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Steel Mills on ventilator awaiting restructuring

September 30, 2013

WHILE the condition of the ailing Pakistan Steel Mills has reached near-collapse, with little hope of survival, the federal government has opted, like others in the past, to put it on ventilator for a while until the next step is decided.

The tragedy lies in the failure of successive governments to stop the steel mills from becoming a white elephant. The minister for industries and production Ghulam Murtaza Khan Jatoi informed the National Assembly on September 20 that the Pakistan Steel Mills (PSM) was incurring a loss of Rs60-70 million a day. Over the past five years, it has suffered a total loss of about Rs200 billion.

Four bailout packages, totaling Rs40 billion, were provided to the PSM during 2008-2012 to keep it alive. The new government, under whose watch the PSM has already suffered an additional loss of Rs7 billion, neither introduced reforms in the management nor brought in professionals to revive the Mills and reduce its losses.

Pakistan Steel is plagued by rampant corruption, inefficiency, over-employment and the government’s lukewarm attitude towards its revival, says a summary of the ministry of industries. But no action has been taken to stop the rot.

There are four options before the PML-N government when it comes to PSM: revival, liquidation, privatisation and closure. Revival is possible only if the government can spare or raise a colossal amount of money to spend on the Mills and pay salaries to its surplus manpower of 16,200.

As it looks, the government cannot do it alone. It is possible if a public-private partnership is worked out transparently, but again, it may require a huge investment for some time before PSM becomes profitable. Liquidation or closure will be the last resort. Closure will be equally expensive, as Rs57 billion would be needed to clear its liabilities.

Privatisation, it seems, is the only option left. And the government has already included the PSM in the list of state-owned enterprises that have to be privatised.

In 2010, the PPP-led government had dropped PSM from the privatisation list, and preferred to provide bailout packages every year. The PPP is still opposed to PSM’s privatisation. It is also opposed to PIA’s privatisation. These two enterprises have surplus manpower, which was mostly inducted on political grounds. So their transfer into private hands can lead to the sacking of many employees. Another party opposed to PSM’s privatisation is the Jamaat-i-Islami, which is also concerned about the job security of its employees.

How the attempted privatisation of Pakistan Steel Mills met its failure in 2006 is something that the present government has to be cautious about and avoid repeating.

On June 23, 2006, the Supreme Court annulled the sale of the country’s largest industrial unit to a three-party consortium, and directed the government to refer the matter to the Council of Common Interests within six weeks. While the court did not find any fraud on the part of either the government or the buyers, its verdict said the entire exercise reflected ‘haste’ by the privatisation commission and the Cabinet Committee on Privatisation (CCOP).

“This unexplained haste casts reasonable doubt on the transparency of the whole exercise and reflects CCOP’s disregard towards mandatory rules and materials, essential for arriving at a fair reference price,” the verdict said.

After the court’s judgment, the then-government did not take steps to revive or privatise PSM to get rid of its losses and make it viable, even if the benefits were to go to a private sector firm. It simply kept the Mills intact and its employees in good humour.

The first installment of the new Rs2.9 billion bailout package was received by PSM on September 20. The entire amount is to be spent on paying four months worth of salaries to employees and the purchasing of raw material. The first coke oven byproduct plant battery, for instance, has been on heating since November 2010, without contributing to the production cycle, although it costs the national exchequer millions of rupees per month.

The decision for the latest bailout was prompted by reports of the wheels grinding to a halt at Pakistan Steel, after it had run out of its entire raw material stock.

The ministry of industries, in a recent summary, proposed an upfront injection of Rs28.5 billion, which it believes could revive the Mills. But the summary was rejected by the cabinet’s Economic Coordination Committee.

As things stand now, PSM’s equity is negative to the extent of Rs200 billion, including over Rs45 billion in bank loans, gratuity, provident fund and outstanding dues of the Sui Southern Gas Company.

The privatisation or restructuring of state-owned companies is one of the conditions imposed by the International Monetary Fund’s bailout package. According to various estimates, Pakistan is losing between Rs400-Rs500 billion due to losses incurred by state-owned entities.

The inefficiency of these companies, however, is only one reason for the loss of money. According to Muhammad Zubair, chairman of the Board of Investment, the previous government’s credibility was another reason that scared investors away. —Ashfak Bokhari