The government appears all set to privatise Pakistan’s largest and the only integrated steel mill — Pakistan Steel Mills Limited (PSML) — by the middle of this year.
No doubt, the PSML privatisation has been under consideration for quite some time in keeping with the privatisation and deregulation policy of the successive governments. The privatisation policy was launched in 1989 as a part of macro-economic reforms to make the industry efficient and competitive and to take the government out of the task of doing business.
An attempt to privatise PSML in the year 2006 was aborted by the Supreme Court of Pakistan. The case of PSML’s 2006 privatisation was unique because it was being sold at a throwaway price along with assets having a cumulative value many times more than the bid price.
PSML owns some 19,086 acres of land in Karachi and Thatta districts, SMC factory spread over some 33 acres in Lahore, a city office in Karachi spread over 2,230 sq. yards, a zonal office each in Lahore and Islamabad spread over 1,900 sq. yards and 1,640 sq. yards respectively. In addition, PSML 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 Engineering (Private) Limited, State Enterprise Display Centre and FTC Management Company (Private) Limited.
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. However, it stipulated to transfer all non-core assets of PSML to the government of Pakistan or an entity to be nominated by it.
In the bid, which was declared “as void and of no legal effect” by the Supreme Court on June 23, 2006, the Privatisation Commission had suggested PSML share value @ Rs17.43, but the Cabinet Committee on Privatisation determined the reference price of the share @ Rs16.18 whereas the final bid was accepted @ Rs16.80 per share for 75 per cent strategic stake in PSML. If the PSM crafty transaction was not quashed by the Supreme Court, in addition to the core plant the buyers would have acquired 4,816 acres of land and other tangible assets by simply paying Rs21.68 billion.
During Supreme Court hearings, it was highlighted that the sale of 75 per cent shares of PSML 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 skill, etc.
There cannot be two opinions about the fact that every country has the right to ensure that its assets do not pass into undesirable hands. Due to its strategic location, transfer of PSML to unscrupulous elements, even in the distant future, could create problems by rendering the region adjacent to PSML into a porous and vulnerable coastal area. The ownership complexities are best illustrated by the US refusal, in the early years of the current century, to transfer one of the US ports facilities to a Dubai-based entity and a similar refusal to allow the Peoples Republic of China to purchase strategic assets in the USA.
As far as the PSML aborted transaction is concerned, its cost-benefit ratio made 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 to the employees 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 PSML as advance tax to the government.
To top it all, in addition to the real estate of PSML, many other tangible assets like stores and spares valued at Rs1.86 billion, stock-in-trade valued at Rs nine billion, assets worth Rs21.78 billion and cash in hand amounting to Rs8.517 billion were not taken into consideration. All this totals to Rs87.924 billion, excluding the cost of the plant.
If the deal had matured, it would have been an unprecedented package. It goes without saying that while pursuing the privatisation of this vital unit, national interest needs to be safeguarded and kept supreme. Furthermore, a detailed inventory of the assets that are stipulated to be transferred to the new management should be made part of the sale agreement to avoid a situation that arose after PTCL privatisation.
PSML came into production, on its completion in December 1984, 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 few years, it has throughout been running at a loss primarily due to mismanagement, overstaffing and obsolesce, which has been a hallmark of most of the public sector entities in the country.
Since the establishment of PSM Corporation in July 1968, the ruling elite or political parties, whenever they got a chance, tried to infiltrate their cronies into the rank and file of PSML. As bulk of the workforce of the mills represented various political parties/groups or ideologies, each of them thought it prudent to have its own pocket union as well. Some members of the unions, at times, behaved as if they were not workers but representatives of the ruling group and hence not answerable to the PSML management. This led to gross indiscipline and mismanagement, ultimately affecting the efficiency and operations of the mills.
The twin menace of overstaffing and mismanagement made this project, right from the beginning, commercially unviable, save the period when the leaders decided to rightsize it, grant it liberal concessions in tariffs and duties, allow increase in the sale price of its products and pass on some of its financial obligations to the federal treasury.
With an annual designed production capacity of 1.1 million tons, PSML 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, water treatment plant, 110-kilometre carpeted road, and 10-kilometre railway track. In addition, in 2006, it had 40 locomotives of 100 HP each, over 100 railway wagons, 80 brand new vehicles, and cash in hand. Ideally located 30 kilometres southeast of Karachi, it is in close proximity to Port Bin Qasim, with access to a dedicated jetty, which facilitates import of raw materials.
The quashed sale of PSML raised scores of questions about the privatisation process, particularly evaluation of assets, true identity of buyers, their capacity to improving the working of national assets, flow of foreign direct investment, etc. All these questions need to be addressed to in a careful and meticulous manner because past experience tells that in a number of cases, the new managements of the privatised units resorted to the sale of real assets instead of running their newly acquired entities.
To pre-empt the emergence of such a situation, the government would do well to constantly monitor all transactions, deals and agreements, especially when these are accompanied with requests for allotment of land; and table a report annually about all privatisation transactions before the CCI and the Parliament. A failure to do so would continue to create suspicions about the privatisation process.
It is time that the authorities devise a strategy that serves national interests best. While disposing of a state-owned company, there should be a clause in every sale agreement that binds the new management not only to keep the plant running, but also to replace the old/obsolete machinery with the latest one.
Despite frequent bailout packages, vested interests saw to it that PSML remained a good-for-nothing entity with the result that currently the plant is giving an average of 44 per cent production for the last four months. PSML has received Rs15.5 billion since May 2014 under bailout package of a total of Rs19 billion. The bailout package was granted to PSML on the assurance from the management that it would bring the production to the level of 77 per cent by February 2015. On the contrary, its losses and liabilities are increasing every passing day and now stand around Rs265 billion.
Meanwhile, smuggling and under-invoicing of steel products imports are making the PSML products uncompetitive in the market. Furthermore, concessions in duties to influential persons importing steel products through SROs has also been affecting the PSML performance and making its products more costly than the imported stuff.
Whatever the case may be, according to knowledgeable circles, PSML promises much more than what the doctored balance sheets says. Stretching over 19,200 acres, its landmass alone is priceless; it’s like a gold mine.