactly those types of comments in our presentation,” says Rahim. “We were very confident as the independent adviser to the government that we had to play the patriotic card: The deal has to be in the interests of the nation, has to be transparent and has to be in the interests of the security of the country.”

With several layers of bureaucracy to contend with, the debate over PTCL raged for a year. The government appointed a task force to evaluate the options, and the task force favored the breakup proposal. In April and May 2004, Goldman and J.P. Morgan arranged for PTCL’s senior management and government officials to talk with experts, who included Hong Kong’s former telecom regulator, Alexander Arena, now an executive at Hong Kong–based telecom operator PCCW, and Manuel Pangilinan, a Filipino banker who had just bought control of Philippines Long Distance Telephone Co. from the Manila government. The experts contended that an integrated telecom business would promote competition and increase telephone penetration.

“We took the view that selling the company as an ongoing concern was the best way to get the investor interest in place,” says Manby. “And we were right.” Crucially, the bankers had powerful support within Pakistan from central bank governor Ishrat Husain and Finance Minister Aziz, both of whom opposed a breakup. Husain says he was determined to avoid the pitfalls of PT Telekomunikasi. On November 8, 2004, Musharraf chaired a high-level meeting in Islamabad that included Aziz, who by then was Prime Minister; Privatization Minister Abdul Hafeez Shaikh; central bank governor Husain; Minister for Information Technology Awais Ahmad Khan Leghari; and the chairman of the Pakistan Telecommunications Authority, Major General Shahzada Alam Malik. After hearing the arguments for both proposals, Musharraf rejected the breakup option and called for a 26 percent stake in PTCL to be sold to foreign investors by June 30, 2005. Even Chishti, the loser, had a good word about the process. It was, he says, “very transparent, which is unusual but very good for Pakistan.”

Manby and Rahim were elated. Project Indus was up and running again. Later that month Goldman and J.P. Morgan took PTCL on a roadshow to meet investors in Hong Kong, Malaysia and Singapore, followed by presentations in the Middle East, China and Europe. The company had reported a 15 percent rise in earnings before interest, tax, depreciation and amortization, to $978 million, on a 16 percent gain in revenues, to $1.35 billion, for the financial year ended June 30, 2004. The 72 percent Ebitda margin was astonishing for a company with 65,000 employees and a fixed-line penetration of just 3 percent of Pakistani households. U-Fone, PTCL’s mobile phone subsidiary, had 25 percent of Pakistan’s burgeoning cell market and was growing its subscriber base by 15 percent a year. The government had overhauled the company’s management. Junaid Khan, a Pakistani who was running Motorola’s Middle East operations out of Kuwait, was brought in as CEO in March 2004. “My brief was to move PTCL culture away from the more civil-service-minded, jobs-for-life, institutional mind-set to a more dynamic private sector attitude,” he says.

BY JANUARY 28 OF THIS YEAR, THE CUTOFF DATE for interested bidders, the government had received applications from 13 contenders. China Mobile, Etisalat, Pangilinan’s PLDT of the Philippines, Saudi Oger, SingTel, Telekom Malaysia and Turkcell Iletisim Hizmetleri were regarded as the front-runners. Mobile Telephone Networks of South Africa; Millicom International Cellular of Luxembourg, which had just bought a Pakistani mobile license; Kuwait’s Mobile Telecommunications Co; Saudi Telecom Co. and a couple of regional private equity companies also had applied. Rahim had made unsuccessful overtures to Spain’s Telefónica, leaving Millicom as the only Western company to express any interest. “There was nothing really from the West,” Rahim says. “I think people are still not focused on Pakistan.”

After demonstrating that they met the technical and financial criteria for bidding, the 13 applicants conducted due diligence on PTCL. This is standard procedure for any bid, but Pakistan presented special challenges. The country is on the travel advisory watch lists of many nations, and some insurance companies will not cover executives traveling there. Visitors to the Karachi Marriott, one of the city’s few international business-class hotels, adjacent to the U.S. Consulate, have to negotiate four vehicle-security checkpoints and a scan at the lobby entrance.

