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Daniyal’s PIA sell-off stunt

Updated February 12, 2018


THE Privatisation Commission seems to be creating an unnecessary hype around the privatisation programme, stalled for more than two years. Any sale transaction during the remaining period of the current government is unlikely owing to legal timelines of the process.

The minimum time required to prepare an entity for the actual bidding involves six to 10 months under the laws to ensure a transparent and fair process. Moreover, there are individual challenges to each entity identified for sell-off.

“It’s no more than a stunt. Timelines and environment are not on our side. Serious investors do not deal with departing government for long-term business,” explains a senior official associated with the Privatisation Commission for almost 15 years.

The remaining time of the current government in office is insufficient to complete a major privatisation deal, as the environment is not conducive close to elections

He says the overall environment is not conducive, as the parties are in an election mode even if they do not oppose the sell-off plan.

It all started last month when Federal Privatisation Minister Daniyal Aziz appeared to inject fresh air into the deflated privatisation balloon, as he announced his plans to trigger the process for the sale of Pakistan International Airlines (PIA).

He said the bifurcation of the national flag carrier’s non-core business and assets from air transport-related operations will be completed by April, and the divestment transaction will be concluded before the government completes its tenure in June.

Only a week later, the prime minister’ adviser on aviation, Sardar Mehtab Khan Abbasi, assured parliament that the government didn’t have any plans to sell the airline. And the next week the Ministry of Finance contributed to the confusion when its fiscal policy statement for 2017-18 tabled in parliament indicated that the government was working to restructure and sell PIA’s shares along with transferring its management to a strategic partner.

The statement was apparently against the basic spirit of the PIA Corporation (Conversion) Act, unanimously passed in April 2016 for possible divestment plan for the national flag carrier without transfer of management.

An explanation written in clause 4 of the act says: “Management control of the company and any of its subsidiary companies in the above circumstances shall continue to vest in the majority shareholder, which shall be the federal government and whose shares shall not be less than 51 per cent.”

The PIA management was working out a restructuring plan to reduce its losses, estimated at Rs325 billion on March 31, 2017. This has to ensure parking of old loans worth Rs150-200bn in the non-core entity to enable fresh fundraising. Clause 5 of the same law required completion of asset evaluation within two years of the law coming into force, with the deadline expiring by end-April this year.

On the other hand, the central haemorrhage to the federal budget owing to the power sector remains off the radar screen.

While former prime minister Nawaz Sharif stopped outright the sale of some power companies two years ago for political reasons, even the stock market listing of selected power companies did not materialise, as profitable companies turned negative and those making losses went down further. Consequently, the circular debt build-up is reported to have reached Rs530bn on top of Rs431bn parked in the Power Holding Company Private Limited.

It stemmed from deteriorating financial position, and corporate rules that discourage initial public offerings to entities that fail to maintain profitability for three years. Perhaps one out of 15 power companies met the requirement, but that too may not be attractive enough in the absence of a power-sector supply chain.

Therefore, no progress on the privatisation of the power sector can be anticipated during the remaining few months of the Pakistan Muslim League-Nawaz’s tenure.

The situation of the Pakistan Steel Mills (PSM) was no different. The corporation was forced to shut down two years back under the watchful eyes of the current prime minister and his team is now part of the unfortunate history of the country’s largest industrial complex. It has accumulated over Rs400bn losses and liabilities since the Pakistan Peoples Party government left behind the debt-liability stock at Rs26bn.

Moreover, the foreign exchange loss due to higher steel import bill after PSM’s closure was estimated at around $3bn to 5bn.

Instead of turnaround strategies, the focus now remains on selling off its prime land to create space for upcoming tax-free industrial zones under the China-Pakistan Economic Corridor.

In the meantime, all the financial advisory contracts expired a long time ago and would be hard to be revived without raising questions over transparency.

No major transaction could be expected over the next nine months, except for some inconsequential progress on tiny entities like the SME Bank. Experts say it would serve the privatisation minister well if he acts on the International Monetary Fund’s advice.

The IMF suggested that the processes and procedures should be completed to make state-owned entities privatisable for generating investor interest, even if the government couldn’t complete the process during its tenure. This will ensure that the next government gets a head start on the privatisation programme at an early stage when the political challenges are minimal.

Published in Dawn, The Business and Finance Weekly, February 12th, 2018