In a latest and unexpected move, the government has taken Heavy Mechanical Complex (HMC) off the privatisation list, at the time when its privatisation process was in an advanced stage.
The Privatisation Commission (PC) had evaluated the Expression of Interest (EOIs) for its sale received in May 2006 and 19 pre-qualified investors were scheduled to bid in December.
The Complex, a strategic industrial unit of great national importance, was established in early 1970s, with the objective to achieve self-reliance in the manufacturing of capital goods and to stimulate the process of industrialisation, to which it has successfully and largely contributed. Within a short span of time, it emerged as the pioneering design, engineering and manufacturing concern and established itself as a leading supplier of complete sugar mill and cement plant of international standards.
It has designed, manufactured and installed 46 sugar mills and 22 cement plants, of various capacities, and 35,000 tons of equipment for power plants for various projects.
A host of other engineering goods manufactured by HMC include road construction machinery, industrial boilers, various types of cranes, railway equipment, truck chassis and axles, equipment for fertiliser plants, chemical plants and oil refineries, besides a variety of steel structures, castings, forgings, spare parts and components. The company earned significant profits, provided employment to thousands, trained hundreds of engineers and technicians, created strong auxiliary and vendor industries and developed new products for strategic industries.
Once an industrial giant and flagship of Pakistan's engineering sector, HMC located at Taxila has now reached a critical stage of gradual denudation of its recognised strengths in human resources, technologies and productivity.
The situation has resulted in a number of constraints and limitations, primarily that of technical and financial nature, which the company confronts currently. The process of divesting the Complex by the previous governments spread over a decade has played a pre-dominating role in making it nearly a sick unit, showing poor performance during recent years. In 1989, half-hearted efforts were made by the government to restructure the company that did not bring the desired results and its production capacity remained grossly under-utilised.
The technology assimilated and expertise developed by HMC in sugar and cement industries was not being utilised effectively and properly due to saturation in these sectors. Resultantly, it lagged behind in its core activity areas and could not keep pace with the technological developments around the world. Sadly, its product diversification plan could not be implemented due to lack of financial and marketing support from the government through its policy framework.
Still, HMC was able to develop collaborative arrangements with international companies to produce equipment for chemical, oil and gas and power sub-sectors, in line with market demand. Nonetheless, its role remained restricted to that of a sub-contractor and it failed to achieve higher value-addition, optimal indigenisation and sustainability in new areas.
The Complex is, therefore, in need of major re-structuring to make it once again a viable and healthy entity, of which the government appears to be fully conscious. Reportedly, it has been decided to approve proposals for upgrading its technology and machinery based on projected business plan, for which an allocation of one billion rupees has already been promised.
After the principle approval of the outline proposal is accorded, sometime by end January/early February 2007, the government is expected to engage independent engineering consultants to carry out detailed studies within three months, seeking administrative and technical approval of the recommendations for revival and restructuring of the company.
To ensure HMC's sustenance in the short-, medium- and long- term timeframe, it is essential that the government, without any loss of time, undertakes concrete major steps. In the first instance, the factors that led to its present deteriorating condition need to be identified and analysed. Detailed proposals then should be prepared and implemented based on past experience, on a fast-track basis, so as to avail the benefits of present favourable economic and investment climate in the country.
In this context, the first and foremost requirement is financial restructuring of the company. The company has earned profits for the last few years but not in a sustainable manner due to various internal and external factors. Again, its accumulated losses as on 30th June 2005 were Rs 2,776 million. Its liabilities are greater than the value of assets as a result of huge bank borrowings-long-term as well as short-term. The company, therefore, has negative equity since the last five years.
It is, therefore, imperative that the government picks up accumulated losses, takes over its current liabilities of the commercial banks on account of principal and mark-up, which amounts to about Rs 1,000 million, and injects cash in equity, making the Complex financially viable. This will not only reduce heavy burden of loans resulting in lower overheads, but will also help HMC secure much-needed working capital.
Second, a comprehensive and realistic business plan should be prepared projecting short-, medium- and long-term programmes. The plan should be based on market investigations and appraisals taking into consideration targets of the government for development of industrial, energy, mineral and infrastructure sectors. Likewise, to determine future pattern of demand for HMC products in the export market, a detailed study of industrial plans of friendly countries having export potential, has to be undertaken.
