PC Board approves lease out plan of Pakistan Steel Mills

MUSHTAQ GHUMMAN

ISLAMABAD: Privatisation Commission's Board headed by Chairman Privatisation Commission, Muhammad Zubair approved lease out plan of Pakistan Steel Mills (PSM) on Tuesday.

The proposed transaction structure of PSM, which would be presented to the Cabinet Committee on Privatisation (CCoP) in the coming days, envisages a tripartite concession agreement between GoP, PSMC and the investor for a period of 30 years on the basis of revenue sharing. PSMs land will remain with the government while the plant and machinery will be handed over to the new company for a maximum of 30 years.

The sources said PSM would lease core assets to the investor including land, plant, machinery and building. No asset would be sold. Investor would form a new company under Pakistani laws and be allowed to operate the plant at the PSM premises. All non-core assets would remain the property of PSM which would be responsible to manage them. All the liabilities of PSM books should preferably be settled/ restructured before any agreement is signed with the investor.

According to sources, GoP would ensure resumption/availability of all utilities especially gas before any agreement is signed with the investor.

The sources further stated that only/portion of the core employees would be retained, managed and/or re-employed by the investor. PSM would have to manage/take care of the remaining labour force. The lease would be for at least 45 years which is negotiable. The capex done/assets brought in by the investor would remain at/transferred to PSM at the end of the lease term at notional value. The investor would not mortgage existing PSM assets to raise finance. The investor may bring in equipment or invest to revive the operations of the company. Entire working capital would be investors responsibility, committed upfront by the investor.

Investor would submit revival and expansion plan of the plant. Investor would pay a lease amount to PSM (percentage of the revenue). PSM team would have the right/option to monitor the operations of PSM, the sources added.

Investor would commit complete overhaul of steel mills operations (1.1 million tons per annum existing capacity) in shortest time possible and make arrangements for upgradation. Investor would commit to the achievement of at least 50 per cent capacity utilization at the end of year two and 85 per cent capacity utilization from year 3 onwards from date of effective/management takeover till end of lease. Arrangement of working capital and its financing would be the responsibility of the investor. The current price of steel has been assumed at $ 362 per ton (translating it to end user/trader price of $ 497 per ton).

The sources said banking guarantee covering one year administrative costs would be provided upfront for the first five years. In case 50 per cent utilization factor is not achieved at the end of year 2 and 85 per cent utilization at the end of year 3 to year 5 PSM would have the right to call/encash the guarantee. Revenue sharing (rental as a percentage of revenue) would remain the same irrespective of whether the investor plans to expand to 2 million TPA, 3 million TPA or more.

The prospective investor would be required to submit a Business Plan highlighting the strategy it aims to employ to revive and upgrade the mills.

The present Government approved a bailout package amounting to Rs 18.5 billion in April 2014, the objective being to privatise the PSM while in an operational condition. However, PSM failed to achieve the desired capacity targets even after exhausting the entire amount of the bailout package.

PSM has not been audited for the last three years and it is difficult for auditors to evaluate the actual price of the national asset. The auditors have not yet decided whether PSM should be privatised as a going concern.

PSM dues (i) payable to GoP (principle plus Interest) stood at Rs 32.9 billion to be converted into GoP equity; (ii) payable to SSGC, Rs 35.436 billion to be paid upfront by GoP. Government may issue zero coupon/interest bearing bond to pay this off; (iii) NBP loan (principal and mark up) of Rs 49.9 billion would be paid/managed by GoP. As an alternate, the loan may be restructured. Government may issue zero coupon/interest bearing bond to pay this off. (iv) Existing employee liabilities (funded gratuity scheme, compensated absences, provident fund) Rs 32.299 billion to be paid or managed by the federal government. (v) VSS amount out of total employee liability would Rs 16.320 billion and employees liability including VSS Rs 26.979 billion totalling to Rs 43.299 billion. Additional amount to be paid by PSM/GoP for VSS option (assuming 50 per cent opt for it) Rs 3.871 billion to be paid by the GoP.

A concession agreement or a lease agreement would be signed between the PSM and the concessionaire. Since employees are being retained on payroll of PSM and outsourced to concessionaire, an outsourcing agreement would be signed for provision of labour.

In addition to approval for privatisation (CCI and CCoP), consent of shareholder of PSM (which is the federal government) for lease of the assets would be required. Permission of lenders of PSM would also be required subject to any negative covenants in the loan documents. Also consent of Sindh government would be required with respect to lease of land.

The Board members also approved the transaction structure of SME Bank which includes sale of 93.88 percent shareholding of the government of Pakistan. Based on the proposed structure, the State Bank of Pakistan is to allow a reduced Minimum Capital Requirement (MCR) of PKR 6 billion on staggered basis over five years, with PKR 2 billion upfront and PKR 1 billion each for next four years. State Bank of Pakistan will also issue a new banking license of a specialized nature with at least 60 percent advances for SME sector to the investor while also allowing Capital Adequacy Ratio (CAR) at 10 percent for five years post-privatisation.

Based on the request from Ministry of Information, PC board agreed to de-list Shalimar Recording & Broadcasting Co. Ltd from the privatisation program, while it agreed to constitute a committee to evaluate the viability of delisting Sindh Engineering Limited (SE) which has been requested by the Ministry of Industries and Production. The committee will assess the legal status of SE assets and provide a comparative analysis in case of privatisation and restructuring or delisting of the entity.

According to official statement issued by the Privatisation Commission it was stated that the Board also approved the initiation of process for hiring of Financial Advisors for Pakistan Re-Insurance Co Ltd, National Insurance Co Ltd and Heavy Electrical Complex (HEC). Board members also approved the initiation of capital market transaction of OGDC shares up to a maximum of 5 percent. This will be a domestic offering.

However, later on the PC spokesperson stated that the issue of OGDCL, HEC or reinsurance did not come under discussion.