Govt proposes buyer-favored terms for PIA stake sale

The government has proposed terms for selling majority stakes in Pakistan International Airlines (PIA) that favour buyers, including the option to make partial payments and allow debt-funded investments over a three-year period.

Express Tribune reported, quoting official sources, that the draft Shareholders Agreement, Sale Purchase Agreement, and Subscription Agreement are being finalised. A briefing on the draft Shareholders Agreement was given on Monday to the PIA Holding Company Limited (PIAHCL) board, chaired by former central bank governor Tariq Bajwa. The Privatisation Commission and financial advisors shared the main features of these agreements with board members. 

Sources indicated that buyers might make partial payments in cash and settle the remaining amount against financial obligations for which the federal government is responsible. However, there are concerns about the federal government’s ability to settle these obligations promptly.

The government has already allocated about Rs630 billion to the PIA holding company, with the finance ministry servicing this amount partially, while the remaining is expected to be covered by privatization proceeds and dividends.

Some board members opposed the proposed three-year investment period, arguing that PIA urgently needs the investment within the first year. It is estimated that the investor will need to invest $700 million to turn the loss-making entity profitable.

Another condition allows buyers to take on debt for these investments. The financial advisors and Privatisation Commission have proposed that the buyer be permitted to take on 70% of debt for investment purposes, with the remaining amount invested through equity. This means the buyer would need to invest only $210 million from its own funds, with the remaining $490 million raised through debt likely secured against PIA’s assets.

The finance ministry has opposed the debt-led investment proposal, arguing that it would adversely affect the balance sheet of the PIA holding company. 

Additionally, the proposal stipulates that the new buyer will not sell its stakes during the holding period, which could be three to five years. After this period, the buyer can sell the stakes through the stock market. 

However, during this period, the buyer would not be required to make dividend payments, affecting the government’s plan to settle PIA’s debt through privatization proceeds and dividends.

The federal government has authorised the sale of 51% to 100% of PIA stakes along with management control. Six parties have been shortlisted and are currently conducting due diligence on the airline. 

PIA reported a loss of Rs75.7 billion in the fiscal year 2022-23, making it the fourth-highest loss-making government-owned firm.