PIA sell-off challenge: crash-landing was long in the making

Six months ago, the buzz in Islamabad was that foreign airline giants were lining up to acquire a seemingly beleaguered Pakistan International Airlines (PIA). The authorities, concerned at potential fallout, seemed preoccupied with deciding which bidder to favour without upsetting their other allies. The plan appeared to be soaring at a high altitude.

But reality soon brought it back to the ground.

Despite the initial optimism, no serious interest materialized from international players. Authorities then shifted focus to courting big local conglomerates, employing high-level persuasion and even bringing the Special Investment Facilitation Council (SIFC) into the fold. Initially, several local groups showed interest in forming consortiums and hiring consultants. Some were serious contenders and began exploring potential partnerships with budget airlines since no major global airline showed enthusiasm.

However, the deal’s underlying issues emerged as they scratched the surface. The “clean” version of PIA, separated from the holding company, still carried significant debt. Another stumbling block was the heavy taxation on air tickets, which consultants and potential partners flagged as a critical impediment. To boost tourism and passenger traffic, ticket prices needed to be reduced—something only achievable through tax rationalization.

Global airline turnaround stories, like India’s focus on improving revenue per available seat mile (RASM), highlight the importance of operational efficiency. Yet, the authorities in Pakistan remained resistant to change, maintaining a mindset that failed to accommodate these realities.

Other complications arose around the valuation of PIA’s assets. Real estate and landing routes were deemed overpriced, particularly the lucrative London route. Additionally, the government’s insistence on retaining board influence, offering only a limited percentage of shares for sale, and enforcing mandatory employee retention periods discouraged potential buyers. Civil aviation-related regulatory issues further muddied the waters.

Despite these challenges, two local groups conducted themselves as serious contenders. With strong balance sheets and a willingness to invest, they pushed ahead. However, coercive negotiations with independent power producers (IPPs) introduced a new friction. One potential buyer, owning an IPP, demanded similar legal protections afforded to Reko Diq. When this was denied, they withdrew.

In the end, only one party—a relatively obscure real estate player with no prior airline experience—submitted a bid. This raised eyebrows, as the other shortlisted groups had established expertise or substantial balance sheets to back their ventures. Questions about how this sole bidder was shortlisted remain unanswered.

Ultimately, the privatization effort failed spectacularly. Whether due to government pretense or sheer incompetence, the outcome has sent a disheartening signal. For decades, privatization has been a talking point, and this was the first time it progressed to an advanced stage—only to collapse.

The fiasco isn’t limited to PIA. A similar case involves an RLNG energy infrastructure project with a long-term government contract. A foreign buyer, initially interested, withdrew after the IPP negotiations fiasco made headlines internationally. Concerns about the country’s risk and contract sanctity prompted a reevaluation.

Last but not least, noted economist Douglass North had famously said that “The inability of societies to develop effective, low-cost enforcement of contracts is the most important source of historical stagnation and contemporary underdevelopment.”

These failures cast doubt on the feasibility of privatizing other state-owned entities, especially in the energy sector. While there’s talk of privatizing distribution companies (DISCOs) within a month, the outcome could mirror PIA’s crash-landing.

Copyright Business Recorder, 2024