Former Finance Minister Miftah Ismail has outlined major obstacles that led credible bidders to withdraw from the privatization process of Pakistan International Airlines (PIA).
In a series of tweets, Ismail revealed concerns raised by potential investors and the Privatisation Commission’s (PC) stance on key issues, which ultimately derailed the deal.
“From what I hear, these were the issues the Privatisation Commission (PC) and the bidders were discussing when credible bidders decided to walk away:
- PC wanted govt directors to have a final say in all major decisions, in spite of the fact that govt would only be a minority stakeholder. The bidders didn’t agree to this.
- The bidders pointed out that there was still a hole of Rs 45 billion in the balance sheet and they wanted the govt to transfer this to the PIA holding company. The PC said no. This had to do with PIA’s historic dues to the Civil Aviation Authority and tax authorities.
- The bidders thought that besides the above Rs 45 billion hole, the govt was over-valuing PIA assets in the balance sheet. The bidders estimated that it would take at least $150 million to make the PIA-owned grounded aircraft airworthy.
- PIA has never been able to return a single leased aircraft back to the lessor. The lease requires that the aircraft be returned in the same condition that it was acquired in. PIA has always ended by buying the aircraft back from the lessor rather than trying to put the aircraft back in its original condition. Buyers estimated that it would cost about $10 million to bring each lessor’s aircraft in the right shape to return it (or they’d have to buy it). This was a future liability that buyers were mindful of.
- Our Civil Aviation Authority is not considered a “fit and proper” regulatory agency by most Western aviation authorities since the statements issued by Ghulam Sarwar Khan, the former PTI’s minister of Aviation. This means flights to the US and Europe are not guaranteed until and unless CAA is reformed and restructured. This could take many months or years. This was a big risk in buyers minds.
- PC or its bosses were not willing to accept that PIA is not a viable business and the onus was on the government to make tough decisions to cut its losses and give its new owner a chance to turn PIA into a serious international airline. They were rather trying to out-smart the investors.
“Our smart PC and CCoP now get to keep PIA and its holding company and incur losses of over Rs 10 billion every month (the value of the only bid they received),” the former finance minister stated.
Earlier, on November 2, Miftah Ismail gave what he described as the ‘full context’ of the Shahbaz Sharif government’s failure to privatise PIA.
He wrote on X, “First of all, PIA is set to lose over Rs 150 billion ($550 million) in the last quarter of this year and the next year. These further losses will now be borne solely by the people of Pakistan.
PIA had a total debt of over Rs 800 billion ($2.9 billion) and of this, the government was absorbing over Rs 600 billion ($2.16 billion) but passing on over Rs 200 billion ($ 720 million) in debt to the private sector bidder for it to pay.
PIA’s losses, visible and not-so-visible, are increasing exponentially. The privatisation process should have considered that by selling PIA it was not only stemming future losses but also opening up the Pakistan aviation sector. This would have created a lot more jobs and provided competitive air travel services to Pakistanis around the world.
The government initially insisted on retaining 40% shares of PIA and also asked that the private sector bidder inject all 100% of the money required for PIA operations and expansion but that the government shareholding not be diluted. This requirement was mind-boggling, to say the least. Even in the end it never agreed to a simple dilution of the government stake if it chose not to invest more.
Initially, there were four very serious and credible parties interested in bidding. Younus Brothers consortium had lined up the Turkish carrier Pegasus (which has 110 aircraft in its fleet) as the operator. Fly Jinnah had Air Arabia (which has 77 aircraft in its fleet) as a partner in its bid. Pak Ethanol Consortium had lined up a Swiss company as its expert aviation partner. There was also the Arif Habib consortium, which was also backed by aviation experts and big Pakistani businesses.
All four of them, plus some others, walked away from the bidding. Why?
The former finance minister wrote, “It suggests that either the government was never interested in selling PIA or it thought it was too clever and would be able to get the private bidders to pay more for less. In the end, all credible bidders walked away.
The decision to have the bidders submit bid bonds two days before final submission was also another strategic error, as it told the eventual bidder that it was the only bidder. Such basic mistakes speak very little of the competence and forethought behind the process.”
Where do we go from here?
“I would suggest that SIFC, whose job is to facilitate investment and support the government, call all the bidders who walked away and ask them why they walked away and what facilities and concessions they need.
Second, SIFC should also call the people responsible for this fiasco to explain why did they came up with difficult and unreasonable conditions so that all serious bidders walked away. They should also be asked who will pay PIA the additional Rs 200 billion ($720 million) that PIA is bound to lose over the next 15 months.
Finally, there should be a committee of eminent professionals from amongst people like Salim Raza (ex-SBP governor), Zakir Mehmood (ex-HBL President), Aftab Manzoor (ex-MCB President), Zafar A Khan (ex-Engro CEO and Chairman PIA), Syed Yawer Ali (Chairman Nestle Pak), and Farrukh Khan (ex-MD PSX) who should be entrusted with negotiating with any of the above bidders or another party and selling PIA with legislation to give it legal cover and protection from NAB.”
