The recent failed attempt to sell off the Heavy Electrical Complex has adversely affected the privatisation of about 30 state-owned enterprises particularly the industrial units within the set time-frame.
On the other hand, it has also exposed the inadequacies of the Privatisation Commission’s capacity, capability and performance to efficiently process the transactions in a transparent manner and with due diligence, in the wake of an ongoing investigation by the Senate Standing Committee on Finance, Revenue and Privatisation into the alleged wrongdoings in the HEC transaction.
Pakistan Steel Mills (PSM), which ceased its operations in June 2015, was to be privatised by December 2015 under the revised schedule, but it has been delayed until June 2016. Apparently, the fate of strategic and the only integrated steel complex is not among the priorities of the government.
In fact, the government has changed its position frequently about the mill’s future, and was unadecided whether to launch the privatisation process wholeheartedly or to take steps for its comprehensive restructuring.
Nothing practically has happened except appointment of retired generals, one after the other and providing bailout packages, from time to time, primarily to finance outstanding salaries of some 15,000 employees.
On Jan 28, 2015 Pakistan signed an agreement with the Asian Development Bank (ADB) for $20m loan for improving corporate governance and management capacity of selected SOEs including PSM, but the progress on utilisation of this loan is not visible even after a lapse of almost one year.
Despite injection of Rs29.5bn into the mill in recent years, its total losses and debt liabilities have exceeded Rs350bn. In addition, there has been serious damage to the critical equipment installed including blast furnaces and coke ovens. Huge funds would be required to undertake necessary repairs to put the plant back into operation.
Reportedly, the PSM’s audited annual financial statements have not been presented to the relevant authorities since 2010-11, and it is no more considered a going concern. Nonetheless, the final nail in the PSM coffin was laid by Sui Southern Gas Company (SSGC) when it disconnected gas supply due to non-payment of Rs35bn dues.
Interestingly, the government is said to have offered to sell part of PSM land to cash-starved SSGC but with no progress on the proposal.
Earlier, proposed offer of the federal government to sell PSM to the Sindh government had made Pakistan a laughingstock, within the country as well as abroad, amid conflicting statements by the various government functionaries. The logic of this offer is not understandable, as it is well-known that the PSM was turned from a profitable organisation (until 2007-08) into a loss-making entity in 2008-09 onwards by the then government of the Pakistan People’s Party. During this period a total loss of Rs104bn was inflicted.
This, however, is not a novel idea since the PSM itself had purchased in November 2003 the Spinning Machinery Company (SMC), but the result had been disastrous for both.
Located in Kot Lakhpat industrial area of Lahore, SMC was the only manufacturer of textile machinery in the country and a profitable entity, which was closed down on acquisition by PSM.
In March 2006, the PSM was sold out to a consortium of Saudi-Russian-Pakistani companies at a throwaway price of $362 million (Rs21.6bn) for 75pc shares, in a non-transparent manner.
On the back of the Russian-led consortium was reportedly Mr Laxmi Mittal, the Indian steel magnate. The privatisation deal was annulled by the Supreme Court in June 2006.
Perhaps, the history would repeat itself as the PSM will soon be privatised with management control and the major work in this direction has been completed as claimed by the PC. There appears to be some similarities in the present developments about privatisation of the mill.
On Feb 15, 2015 the PC had invited Expressions of Interest for appointment of financial advisers for the PSM transaction, but it was re-advertised on March 3, 2015. On April 24, 2015 the PC approved appointment of the only prequalified consortium consisting of China Development Bank Securities Co Ltd, Sinosteel Corporation of China, Pak China Investment Co Ltd (Government of Pakistan’s joint venture with China Development Bank), Iqbal A. Nanjee and Co (surveyors and evaluators), Abacus Consulting Technology (consultants), Cornelius, Lane & Mufti (advocates and solicitors), and PwC/AF Ferguson &Co (chartered accountants).
On the face of it, the prequalification criteria were tailor-made to allow a single bid.
While the Russian and Chinese groups have shown interest in acquisition of PSM, there are reports that Pakistan might sell the coastal-based integrated steel mills to the Chinese investors under the China-Pakistan Economic Corridor initiative.
Interestingly, Sinosteel, which is a member of the consortium appointed as financial adviser for the PSM, has also offered, in response to PC’s road-show in China, an investment of $778m in PSM.
The offer of capital injection was made by Sinosteel in two meetings with the federal minister of industries and production in July and October 2015, having done due diligence of the PSM plant machinery.
According to the reports, Sinosteel, with strong presence in India (Sinosteel India Pvt Ltd at New Delhi, Kolkata and Rourkela-Orissa) would invest $170 million in the first phase. Is it the ‘soft marketing’ of PSM that the PC chairman referred to recently, without sharing information?
Published in Dawn, Business & Finance weekly, January 11th, 2016