ISLAMABAD: Local prospective buyers of Pakistan International Airlines (PIA) have called on the government to extend the same investment protections afforded to foreign investors under an Act of Parliament. In addition, they have sought complete exemption from taxes related to air travel, fuel, and aircraft leasing, according to sources within the Privatisation Commission.
During the ongoing due diligence process for PIA’s privatisation, several shortlisted parties presented their demands to the government. These demands, coupled with their refusal to accept performance benchmarks, have created challenges in advancing the privatisation transaction smoothly, according to officials.
The demands from the bidders clash with an agreement made with the International Monetary Fund (IMF), which prohibits Islamabad from offering preferential treatment to any specific group of investors, according to finance ministry officials.
The government has shortlisted several entities, including Airblue, Arif Habib Corporation, Blue World City, Fly Jinnah, Pak Ethanol (Pvt) Consortium, and YB Holdings Consortium, as potential buyers for PIA. Initially, the government planned to finalise the airline’s privatisation by June-July 2024 but later extended the deadline to October 1.
According to sources, the pre-qualified bidders are requesting that they be recognized as investors under Section 2 of the Foreign Investment Promotion and Protection Act 2022. This section defines covered investments as any asset owned or controlled by an investor that demonstrates characteristics such as capital commitment, profit expectation, and risk assumption. The law also offers immunity from various taxes and grants special legal status to investments.
However, no foreign bidders have shown interest in acquiring PIA, with all six shortlisted parties being local entities. Under the IMF’s $7 billion Extended Fund Facility, the government is restricted from offering any special treatment or tax exemptions to attract investment.
Privatisation Commission Secretary Usman Bajwa did not respond to requests for comment on whether the shortlisted parties sought protection under the Foreign Investment Promotion and Protection Act or whether they requested tax exemptions.
Prime Minister Shehbaz Sharif has issued directives to the Privatisation Commission to ensure transparency throughout the privatisation process.
In another set of demands, the bidders have requested amendments to tax laws to eliminate sales tax on aircraft purchases and leases. They have indicated that expanding PIA’s existing fleet is essential for making the airline financially viable, but they have refused to commit to specific targets for adding new aircraft.
Sources further revealed that some bidders have called for the removal of all taxes, including federal excise duty (FED) and sales tax, on both domestic and international air travel. International travel is heavily taxed, with the government imposing additional FED on tickets, amounting to approximately Rs56 billion in the current fiscal year.
The prospective buyers have also sought assurances that the government will refrain from imposing new taxes on PIA and its associated businesses for at least ten years. Additionally, they have requested a general tax exemption under the Foreign Investment Protection Act.
The bidders also want the removal of sales tax and FED on fuel to enhance PIA’s competitiveness against foreign carriers. The government has already eased the burden on potential buyers by offloading Rs623 billion in liabilities from PIA into a holding company, where taxpayers will service these obligations.
However, the bidders have refused to take responsibility for Rs56 billion in pending tax payments owed to the Federal Board of Revenue (FBR), urging the government to absorb these liabilities. On the other hand, they have shown interest in recovering Rs62 billion in pending tax claims, which include Rs26 billion in overdue payments to the FBR and Rs30 billion in contingent liabilities as of April 2024.
Some investors have also demanded that the government should settle all tax liabilities, penalties, charges, and claims before the privatisation is completed. They have further requested general immunity from any potential adverse outcomes related to federal or provincial tax liabilities before the privatisation process is finalized.
