Three cheers for the Supreme Court
KARACHI: It is not every day that we, in this country, have something to cheer about. But on Friday we most definitely did. For that, of course, was the day the Supreme Court handed down its decision to cancel the sale of the state-owned Pakistan Steel Mills (PSM) – the country’s biggest industrial enterprise – to a consortium of buyers comprising a Russian company, a Saudi company and a Pakistani company for a mere $ 362 million (Rs 21.68 billion) at a rate of Rs 16.8 per share.
One says “a mere $ 362 million” because the 4,457 acres of land alone, which is part of the Steel Mills, is worth more than that at current prices. It seems fishy, to say the least, that the price of this land was not included in the Privatisation Commission’s evaluation of what PSM is worth.
On top of that, the Privatisation Commission was giving the buyers a bunch of extra benefits: including Rs 10 billion worth of stock in trade, and cash amounting to Rs 8.599 billion lying in PSM’s bank accounts (out of which post-dated cheques for about Rs 7.67 billion had already been issued to clear the liability of loans due from the year 2013 to 2019). Also, a tax liability of Rs 3 billion had already been paid, out of which Rs 1 billion would have been refunded to the buyers on their taking over the unit.
As if all this were not enough, the government had accepted the liability to pay PSM workers who were to be laid off Rs 15 billion under the golden handshake scheme.
When all these factors are taken into account, the government was losing Rs 34.59 billion in cash and kind and getting back only Rs 21.68 billion from the buyers as the sale price. Thus, the government was incurring a net loss of at least Rs 12.91 billion on the transaction. And this loss does not include the market value of 4,457 acres of land owned by PSM, which was being handed over to the buyers as part of the deal.
The amount of land owned by PSM is actually much more than 4,457 acres. Located at a distance of 40 km southeast of Karachi at Bin Qasim, PSM is spread over an area of 18,660 acres, including 10,390 acres for the main plant, 8,070 acres for the steel mills township, and 200 acres for a 110 million gallons capacity water reservoir. In addition, it has leasehold rights over an area of 7,520 acres for the quarries of limestone and dolomite in the Makli and Jhimpir areas of Thatta district.
In 1968, the Pakistan government decided that the Karachi Steel Project should be sponsored in the public sector, for which a separate corporation should be formed under the Companies Act. In pursuance of this decision, Pakistan Steel Mills Corporation Limited was incorporated as a private limited company to establish and operate steel mills at Karachi.
In January 1969, PSM concluded an agreement with V/o Tyaz promexport of the then Soviet Union for the preparation of a feasibility report for the establishment of a coastal-based integrated steel mill at Karachi. In January 1971, Pakistan and the then Soviet Union signed an agreement under which the latter agreed to provide technical and financial assistance for the construction of a coastal-based integrated steel mill at Karachi. The foundation stone of the project was laid on December 30, 1973 by the then Prime Minister of Pakistan, Zulfikar Ali Bhutto.
Construction work on the mammoth project was carried out by a consortium of Pakistani construction companies under the overall supervision of Soviet experts.
PSM not only had to construct the main production units of the 1.1 million-tons-a-year-capacity steel mill, but also a host of infrastructure facilities. Component units of the steel mills numbering over 20, and each a big factory in its own right, were commissioned as they were completed between 1981 and 1985, with the coke oven and by-product plant coming on stream first and the galvanizing unit last.
The commissioning of blast furnace No. 1 on August 14, 1981 – Independence Day – marked Pakistan’s entry into the club of iron and steel producing nations. The project was completed at a capital cost of Rs 24.7 billion. The completion of the steel mills was formally launched on January 15, 1985 by the then President of Pakistan, General Zia-ul-Haq.
PSM has had a chequered history since its commissioning in 1985. There have been many ups and downs, which at times even threatened the very survival of the mills. At one stage, over-manning pushed up PSM’s employees-per-ton-of-capacity ratio to the highest for any steel mill in the world. Its per-ton-cost of steel produced was also one of the highest in the world.
Losses mounted over the years, until PSM reached a stage when it could not even pay the interest on its outstanding loans. The government had to bear the cost of servicing PSM’s loans. The problem was compounded by the fact that PSM’s product mix had been designed to produce 50 per cent steel billets for the re-rolling industry and 50 per cent other products to feed other downstream industries. But the latter were not set up until much later, forcing PSM in its early years to limit its production to billets and a few other products. This skewed product mix increased PSM’s production costs, adding to its financial woes.
In May 2000, the government approved the financial restructuring of the mills along with the downsizing of its manpower, and laying emphasis on the repair and maintenance of plants needing immediate attention.
As of June 30, 1999, PSM had accumulated long-term liabilities of Rs 19.117 billion in the form of loans owed to commercial banks, including a principal amount of Rs 11.35 billion and accrued interest of Rs 7.767 billion. In accordance with the government’s decision, these total long-term liabilities of Rs 19.117 billion were bifurcated into two financial facilities: financial facility No. 1 and financial facility No. 2.
The total principal amount of Rs 11.35 billion under financial facility No. 1 was to be paid in 12 equal annual installments at a markup rate equivalent to the average Treasury Bills rate in the preceding year plus 1.5 per cent for the first four years, 2.5 per cent for the second four years and 3.5 per cent for the last four years. The accrued markup amounting to Rs 7.767 billion under financial facility No. 2 was to be paid in 7 equal installments after loan No. 1 was fully repaid. The government was to pay the interest on this loan.
In accordance with this restructuring plan, PSM started making payments to the banks regularly and by June 30, 2002 it had paid the banks Rs 4.671 billion. However, in fiscal 2002-3, taking advantage of unprecedented sales and a record profit, PSM decided to pay the remaining principal amount in one go with the approval of the government. Accordingly, an amount of Rs 10.409 billion (Rs 9.458 billion loan plus Rs 0.951 billion markup) was paid to the banks on July 1, 2003.
In order to make PSM economically viable and to facilitate it in the repayment of outstanding loans, it was also decided to lay-off excess manpower, reducing it from 20,533 to 15,000. Accordingly, PSM introduced a voluntary retirement facility (VRF) scheme with effect from May 5, 2000. Under this scheme, the benefit of two additional basic monthly pays for each completed year of service along with normal retirement benefits was allowed.
As a result of this manpower restructuring, the number of PSM regular workers was reduced from 20,544 in 1998-99 to 13,371 as of June 30, 2003. Thereafter, the number was further reduced and now stands at 12,500 regular employees.
As part of the restructuring programme, it was also decided that PSM should undertake to carry out immediate capital repairs and spin-off its non-core activities.
The areas of repair and maintenance that had been neglected in the past were also given due attention. The major capital repairs that were carried out included the installation of boiler No. 2 in the steel making department, the second category capital repair of blast furnace No. 2 and the capital repair of two units of the oxygen plant along with their compressors.
The outsourcing on non-core activities, such as security, transport, medical care, education, etc., also yielded positive results, reducing the expenditure of these departments by 71 per cent.
In 2005, PSM broke all production records and made a net profit of Rs 6.5 billion. It made another Rs 3 billion profit in the first quarter if 2006. PSM is now a viable profit-making entity and is no longer a drain on the national exchequer. Given this fact, is there any need now to privatise PSM?
This is the question that the Council of Common Interests should address when it meets sometime during the six-week time frame given by the Supreme Court. Meanwhile, three cheers for the Supreme Court for handing down a ruling that will be welcomed by all those who believe in transparency.