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The sale of 868 sick units

A last-ditch attempt by the government to solve the twin problem of sick industries and non-performing loans

Mar 12 - 25, 2001

The Chief Executive Gen. Pervez Musharraf has approved the sale of 868 sick units through open public auctions. These units in the private sector were identified by the Corporate Industrial Restructuring Corporation (CIRC) in consultation with the concerned banks as these units closed for year owe over Rs. 107 billion to the nationalized commercial banks.

After a detailed presentation to the Chief Executive, also attended by Ministers for Finance, Industries, Privatization, apart from Governor State Bank and Secretary General Finance, the Chief Executive of CIRC. Mr. Tariq Hamid told newsmen that a priority list of 92 units has been prepared for the auction of which will start from next month. These units owe over Rs.12 billion to United Bank, Habib Bank, National Bank and NDFC. We will take six to eight units monthly in the market for sale and complete this process within this year. "We are beginning with the worst units", Mr. Tariq Hamid claimed.

He said the CIRC will take over these assets from the government owned banks and financial institutions at their book value and in return the government will issue bonds to these banks at the time of privatization of the unit or after three years of take-over, whichever is earlier. The bonds at the book value of the units will have 5-year maturity period with government guarantee at a profit fixed by the federal government from time to time in accordance with State Bank rates, he said.

The banks and financial institutions will be able to use these bonds as their liquidity, he added. He, however, did not directly comment on the market condition to absorb these transactions, saying the media was well aware of that whole process of restructuring and revival of 868 private sector sick units will be completed in six years as the CIRC will stand abolished under the "sunset clause" of the CIRC ordinance.

Initially, he said, the CIRC selected 101 cases for the process from six banks and financial institutions, namely the National Bank of Pakistan (NBP), United Bank Limited (UBL), Habib Bank Limited (HBL), Industrial Development Bank of Pakistan (IDBP), National Development Finance Corporation (NDFC) and Agricultural Development Bank of Pakistan (ADBP). The CIRC became operational after promulgation of two ordinances, in September and November last year. Under the ordinances the original borrowers are given the chance to settle their dues within 30 days or otherwise the CIRC starts executing cases through high courts.

Mr. Tariq Hamid disclosed that the CIRC was handling cases of the UBL on priority basis because the bank was on top of Privatization Commission's list. These 101 cases had total outstanding amount of Rs.14 billion but 11 cases were withdrawn by the banks before the CIRC could start their processing. In this way, CIRC was in advance stage of executing 90 cases with an outstanding amount of Rs. l2.2 billion in high courts where auctioneers and liquidators had already been appointed. These 90 units would be disposed of within this year, he said.

Hamid said the whole process was being monitored and supervised by the High Court judges especially dedicated to speedily dispose of cases of the sick units. He hoped that the CIRC would be able to take over these 90 units at around Rs. 3 billion book value against the actual outstanding amount of Rs.12.2 billion. He said the book value was determined under the SBP prudential regulations. These 90 units included 20 textile cases, 2 tanneries, 3 electronics and 65 from other sectors. Of these, 37 units have already been taken over by the CIRC through agreements with banks and remaining 53 units will be taken within four weeks. The first lot of six to eight units that are planned to be put for open auction next month included a paper mill in Sheikhupura, a Ghee Mill in Aimanabad, a re-rolling factory in Badami Bagh and an old power weaving mill in Kasur. He said the government intended to attract overseas Pakistanis to purchase these sick units but the new buyer will not be misled about assets and would be properly advertised at home and abroad and would be allowed inspection.

The strategy to auction the irretrievable sick industrial units having been approved by the Chief Executive may be seen as a last-ditch attempt by the government to solve the twin problem of sick industries and non-performing loans of the NCBs/DFIs which constantly threaten their operational viability. It appears that the creditor banks and DFIs have not been able individually to change the management of the sick units owing sizable amounts of loans through open auction in the market. This may be due partly to the fact that the task requires concerted action by the management of the banks and that would destabilise their daily working as the number of defaulting units has been increasing rapidly in each bank. In this context creation of a single specialised institution like the CIRC is the right step to exclusively attend to the task. It is, however, to be seen how many new investors, domestic and foreign, would be attracted to the auction of the sick units which include different types of manufacturing units. Some overseas Pakistanis may enter the scene to buy suitable enterprises from among the sick units. Additionally, foreign investors from the Middle East countries may also be interested in exploring the opportunities to make investments in relatively medium-scale amounts. This process would bring into focus the need for simultaneous programmes of privatization of state-owned enterprises and sale of sick units belonging to defaulting private sponsors. The response to both these processes from new investors may determine the future course of fixed capital investment in the industrial sector which has remained relatively poor over the last few years.