PSM: Of ambitious revivals

The government's prime economic focus is to sustain stable external account till the elections. The slippage in fiscal account can be taken care by domestic central bank financing for the time being. Introducing a lavish export package is a demonstration of that approach as up to Rs180 billion can hurt fiscal deficit in coming eighteen months in hopes of earning some foreign exchange. Latest current account numbers for the first half of FY17 show a slip of 92 percent to $3.6 billion; up from 1.3 percent of the GDP to 2.2 percent. The picture is bleak.

Now privatization is all of a sudden catching headlines. The government is attempting to offer some sort of mechanism to handle Pakistan Steel Mills in private hands. Meanwhile, with oil prices rebounding, the government is trying to reinitiate the process of offloading OGDC shares by a secondary public offering.

The government concurrently is taking some bold steps of maturing $500 million Chinese loan taken as a safe deposit in 2009, which had been rolling over since. But now the finance ministry has finally decided to repay the loan.

It's a tough task, as foreign reserves are down by $800 million from its peak in October 2016. This is despite the fact that around $500 million flowed in from Engro Foods sales. The gap between the currency rate in interbank and open market is abnormally high. That is not a good sign as it suggests the currency is under pressure and some forces might not be letting it to depreciate in interbank market.

The government is trying to arrest the depreciating trend in open market by exempting currency dealers to surrender 10 percent of imported dollars to banks. This may increase supply of dollar in open market and may shrink the gap between the two exchange markets.

However, the key to keep currency intact and external account stable is to build reserves on no-debt base foreign inflows. The offloading of OGDC most likely will take place outside Pakistan. The local market does not have the appetite for any further shares of the giant. Five percent shares of OGDC can fetch up to $350-400 million in foreign exchange. The deal will not lower the fiscal deficit as the proceeds will be below the line; but it will improve the financing mix.

It's a good move. Concurrently, the government is trying to get rid of the PSM - an ailing asset. Had the steel mill being sold in 2006, it would have not only generated $362million (Rs21.6 billion) but would also have saved successive governments from pumping tens of billions of rupees. PSM losses and liabilities have increased from Rs26 billion in 2008 to Rs415 billion today; and in the process, government's commutative bailout packages are at Rs85 billion. That is some loss!

Anyways, one cannot undo the past. Today, after the exhaustion of last bailout package of Rs18.5 billion by PML-N government issued in April 2014, the government decided to not pump anymore to revive the capacity. Today, its production is virtually nothing.

Now, PMLN government is trying to lease out the mill with nothing coming to government immediately but with an assurance that the plant's capacity will be utilized in a staged manner. That is smart thinking. But materializing it is not an easy task. The government is giving all kinds of exemptions and support for Chinese to build up plants in Gwadar. Why would anyone be interested in taking the political pains associated with PSM. Chinese lately bought K-Electric; but Abraaj group took all the pain and restructured it to lure serious investor in the business to take over. Are we looking for private equity buyer in PSM or eyeing a steel magnet to buy it directly?

In Gwadar, China Baowu Steel Group, second largest world steel maker, is planning to build a massive industrial park (read CPEC: waiting for Ba Tie Bao) with an estimated steel production capacity of nearly 10 million tons. It will be hard to find a buyer for PSM when other avenues of investments are available for steel players in Pakistan.

The rumors are that a Chinese player is interested in buying PSM and that is why the plan is put on the table. Let's hope it's true and government is able to get rid of the white elephant; and the buyer is able to revive the mill.

According to media sources, PSM's core assets including plants, machinery, land and buildings would be leased to the buyer; but no assets will be sold. It would a long term lease for at least 30 years. The investor would commit to achieve 50 percent capacity (out of 1.1 million ton per annum) in two years and 85 percent by five years. Government would take the existing liabilities which are close to Rs150 billion -Rs33 billion is government loans which will become its equity; and rest will be its responsibility. Best of luck to the privatization commission board!