The Pakistan Steel Mills (PSM) is being offered for sale, once again. To smoothen the sale process, some circles have started a press campaign raising fingers at the quashing of PSM’s earlier deal by the country’s apex court. If the Supreme Court had not quashed the PSM’s earlier transaction, through its order of June 23, 2006, the nation would have been tricked to sell one of its vital mega assets at a throwaway price.
The PSM is the country’s largest and only integrated iron mill having finishing plants, coke oven batteries, billet mill, blast furnaces, steel converters, hot and cold rolling mills, galvanising unit, grinding units, 165 MWs of power generation units, 4 steel plants in Thatta, water supply plant, 40 locomotives of 100 HP each, over 100 railway wagons, 110 kilometre metalled road, 10 kilometre railway track, water treatment plant, a large fleet of vehicles, etc. It is ideally located 30 kilometre south east of Karachi, in close proximity to Port Qasim, with access to a dedicated jetty to facilitate import of raw materials.
The PSM also owns some 19,086 acres of land in Karachi and Thatta districts, SMC factory spread over some 33 acres in Lahore, one city office in Karachi spread over 2,230 sq. yards, one zonal office each in Lahore and Islamabad spread over 1,900 sq. yards and 1,640 sq. yards respectively. In addition, the PSM has investments in Pakistan Steel Fabricating Company (Pvt) Limited, Abbas Engineering Industries Limited, Arabian Sea Country Club Limited, Multipole Industries Limited, Resource and Engineering Management Corporation, Envicrete Limited, Chiragh Sun Engineeering (Private) Limited, State Enterprise Display Centre and FTC Management Company (Pvt) Limited. A lengthy and impressive list of tangible assets, indeed!
After restructuring in 1998, the PSM had become a profit-yielding concern. During FY02, the PSM earned a net income of Rs4 million, which increased to Rs1,024 million in FY03, and in the subsequent two years to Rs4,852 million and Rs6,008 million respectively.
The Privatization Commission had agreed to sell 75 per cent shares of the PSM, along with 4,457 acres of land and management control, at Rs16.80 per share, which came to US$348 million, i.e. Rs21.68 billion, in 2006. The valuation was done on the basis of structure and fixtures, while ignoring other tangible assets and the cost of the land on which those structures existed.
During hearings at the country’s apex court, it was revealed that the sale of 75 per cent shares of the PSM for Rs21.68 billion was quite low for a mill built at a cost of US$2.5 billion. It also transpired that the reserve price did not take the value of land and the stock-in-trade into consideration, while at the prequalification stage nobody bothered to properly evaluate the credentials of the successful bidders as regards their good legal status, financial viability, management skills, etc.
It may be noted that in the quashed transaction, the bidders were different from the purchasers. Initially, the buyers had created a 3-member consortium for participation in the PSM bid, but after acceptance of the bid, two members of the consortium were replaced. A corporate body, i..e. PSMC SVP (Mauritius) Limited, which was one of the members of the buyers’ group had got incorporation in Mauritius only a few days before entering into the sale purchase agreement. Naturally, the change created suspicions among some of the stakeholders about the transaction, especially when the purchase agreement did not bar the buyers to sell their share and/or transfer PSM management to any other group after three years.
It goes without saying that every sovereign country has the right to ensure that its assets do not pass into undesirable hands. Due to its ideal and strategic location at the harbour in proximity to a vibrant seaport, transfer of the PSM to unscrupulous elements, even in the distant future, could create problems by rendering the belt in PSM’s possession into a porous and vulnerable coastal belt.
The cost-benefit ratio of the annulled transaction also makes an interesting reading. Against the gross sale proceeds of Rs21.68 billion, the government had agreed to pay up to Rs15 billion in golden handshake besides tendering a cheque for Rs7.67 billion to clear off the liabilities that were to accrue in between years 2013 and 2019. Strangely, although the due date for the redemption of the loan was June 2013 onwards, it was payable immediately to the new buyers, as per the sale and purchase agreement. In addition, the new management would have received a refund of Rs one billion paid by the PSM as advance tax to the government.
To top it all, in addition to the real estate of the PSM, many other tangible assets, like stores and spares valued at Rs1.86 billion, stock-in-trade valued at Rs9 billion, assets worth Rs21.78 billion and cash in hand amounting to Rs8.517 billion were not taken into consideration. This totals to Rs41.157 billion, excluding the cost of land and payments to be made on account of liabilities, as spelled in the preceding paragraph.
The quashed deal envisaged to transfer some 4,457 acres of land under the Core Plant, along with Core Steel Plant and ancillary facilities, 110 MG Reservoir, Makli Limestone Project, Jhimpir Dolomite Project, each covering a land area of some 240 acres, 74 acres and 45 acres respectively, to the buyers. The term ‘ancillary facilities’ is very wide and such terms need to be avoided in view of our past experience.
Furthermore, the haste with which the whole transaction, starting from bidding to final settlement, approval and delivery of the acceptance letter to the buyers, all within a time span of 48 hours, made the whole transaction suspicious. It may be noted that the final report of the Financial Advisor was received on March 30, 2006, Privatization Commission (PC) officials processed it the same day, the meeting of Board of Privatization Commission also took place the same day and the summary for CCOP was prepared the same day. The very next day, i.e. March 31, 2006, the CCOP met, considered the summary, fixed a reference price and authorised the PC to approve the highest bid.
Could a gigantic deal of the PSM scale be scrutinised in such a short period of time? It really boggles down one’s mind. Was it the glitter or pressure from invisible quarters that made a mockery of the whole process?
On completion in December 1984, the PSM came into production, as a 100 per cent government-owned entity. However, it has never been able to operate at 100 per cent of its designed capacity of 1.1 million tons per annum. And barring four years (2002-2006), it has been running throughout at a loss primarily due to mismanagement, corruption, overstaffing and obsolescence — a hallmark of public sector entities in Pakistan.
The PSM overstaffing had been discussed, off and on, at various fora. Once during deliberations at a parliamentary committee meeting, an expert deposed that if a mill of this scale was in the West, the management would have hired at the most a staff of 3,500-4,000, if it was in the Communist world they might have recruited some 7,000 workers, but there appeared no justification for hiring a staff exceeding 22,000 for running a modest mill, like the PSM. It is a common knowledge that Sindh-based mainstream political parties have been infiltrating their cronies and camp-followers in the PSM rank and file. Due to their political clout, those people often behaved as if they were not PSM workers but representatives of the ruling political parties. This led to gross indiscipline and mismanagement, ultimately affecting the PSM efficiency and operations.
As public sector entities have often remained economically unviable, prudence demands their privatisation. However, while pursuing privatisation of this vital unit, having a lengthy list of assets in major towns and cities, the sale document should specifically mention each and every asset that is included in the deal and would be transferred to the new entity. In other words, phrases like ‘ancillary facilities’ need to be avoided as these could be interpreted differently by the parties to the deal, and could thus create trouble!