Goldman and J.P. Morgan got around these logistical difficulties by setting up an online data room operated by the U.S. company IntraLinks. Potential bidders were provided with passwords that allowed as many as 50 staff to review PTCL’s detailed financial statements from their own desktops. “We scanned 60,000 pages of related data and put them all online,” says Rahim. “It took about ten days. It was a very big job, painstaking.”

Seven parties asked some 5,000 questions of PTCL’s advisers. SingTel put in more than half of the queries and Telekom Malaysia 1,000. Etisalat, the eventual winner, had only 20. With four parties having decided to drop out by the spring, the field was now down to nine: Etisalat, China Mobile, Kuwait’s MTC, Saudi Oger, Saudi Telecom, SingTel, Telekom Malaysia, Turkcell and a consortium led by Egypt’s Al-Mal Investment Co., which was still searching for a telecom operator with which to partner.

In April and early May, the interested parties came to Pakistan three at a time for a week each to meet senior PTCL management. When the due diligence process ended on May 11, only three potential bidders remained: China Mobile, Etisalat and SingTel. The Hariri family’s Saudi Oger decided to focus on a Turkish privatization; a consortium led by the company would edge out Etisalat by bidding $6.55 billion for a 55 percent stake in Türk Telekomünikasyon in July, two weeks after the PTCL sale. The early favorite among the final three was SingTel, owned by the Singapore government. CEO Lee had spent $30 billion buying telecom companies around Southeast Asia and in Australia over the preceding four years. SingTel also owned a large stake in India’s Bharti Tele-Ventures, a fact that worried some in Islamabad, particularly generals influential with the administration. After all, one of the government’s conditions in awarding the mandate to Goldman and J.P. Morgan had been that no Indian nationals working for the banks be allowed anywhere near the deal. SingTel stressed that its stake in Bharti was a passive one. (The company declined to comment for this story.)

China Mobile also was a formidable contestant. Its 270 million subscribers make it the world’s biggest mobile phone company, and it posted net profits of $3 billion in 2004. The company had no overseas experience, but the fact that Beijing is Pakistan’s closest Asian ally was a plus. “We were very impressed by the state of PTCL’s accounts,” says Xu Yucheng, associate director of state-controlled investment bank China International Capital Corp., which advised China Mobile on the deal. “They were much better than the state-owned enterprises I am used to seeing in China, and I am in a position to compare. It was quite pleasant.”

Etisalat, which is partly owned by the United Arab Emirates government, was awash with cash and posted a net profit of $926 million in 2004. The company is moving aggressively to expand outside its small domestic market, where it has only 1.2 million fixedline subscribers and 3.9 million mobile users. The company paid $3.3 billion for a mobile license in Saudi Arabia in August 2004 and bought Ivory Coast–based Atlantique Telecom, which operates in six West African countries, for a reported price of more than $120 million in April 2005. The company also enjoyed an intimate connection with Pakistan: About one quarter of its staff were expatriate Pakistanis working in the Emirates and in Saudi Arabia.

“I didn’t recommend any particular bidder to anyone,” says Rahim. “I just told the client, ‘This is the buyer universe that you started out with, this is the buyer universe you now have, and the reason it’s gone from here to here is because of the perceived risk issues.’” The last weeks of the sale process were nerve-racking, as opponents of the privatization, notably the company’s powerful labor unions, made last-ditch attempts to derail the deal by threatening to destroy assets or jam PTCL’s network. The government briefly detained three members of the union action committee, sent Pakistani Army Rangers to take over key company facilities in Karachi, Lahore, Peshawar, Quetta and Rawalpindi and positioned troops at 38 telephone exchanges around the country.

“They said, ‘PTCL is our mother, and we are not going to let our mother be sold out to anybody,’” recalls Tashin Iqbal Khan, permanent secretary of the Privatization Commission. “Of course, when you looked at the state of the company, you had to ask, ‘What have you been doing to your mother for the last so many years?’” On June 10, just eight days before the bidding deadline, Information Technology Minister Leghari announced that the government would raise salaries at PTCL by 5 percent, at a cost of $80 million, and commit to maintaining job levels at the company for two years.