In the past, HMC has supplied and installed sugar mills and cement plants in Bangladesh and Indonesia and has also exported a host of other industrial products to various countries. In the wake of privatisation process, however, it could not retain its presence in the export market in subsequent years. It is now imperative that export growth should be the mainstay of the company in future.
Third, the depreciated plant machinery needs up-gradation, balancing and modernisation. The requirements of new machines for balancing the installed machinery will depend upon parameters of its projected business plan, thereby firming up the product range for coming years. The upgradation plan should have a focus on immediate refurbishment of the general-purpose machinery and material handling equipment, whereas the foundry section is in need of major overhauling and installation of modern instrumentation and controls.
The replacement and addition of other machines, such as heavy duty CNC (computer numerically controlled) machines, precision welding machines/positioners and material preparation equipment, will also be essentially required to manufacture new and diversified products. These machines should be selected considering their optimal utilisation and ensuring non-duplication.
Heavy Mechanical Complex consists of two major industrial units, HMC Mechanical Works, which was established in late 1960s, and HFF or Foundry & Forge Works, constructed in late 1970s. The two complementary units were set up with the Chinese economic and technical assistance. The integrated production facilities at HMC include fabrication, machining and assembly, steel, cast iron and non-ferrous foundry, forging, heat treatment, surface treatment, galvanising, woodworking, dies and tool room and other infrastructure, supported by comprehensive quality assurance and control systems.
The fact is that these production facilities have become outmoded and anachronistic, and thus plant capability is no more compatible. When installed in 1970s its plant machinery was well advanced to the level that even the engineering industrial units in China were not having comparable facilities. A typical example is that of a 3,000- tons capacity hydraulic press, which was especially designed by the Chinese for installation at HMC given that a hydraulic press of this large size was not available in China at that time.
Since then, however, no major investment has been made to replace and modernise the installed plant machinery, though rehabilitation of major machines was done at HMC on a regular basis under the supervision of the Chinese engineers.
A number of schemes were prepared meanwhile, but could not materialise due to lack of requisite support from the government. Only a few machines were added during 1980s from the Western sources, to augment its capabilities in the field of manufacturing of components for thermal power plant.
Fourth, technology acquisition and assimilation is of prime importance to HMC, which has been stagnant for quite sometime. The latest and state-of-the-art engineering and manufacturing technology related to various sectors has to be forthcoming from foreign sources, thus requiring, preferably, direct purchase of requisite technology under licensing arrangements.
This however will be a very expensive proposition and as such should be limited to a few products only. The other option is to promote technical co-operation, turnkey collaboration and consortium arrangements with selected technology partners with the premise of joint manufacturing.
The proposed arrangements can immensely help the company in regaining its lost export market and developing other potential avenues of sales and marketing. Many industrialised countries, like Germany, Sweden and Japan, extend financial grant to the developing countries, including Pakistan, for acquiring latest technology in selected areas of energy, industry and environment. It will be worthwhile to explore and avail such opportunities in the interest of HMC.
Finally, but in parallel, the government should review its existing investment policies that freely allow import of machinery and equipment which otherwise could be produced indigenously. Also, incentives to undertake import substitution need to be extended to the engineering industry with full support and patronage of the government.
Indeed, the government's approach to economic development, especially its industrial strategy, will establish policy parameters of the restructuring of HMC. Trends in major sectors greatly influence development of current and potential market for the capital goods, in general, and that of HMC products in particular. Historically, it is established that as long as HMC continued to receive the government policy support, it flourished, and when withdrawn, the company regressed.
The other gray areas of the company should also be addressed effectively and timely. For example, working methods and procedures need to be reviewed and placed on modern lines. At present there is a dearth of highly skilled engineers and technicians, mostly having left HMC as a result of implementing Voluntarily Separation Scheme (VSS) offered to the employees a number of times.
Introduction of market-based salary structure for engineers and managers will therefore help in retaining the qualified professionals on-roll, who currently suffer from uncertainty about future with a deep sense of despondence. At the same time, the role of labour unions at HMC should be controlled and minimised. It is of vital importance to allow more autonomy and flexibility to the management in the operational areas of human resources, marketing and foreign travelling for business.
It will prove to be an exercise in futility, in case a comprehensive and integrated restructuring plan for HMC is not formulated and implemented in its totality and on priority. This is the only way to turn-around the company and to meet the challenges of globalisation and free-market economy.
(The writer is former Chairman of State Engineering Corporation and Heavy Mechanical Complex.)
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