On 13th November 2023, The Ministry of Privatisation formally handed over Pakistan Steel Mills (PSM) to the Ministry of Industries and Production (MoI&P). This was the first step in trying to privatise the ailing national asset. Except this first step wasn’t quite being taken for the first time ever.
The case of Pakistan steel mills is a bit like two steps forward and then two steps back repeated in an endless loop until anyone following what happens to the company goes just a little bit loopy. Because nearly four years ago the same sequence of events had taken place as well. The PSM is one of those grand old state owned companies that have seen better days and have become a bit of a strain. Nobody knows what to do about them so different ministries keep playing pass the parcel with it.
Entire little economies of consultants, bureaucrats, and politicians develop around these entities. And the entire time the company is stuck in the limbo known as privatisation in Pakistan.
So why is the national exchequer bleeding money so boring men in big conference rooms can keep kicking the same can down the road, then back up it, and back down again? Perhaps a quick look at the recent history of this unwanted behemoth can offer some clues.
A short background
On the face of it, PSM is one of the largest industrial corporations of Pakistan which has the capacity to produce 1.1 to 5.0 million tonnes of steel and iron foundries. The mill was a mammoth undertaking from the stage of a seed to a full grown tree. How long did this take? To get context of how this plan went from idea to execution, it took more than half the country’s history or roughly 38 years to come into life.
The bureaucratic behemoth was the vision of Liaquat Ali Khan who wanted to make the country self dependent for its own production. The vision became a reality after Soviet cooperation came through and the stone setting ceremony was carried out by Zulfikar Ali Bhutto in 1973. The plant started production in 1985 after it was inaugurated by Zia ul Haq. It seems the history of PSM is intertwined with the politics of the country. In short, the Mills saw ten prime ministers from the thought till it started operations.
In the 2000s, there was an active effort to give the company to private owners. Around 2006, there was a push to sell the State Owned Enterprise (SOE). This was based on the fact that since early 2000, the company had become profitable and much of its accumulated losses had been wiped out. It was felt prudent to hand over the reins of the company to the private sector. This was done under the PM ship of Shaukat Aziz who wanted the government to offload the company.
This led to the sale of PSM to a consortium in 2006. It seemed like the national nightmare was finally over. Or was it? The issue with this sale was that it was seen as being given at throwaway price of $362 million and the sale was carried out in a non-transparent manner. Due to the suspicion revolving around the sale, the Supreme Court of Pakistan annulled that privatisation.
From losses to a full blown disaster
At this stage, the company was still performing well as it earned profits through 2007 and 2008 but fortunes changed from 2008 onwards. From that period till now, it has been seen that the company has become bloated and operationally cumbersome. Hit by the country’s energy crisis and mounting legacy costs, the company was used for little else than for political purposes. Overemployment was allegedly carried out with political interference taking place at the top — another reason why many feel it is better for the government to wash its hands of PSM. The result of these steps has been that the company has run into cash flow shortages and has accumulated huge losses on its books.
The situation got so bad that during the Yusuf Raza Gillani administration, the company had to be taken under the fold of the government in order to sustain it. The government had to give Rs. 2.9 billion as a bailout to the company in order to make sure that the company could function.
Since then the company has been through multiple discussions of privatisation with the first one taking place before 2015. At that point of time, a consortium of Russian and Chinese companies offered to invest $778 million but the process was never completed.
The company has been suffering losses of around Rs 23 billion on an annual basis. To put this in context, the total health expenditure to be carried out for health affairs and services was Rs. 23 billion in the Federal Budget for 2023. Again, the federal health budget is not the most important part of the federal budget and more important in a provincial context because of the 18th amendment, but the staggering losses do give you some perspective.
The backdrop to 2019
So what happened the last time privatisation was considered?
It is important to understand what happened before 2019 which led to the company again being placed on the privatisation list. After the plant had shut down in 2015, the PTI government had pledged that they would revive the dying company and take it under Government control in order to do so.
In October of 2018, the company was delisted from the privatisation program and MoI&P was asked to develop a plan to make the company operational again. This will happen a lot because the government always feels it can turn the fortunes of the company. Until it can’t and gives up.
Around March of 2019, the Senate Standing Committee on Industries and Production was told by the management at the steel mills that the government and the bureaucracy were both not serious in addressing the issues. The workers had not been paid salaries for the last three months and no decision making was being carried out to allay the concerns and problems present at the company. This was the first sign that the planned turnaround was not going to happen.
So what then was the cure to the problem? A revival plan was shared in April 2019 by the Expert Group. The group suggested that the best course of action was to privatise the company and to appoint a Transaction Advisory Consortium (TAC) which could help set up appropriate public private partnership models that could be acted on by the government.
A bit of a “circle of life” moment. Government promises to not privatise and revive the company. Revival plans are sought with little to no changes taking place in the management of the company. The revival plan is to privatise it. And the circle keeps going on.
In May 2019, the Economic Coordination Committee (ECC) decided to privatise the company based on the recommendation made by the MoI&P. This came after months of uncertainty where the representative in the government kept saying that it would not be privatised. So much so that Asad Umar, the then finance minister, actively opposed this step and was responsible for the removal of the company from the privatisation list earlier.
The carousel starts again
The bureaucracy did its job and the long journey to bring the privatisation to fruition started. After the approval from the ECC, the MoI&P was asked to put the matter in front of the Competition Commission of Pakistan (CCoP) which directed the Mills to be placed on the privatisation list formally. The first step after this move was to advertise for the Transaction Advisor to be recruited and this decision was ratified by the Federal Cabinet.