The labor tensions did arouse concerns at SingTel and China Mobile, Rahim says. Though hardly a full-fledged democracy, Pakistan has a vigorous press and a long history of union activism, both anathema to China and Singapore. “The unions were a bit of an issue for us,” acknowledges China Mobile adviser Xu. “It was very interesting for me as a Chinese to see how these unions were able to protest and how the government dealt with it.”

Tension built as the June 18 bidding date approached. In a sign of the transaction’s importance, the auction would be televised live from the Crystal Ballroom of the Islamabad Marriott. A reserve price, not disclosed but reported to be $1.03 a share, valuing the 26 percent stake at $1.36 billion, was set in a meeting at the Privatization Ministry on the afternoon of June 18. A few hours later senior officials entered the Marriott, surrounded by security forces, to join executives of the three bidders, their advisers and about 100 reporters. Three journalists — Farhan Bokhari, a correspondent for London’s Financial Times; Saniyya Gauhar of Pakistani business magazine Blue Chip; and Nadeem Malik, a correspondent for the national newspaper, The News — had been selected to draw the bids from a clear plastic box, in front of the TV cameras.

The room buzzed with anticipation. “It was tense, but it was also very upbeat,” says Gauhar. “People were wildly speculating on who would win and how much they would pay. The favorite seemed to be SingTel.” Market reports cited estimates of as much as $2 a share, while the talk in the room suggested it would take at least $1.75 to win.

Finally, at 7:00 p.m., a deal that had been stalled for seven years got under way. Rahim, serving as master of ceremonies, called it a historic day for Pakistan and thanked the bidders. Privatization Minister Khan explained the procedures and called the contestants up in alphabetical order to place their bids in the box. SingTel’s and China Mobile’s were typewritten, while Etisalat’s was written by hand. The bids were checked by Rahim’s J.P. Morgan colleague Faisal Shaikh to ensure they were properly worded. “We didn’t want anybody adding or subtracting, or ‘ifs’ and ‘buts’ or whatever,” says Rahim.

The Financial Times’ Bokhari then stepped up and drew Etisalat’s envelope from the box. He read the bid aloud: $1.96 a share. The figure was immediately flashed on an overhead screen, along with the $2.59 billion value it put on the 26 percent stake and the $10 billion market cap that this implied for PTCL. The room erupted into applause. “They just couldn’t stop clapping,” says Rahim. The bids from SingTel and China Mobile remained to be opened, but the body language of their executives told everything. Rahim recalls looking at the face of the China Mobile executive: “He was shocked. I said to myself, ‘that’s probably it.’” Gauhar pulled out SingTel’s bid of 88 cents a share, and Malik announced China Mobile’s bid of $1.06. Etisalat’s offer was 85 percent greater than that of its closest rival.

The low level of the bids by SingTel and China Mobile showed that the Pakistani government has to work much harder to attract Asian investment and to address concerns about political risk, Rahim asserts. “Those numbers are an eloquent statement of perception,” he says. “You work much less with the Saudis and the UAE because they are your brothers: You have religion in common, and you have culture in common.”

The day after the auction, Etisalat paid a deposit of $260 million into the State Bank of Pakistan, $40 million of it non-refundable. The company arranged a $2.2 billion bank facility during the summer and was due to pay the balance of the purchase price in September. But after chairman and CEO Mohammad Hassan Omran met with officials in Islamabad late last month, the government agreed to delay completion of the sale until late October. “There are some serious issues to be addressed, and we are sparing no efforts to resolve them,” Etisalat spokesman Ahmed bin Ali said. He declined to elaborate, but some people involved in the deal speculate that the company, sensitive to how much it outbid its competitors, was seeking to bargain down the price.

For bankers and officials who had toiled for years to pull off the transaction, the last-minute hiccup was a worrying development that threatened to undo all their work. “There is a risk,” says one person involved in the sale. “The question is, how high is that risk?”

For PTCL, and for Pakistan, that remains the key question.