Amid government's claims that Pakistan Steel Mills privatisation was made in a transparent manner, the highest judicial authority, the Supreme Court, has since set aside the deal. The court has also ordered that the Council of Common Interest (CCI) be reactivated and the matter placed before it.
During the course of hearing in the Court, it transpired that the valuation of the assets of the Mills was made on "historical" basis instead of the current market prices.
The short judgement announced by the Court indicates that the government of Pakistan has accepted the responsibility of making payment of over Rs 15 billion for meeting the expenses of the golden hand-shake to be given to the employees to be forcibly retired by the new management.
Apart from that, the government has also undertaken to refund the taxes amounting to Rs 1 billion or so. So after we deduct this sum of Rs 16 billion from the sale proceeds of Rs 22 billion, the government would have sold the hefty project of national importance for a paltry sum of Rs 6 billion only. Was this a fair price of this hefty project?
It is believed that the project, which went into production in 1983-84, did cost the government to the extent of Rs 25 billion which, at the then prevailing exchange rate of $1= Rs 15 translated into $1.7 billion. Since the project went into production, a lot of developments had taken place. The prices of each item of the project have increased manifold since 1983-84.
The cost of land alone has increased manifold. The project occupies 4,500 acres of land. A local broker, immediately preceding the process of privatisation, had estimated the cost of land @ Rs 20 million per acre. At that rate, the cost of land alone works out to Rs 90 billion equivalent to $1.5 billion but it had been sold merely for $362 million.
Earlier the President had himself asserted that the Mills will not be sold below the price of Rs 60 billion. How the Privatisation Commission sold it at 1/3rd of the cost estimates of the President and the deal approved by the Cabinet Committee on Privatisation (CCOP) needs to be looked into by the appropriate government authorities.
The Supreme Court's judgement has put a final seal that the deal was not transparent. Apart from government bearing the staff exodus cost (Rs 15 billion) and tax refund (Rs 1 billion), following concessions are reported to have imprudently been extended to one of the members of the consortium of buyers, Al-Tuwairqi group:
(a) Under an SRO, Central Board of Revenue (CBR) declared the 220 acres of land, on which the new mill is being erected by this group, as the "Export Processing Zone" that means the project gets the tax exemption on imports. [It is not known which authority has allotted this big chunk of land to the group and at what cost?]
(b) Under CBR SRO 461 issued in June, 2004, the government has restricted all the units in Karachi Export Processing Zones (KEPZ) to export only 20 percent of their products to the "Tariff Area' in Pakistan. But in January, 2006, this group has been excluded from the jurisdiction of the above SRO and has been permitted to export its entire production to the "Tariff Area" in Pakistan as and when it commences production. Other investors in the KEPZ, being deprived of the level playing field, have been protesting against that decision but who cares?
IS THIS THE RIGHT MODE OF INVITING FOREIGN DIRECT INVESTMENT (FDI)? Another aspect of the matter is that by purchasing the Pakistan Steel Mills and erecting a new re-rolling mills near it, the Al-Tuwairqi group will enjoy the monopoly position in the matter of production and supply of steel in the country.
Will it be desirable and in the national interest viz-a-viz the price controls of the steel items to permit creation of yet another monopoly when one finds that the government had been totally incapable of resisting the monopolies of the cement and sugar manufacturers in the recent times.
The question is whether the privatisation of the steel mills at this juncture is a prudent policy? Certainly not; that we look into the immediate future scenario when we shall need steel pipes for laying down the gas pipelines from Iran or Turkmenistan.
Shall we then resort to costly imports and what will happen to our trade imbalance in that scenario? It would rather be appropriate to expand the Steel Mills rather than its sale at throwaway prices so as to save foreign exchange at least to the extent of "value-addition" even if the basic raw material is required to be imported.
As pointed out in the Supreme Court's short judgement and as the sections of the general public who are aware of the past history, the issue of expansion of the Pakistan Steel Mills remained under consideration of the governments right from 1997.
When the then Prime Minister Muhammad Nawaz Sharif visited China and Hong Kong in his second tenure, the Chinese were ready to discuss the deal relating to expansion but the issue was not raised from our side. No effort seems to have been made by the existing rulers.
It seems that the authorities-that-be were never interested in the expansion of the Mills. They are only busy in meeting the external sector imbalance by selling the national assets to the foreigners without pondering as to what will happen when after about 2 years all the assets would stand "internationalised" and demand for remittance in foreign exchange by the buyers of the relative assets shall mount resulting in larger imbalance?
What was conspicuous by its absence in the sale agreement signed by the government with the consortium of the buyers was that the buyers were not bound to use the assets of the Mills for production and supply of the steel products. On the Court's enquiry, a letter of commitment in this regard from the buyers was produced which the court did not accept as legally binding.
Now, in deference to the Court's judgement, the Federal Government will constitute CCI and refer this issue to it. What will be the composition of the CCI and how prudently its members will behave in deciding the issue, only time will tell.
The chances of the members of CCI bowing to the will of the "powers-that-be" and restoring the deal with slight modifications cannot entirely be ruled out. Therefore, the public who have been successful in getting the imprudent deal rescinded need to remain alert to face the situation as may arise in near future.
As per the legal framework, the government is required to spend 10 percent of the privatisation proceeds on poverty alleviation programmes and the remaining 90 percent on retirement of the expensive debt. The question being asked these days is where the privatisation proceeds - which are put at Rs 400 billion - have been spent by the government.
An examination of the State Bank of Pakistan's annual report for the fiscal 2004-05 and the second quarterly report for the fiscal 2005-06 indicates that privatisation proceeds are increasingly being utilised to finance budget deficit and a total sum of Rs 70.3 billion has so far been used to finance the fiscal deficit as per the details given below:
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2001-02 Rs 8.4 billion
2002-03 Rs 3.7 "
2003-04 Rs 11.2 "
2004-05 Rs 28.3 "
2005-06 Rs 18.7 "
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(July-December 2005)
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TOTAL Rs 70. 3"
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In addition to that, as pointed out by the State Bank Governor in May, 2006 in her address at the Woodrow Wilson Centre, Washington, a sum of Rs 140 billion out the sale proceeds of the Pakistan Telecommunications Company Ltd was utilised to retire the government Treasury Bills held by the SBP and consequently SBP's holding of these securities came down from Rs 540 billion to Rs 400 billion.
All this accounts for utilisation of about half of the privatisation proceeds although the utilization in the above manner is not in conformity with the law. The government is yet to come out publicly about the use of the remaining half the privatisation money.
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