This Kafkaesque nightmare then continued as from July 2019 to January 2020, the formalities of placing a financial advisor, due diligence of accounts and other legal technicalities had been out into place. From April to August 2020, the due diligence reports presented by the financial advisor were considered and a transaction structure was decided upon. Even after such lengthy time being taken, reservations and concerns were raised at different levels which had to be addressed. No more so than by the Chairman of the PSM Board who felt that the transaction structure was not justified.
After issues were raised, meetings were held at the MoI&P which looked to resolve these issues and decided that the whole exercise needs to be put into action rather than being prolonged for a period of time. Finally in December of 2020, the CCoP approved the transaction structure which was to incorporate a separate subsidiary company, identify the key operating assets and get the proper No Objection Certificates (NOCs) from the relevant authorities. A Scheme of Arrangement (SoA) was devised by PSM itself which would transfer its assets to the subsidiary company being set up.
This brought to an end a period of two years and four months where internal memos and meetings had decided on the transaction structure and the assets which were going to be sold. It is true that Rome was not built in a day, but if it had bureaucracy like this, it would never have been built at all.
The process which had started in May of 2019 had just been concluded after 2 years and 4 months and even then there was no bidding process even on the horizon. CCoP invited Expression of Interest (EOI) to be sent for PSM in August of 2021. The EOI led to bidders from China, Russia and Iran. From these, four bidders were pre-qualified for the bidding process who could then carry out their own due diligence.
The interest shown
So here we finally had four parties qualified as interested parties by January 2022 which included (i) BaoSteel Group Xinjiang Bayi Iron & Steel Co. Ltd (BaoSteel); (ii) Tangshan Donghua Iron and Steel Enterprise Group Co. Ltd (Donghua); (iii) Maanshan Iron and Steel Co. Ld (Maanshan) and;(iv) Tianjin Jianlong Iron & Steel Industry Co. Ld. and MCC (“Jianlong” and MCC).
By March 2022, the interested parties were asked to carry out buy-side due diligence which led to Jianlong and MCC expressing disinterest in the deal. After this, BaoSteel and Donghua were asked to conduct on-site by August 2022. This led to a subsequent withdrawal of interest by BaoSteel and Maanshan based on the country’s macroeconomic outlook and the global economic conditions with a slowdown in steel demand. This was further compounded by the fact that the country was facing difficulties in importing raw materials due to controls placed by the State Bank of Pakistan’s (SBP) Foreign Exchange Regulations.
It seems like the economic policies, the global economic outlook and the regulations of SBP were going to create the perfect storm for the deal to not go through.
So what ended up happening?
The deal dies a slow death
With interested parties falling by the wayside, it was becoming obvious that the deal would be broken at some stage. In the SIFC Apex Committee held on October 4th 2023, it was decided to annul the current bidding process which only had Donghua as the interest party left. The recommendation was made in the light of the fact that a single bidder auction will lack transparency and will lack a competitive process to lead to a better valuation for the plant. A new recommendation was made to form a Working Group which could come up with a new way to auction the plant with private sector participation to be carried out.
In short, a long spiel of bureaucratic talk to say that we have failed to find suitable buyers for the plant and that we would rather like to hold onto it for a little longer until a better buyer comes along or we can sell the plant to a more attractive bid. The process which had started in 2019 was finally dead. On 10th October 2023, the last nail was put into the privatisation deal of PSM when the caretaker government declared that PSM was a dead asset. This is a legalese way of saying that the country cannot look to sell off the asset and now it was the task of the MoI&P to revive the non-operational company back to its glory days.
What was the real cost of all this dilly dallying?
What was forgone?
The privatisation process and the interest shown by Chinese, Russian and an Iranian company showed that there was foreign interest in investment and take over of PSM. It feels like a great platform was squandered with a lack of commitment towards this process. For the first time, four Chinese companies were looking to revive the flailing SOE and were looking to technologically upgrade and expand the existing capacity of the plant.
The transaction being talked about would have meant that PSM would have given up a stake of anywhere between 51 percent to 74 percent to one of the bidders giving them ownership and right to control the management. This would have been a much needed boost in terms of foreign investment in the country with the added advantage of the company not having to be subsidised by the state anymore.
The failure to privatise shows that the Privatization Commission (PC) lacks the expertise and capability to carry out such transactions. The company has been used as a political football from time to time as well where any talks of privatisation are met with union strikes and actions. It seemed that this time round things were going to be different as contact feedback from the PC showed that privatisation was at an advanced stage and was even censured in February of 2023 by the then PM Shehbaz Sharif for not completing the process quickly.
This was the best the country has come to unload PSM as it is obvious that no amount of restructuring will be able to make the company viable technically and economically. The equipment that is installed at the plant has become damaged after the plant was abruptly shut down in June of 2015. Even the machinery that is functioning is more than half a decade old and needs to be updated.
In addition to machinery being replaced, the company also needs a working capital of around $100 million to carry out the necessary repairs and start functioning.
Where do we stand now?
In order to start the process of privatisation yet again, the caretaker Federal Cabinet has approved the recommendations of the Privatization Ministry after the decision was taken by the Special Investment Facilitation Council (SIFC). In line with this, the Privatization Board has also appointed the necessary personnel forming part of the formalities in order to execute the privatisation. It seems that we have travelled back in time to May of 2019 when such an attempt was made last time. The frustrating fact around this story is that each time there is a consensus to sell the company, there are blockages in the regulatory, economic and political framework which slows the whole process down. It takes months of bureaucratic minutiae to carry out substantial effort which can finally lead to the privatisation finally taking place until some problems derail the whole process. Time and time again this has happened and this time the efforts might again go towards a dead end. It is high time for the government to sell off these loss making SOEs which is the need of the hour.
Let’s hope we are not writing this story again four years later.