PRIVATIZATION OF PAKISTAN STEEL
FROM SHAMIM AHMED RIZVI, ISLAMABAD
Apr 17 - 23, 2006
Minister Incharge Privatization and Investment Mr. Awais Leghari, while talking to a group of newsmen in his office in Islamabad on Saturday, took pains to justify the privatization of Pakistan Steel Mills for Rs. 21.6 billion describing it as a reasonable price.
Pakistan Steel Mills Company (PSMC) was sold last week for Rs. 21.6 billion to the highest bidder, a consortium led by a Saudi Business group. Al-Tuwarque, which also includes Magnitogorsk Iron and Steel Works of Russia and Pakistan's Arif Habib Securities which had offered Rs. 16.80 per share for a 75 percent stake. Some members of the Public Accounts Committee have taken strong exception to the deal describing the sale price as too low. "It amounts to selling a profit making highly valuable national asset at a throw away price. A huge scandal behind the privatisation of the Pakistan Steel Mill definitely surface causing a colossal damage to the national exchequer" this was the observation, emanated at a meeting of the PAC, held at the Parliament House, with MNA Riaz Fityana in the chair.
The meeting took serious note of the privatisation of the state owned institutions cheaply "owing to the sheer negligence, slackness and irresponsible attitude on the part of the bureaucracy". Participants of the of the meeting observed that the steel mills meeting which stretched over an area of 4500 acres and the it's only land worth Rs. 45 billion was sold out for only Rs.22 billion. Whereas the machinery of the mills worth 10 billion has been totally wiped out.
On Friday there was uproar in the National Assembly on the issue of Privatisation of Steel Mills. Combined opposition wanted to discuss the issue in the house and staged a walk out when the speaker did not allow a debate on the issue. Members, however condemned government decision to sell out Pakistan Steel at a throw away price. Talking to newsmen in the lobbies they described the action as a betrayal of national interest. The workers union of PMSC has also called the sale price as peanut. According to them Rs. 21 billion does not cover even the cost of land. In independent circles the sale price is also being described as too low.
Defending the sale of Pakistan Steel Mills as fully transparent Mr. Leghari told newsmen that the cabinet Committee on Privatisation (CCOP) while approving the reference price had authorized the Privatisation Commission (PC) prior to holding the bidding for Pakistan Steel Mills Corporation (PSMC), to issue letter of Acceptance (LOA) in case of highest bid is above than the reference price determined by the CCOP, which was however, not disclosed. He said that all standard procedures were observed before and after the bidding of PSMC. The privatisation of Pakistan Steel Mills Corporation (PSMC) was among the most transparent and successful transaction, he maintained.
The minister while replaying to a question clarified that as far as land evaluation was concerned it may be kept in mind that the plant has been sold as a going concern and although the figure of land cannot be worked out separately for such a big chunk of land of 4457 acres, yet it works out, to more specific above the going rate of land being given to National Industrial Park (NIP) out of the unbundled PSMC land i.e. Rs. 3 million per acre for developed land and Rs. 1.5 million per acre for undeveloped land.
He added that it was also pertinent to mention that out of 4457 acres of land, the core steel plant occupies only 1.034 acres land 1733 acres of land was for slag dumping, slag granulation and skull breaking etc. This land cannot be used for any other purposes. It has also been ensured through the Share Purchase Agreement that the Steel making process shall continue and in case of default the land shall revert to the province, he said.
The minister stated that standard methods used for valuation were Discounted Cash Flow (DCF) basis, comparable Companies Analysis and Precedents Transaction methodology. However, DCF is the most recognized method to value the concerns on a going basis. The financial projections were prepared for ten years basis with sensitivity analysis, he told newsmen. The value of US $ 362 million received from the highest bidder for a 75% equity stake (or US $ 483 million on 100% basis) reflected the value of PSMC on a going concern basis, it took into account its ability to generate cash flows in the future after taking into account the substantial investments, he added.
The minister further stated that PSMC received the highest offer above than the approved price, therefore, it could not be termed a sale at a throw away price. The Privatisation Commission was bound under its rules and regulation, not to disclose the reference price of any entity at any forum, he replied to a question. He expressed his astonishment that now when the process of privatisation of PSMC has been successfully completed, the individuals with vested interest were suggesting new and out of process offers, which would never be considered appropriate, justified and transparent by any economic writer, analyst or critic.
He said government considered employees of public sector entities as the important and strong stake holders and we offered golden handshake scheme to the interested workers to ensure that they should not be left high and dry.
The minister informed that as a result of such post privatisation benefits to the employees so far a huge amount of Rs. 6.794 billion has been disbursed as GHS among 31727 employees of the privatized units. The buyers of the privatized units were bound to retain these workers for a period of one year after the privatisation of any entity except in case of Voluntary Separation Scheme (VSS) and not to expel these employees immediately even in case of excess work force or inefficiency. The financial impact of GHS/VSS for the employees of PSMC was Rs. 15.6 billion, which was unprecedented in the privatisation history of the country, he added
Steel mills being fundamental to industrial development in any country, it goes to the credit of former Prime Minister Zulfiqar Ali Bhutto that he commenced the process to set up the country's first steel mill with the help of the erstwhile Soviet Union. It was duly flaunted as the 'pearl' of Pakistan's economy. However, like so many other public sector enterprises, it began to lose its luster as successive governments began using it as an employment exchange to give jobs to their political supporters and hangers on. Over time, it became synonymous with corruption and inefficiency, and began to incur huge losses. It was only during the recent years that special efforts were made to turn around the entity so as to auction it off as part of privatisation process. The government is however, well advised to rebut all allegations made by the workers union in details and satisfy the dissenting members in the National Assembly, the Public Accounts Committee & the general public.
It may not be out of place to mention here that some time ago the government had announced that a major chunk of the proceeds from the privatisation process would be spent on debt retirement and the remainder would go into poverty alleviation programs. But the plan now seems to have been completely forgotten. During the last one year the government has been borrowing heavily, and incurring new debts instead of pay back the earlier ones. What is particularly disturbing about this trend is that fresh debts are being contracted not only to fund new development schemes, but also to run the government. Such unproductive expenditures surely are not reflective of an inclination to maintain tight fiscal discipline, which is extremely necessary given the poverty level in this country.