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The controversial takeover of PCGC by Karandaaz

Allowing DFID to convert unspent grant including the interest accrued over the past twelve years into equity for Karandaaz will set a dangerous precedent for other donors. But if SBP decision continues with the original plan - it will go a long way in supporting the Prime Minister’s vision of uplifting the SME sector and creating employment opportunities.

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Government of Pakistan (GoP) has rightly paused to re-think its decision of a recently approved sale of majority shareholding in state-owned Pakistan Credit Guarantee Company (PCGC) to Karandaaz.

PCGC was formed to absorb the grant money received from the Department for International Development (DFID) of the UK in 2008 (originally for the purposes of providing credit to SMEs through the SBP) after an in-depth option analysis in 2016-17. As a result of this analysis, twelve options were proposed that met the original objectives of the DFID grant and each with a potential to catalyze finance for start-ups and SMEs and thereby generating millions of jobs. SBP and DFID mutually agreed on one of the proposed options to “commercialize” the facility through establishment of a new professionally managed corporate entity. This would have been done by ensuring a corporate governance structure with maximum independent directors in line with world class best practices implemented by leading PSEs such as Temasek and the institutions under New Zealand’s Ministry of State-Owned Enterprises.

Detailed business planning and feasibility analysis for establishment of PCGC was later conducted that highlighted the need for GoP to remain the majority shareholder for an initial three years. Majority shareholding would have implied GoP acting as an implicit guarantor of last resort and enabling a resultant rating required for its operations by PCGC. Three years was the estimated time by when this company was expected to build track record required for it to establish re-insurance lines and tap into capital markets for ensuring minimum rating without GoP’s majority shareholding. Karandaaz was also consulted multiple times during this phase, however it did not express any interest in investing and being a part of the original shareholding.

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Finance Division and SBP taking divergent views?

The Finance Division is of the view that the 2008 DFID grant agreement was in spirit a one-way transaction and non-refundable, as grants usually are. Bizzarely, it seems from recent news that Finance Division and the State Bank of Pakistan have taken entirely divergent views. Finance Division is firmly of the view that for the purposes of the 2008 MoU, all grant funds have been spent or are in the process of being spent to provide credit to SMEs or are earmarked for PCGC. And that any dispute (if any) is only about the principal amount given by DFID and not the mark-up earned on the grant in the course of utilizing it. In fact, the mark-up dwarfs the original grant by many times.

Furthermore, there is surprise in all quarters of the government at the attempt to gift Karandaaz PCGC because PCGC itself was setup with DFID’s approval, and at that time there was no mention in any official documentation of DFID ownership in exchange for a grant. Therefore the grant money and mark-up earned cannot be leveraged in negotiating a take-over of PCGC by Karandaaz, without a total and unfathomable about face in government policy and its own agreements. This also goes against the original spirit of the mutual agreement between all parties to establish PCGC based on the recommendations from a third party.

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Alarm bells ringing

It is not only Finance Division which has raised the alarm. Other stakeholders have raised legal issues with transferring ownership in a state-owned company without a public auction. Indeed, the general alarm over giving back grant money is understandable. SBP simply needs to “spend” the grant amount before March 2021 by transferring this amount into PCGC which was the primary reason for forming this company two years back.

While awaiting funds from SBP over the last year, PCGC has managed to get soft commitments of Billions of Rupees from local commercial banks as long as the loan portfolios are backed by a guarantee instrument. Moreover, World Bank, UNIDO, KFW and other donors have also made commitments that are contingent on SBP doing the required transfer on a timely basis.

Supporting SME sector has been part of the PTI manifesto and capitalization of PCGC was also included in its 100-day agenda. Last year Minister Hammad Azhar also announced a Pakistan Innovation Fund during the budget speech, a project initiated by PCGC through various commitments from diaspora and donors.

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A dangerous precedent 

Allowing DFID to convert unspent grant including the interest accrued over the past twelve years into equity for Karandaaz will set a dangerous precedent for other donors. If donors were to suddenly remember at some point that their ‘grants’ were actually ‘loans’, and Pakistan entertained even one donor’s request, imagine where it would end? It would effectively weaponize donor money, because every time Pakistan did not agree with a donor (or the state backing it) it could financially blackmail Pakistan with converting its grants to loans. Perhaps something similar is happening here; Whoever, for whatever reason, wants DFID to own the controlling stake in PCGC and through very public dealings has made clear the proverbial stick they will use to ensure compliance. Such uncharacteristically aggressive pressure by normally amiable development focused donors such as DfID raises the question as to whether DFID is involved at all. Truly, it is difficult to believe that Her Majesty’s Foreign, Commonwealth, and Development Office has resorted to such publicly ham-handed tactics in a sensitive relationship to own what is ultimately a minnow in the UK’s foreign development and diplomatic portfolio.

This action will also effect the ability of PCGC to underwrite credit guarantees due to its inability to maintain the required ratings without majority shareholding of GOP. On the other hand, SBP’s decision to continue with the original plan to transfer the unspent money to PCGC will go a long way in supporting the Prime Minister’s vision of uplifting the SME sector and creating employment opportunities. SBP can always pursue the privatization process after three years but for now it needs to focus on operationalizing PCGC so that billions of rupees are not wasted, and rules of business are not bypassed to appease Karandaaz.  

The author served as the South Asia Regional Director of a global advisory firm that is known for establishing noble prize winning Grameen Bank as well as many other microfinance banks around the world including Pakistan. The views expressed in this article are the author’s own and do not necessarily reflect the editorial policy of the publication.