Ministry of Privatisation has started work on comprehensive restructuring plan of Pakistan International Airlines Corporation Limited (PIACL) in consultation with concerned stakeholders, sources close to Minister for Privatisation told Business Recorder.
Daniyal Aziz, Minister for Privatisation, sources said, has held a number of meetings to expedite the restructuring process, feeling that the term of incumbent government is about the end in the next few months.
Prime Minister, Shahid Khaqan Abbasi, sources said, while acknowledging that this is not going to be a standard transaction and therefore must be kept simple, has stated that the process of proposed restructuring plan (phase-I) of PIACL could start and a detailed plan to privatize it can be submitted to CCoP for consideration.
Giving the details, sources said, Minister for Privatization gave a presentation on the proposed restructuring of PPIACL. While giving the background, he informed the meeting that the CCOP had approved the Privatization program in October, 2013, which included restructuring of PIACL, followed by divestment of GoP equity stakes to a strategic partner with management control (Transaction).
In October 2014, the Privatization Commission appointed a consortium of M/s Dubai Islamic Bank, IATA Consulting, Deloitte, Haidermota BNR, Fresh fields Bruckhaus Derringer, Abacus Consulting, APCO, and Prestige (Financial Advisors) for the transaction. The proposed transaction was envisaged to be carried out in two phases: (i) phase-I formulation of restructuring and divestment strategy and its implementation, and (ii) phase-II - facilitating private sector partnership in the core operations of PIAC leading to successful closure of the transaction.
In August 2015, after a comprehensive due diligence exercise of PIAC, the financial advisors recommended the conversion of PIAC, a statutory corporation functioning under the PIAC Act, 1956, into a public limited company under the then Companies Ordinance, 1984.
Minister for Privatization further revealed that after due legislative process, the joint session of the Parliament unanimously passed the PIAC (Conversion) Act 2016, whereby, the PIAC stood converted into a public limited company, namely PIACL. An amendment was incorporated in the said Act by the Parliament, which restricts the federal government from transferring management control in the airline business of PIACL while retaining at least 51% shares in the entity.
Further, in order to facilitate the envisaged segregation of core and non-core business segments of PIACL, section 4 (Powers to pass orders for the transfer of assets) was made a part of the PIAC (Conversion) Act, whereby the federal government may issue orders which provide for the transfer of specified assets to a relevant entity substantially on the terms set forth in the relevant arrangement, during a stipulated period of two years, defined as validity period, from the date of promulgation of the Act, due to expire in April 2018. Such orders shall be binding on the company, the relevant entity and any other person having any right, claim or liability in relation to the company or any relevant entity. Valuation of assets of PIACL, and its subsidiaries carrying on air transport business is to be carried out prior to transfer of any shares to a third party.
Daniyal Aziz apprised the meeting that in July 2016 the CCoP directed Privatization Commission to continue to proceed and finalize the segregation of core and non-core business segments of PIACL, in consultation with, and assistance of the Aviation Division and PIACL Privatization Commission, Aviation Division, PIACL and Financial Advisors agreed on carving out of non-essential business segments of PIACL, including hotels, real estate, precision engineering and legacy financing (including debt like liabilities).
According to sources, Privatisation Minister further stated that the Financial Advisors submitted a draft restructuring and implementation plan, which envisaged three options/modes to implement the proposed segregation. The mode, which was in accordance with the PIAC (Conversion) Act was considered to be the preferred mode as it entails transferring of identified non-essential assets to an entity owned and controlled by the federal government, by exercising provisions of section 4 of the said Act, which empowers the federal government to issue a statutory notification on the request of PIACL during the validity period expiring on second anniversary of the promulgation of the Act, ie April 2018. However, comfort and agreements by the federal government may be required for transfer of the identified non-core liabilities of PIACL to such federal government owned and controlled entity.
He stated that shares of the new company would be issued to all existing shareholders of PIACL in the same proportion. Precision Engineering Complex (PEC), PIA-IL, Real Estate (RE) would be transferred through statutory orders, under section 4 of the PIAC (Conversion) Act. Comfort and agreements by the federal government may be required for transfer of the identified non-core liabilities of PIACL to a relevant entity.
According to the Minister, the opinion of the Ministry of Law & Justice regarding classification of assets and liabilities contemplated under section 4 of the PIAC (Conversion) Act was as follows: "based on the relevant provisions of the Act, it transpires that the orders to be issued by the federal government contemplated by sub-section (1) of section 4 providing for the transfer of specified assets to the relevant entity shall be subject to the terms and conditions set forth in the relevant arrangement between the company and the relevant entity and, therefore, may include liabilities and such other terms as may be agreed upon by the parties to carry out purposes and give effect to provisions of the Act."
Privatization Commission Board on November 2, 2017 had recommended that sub section 4 of section 4 of the PIAC (Conversion) Act, 2016 may be amended for privatization of PIACL. However, it may not be attainable. He stated that Financial Advisors have prepared a draft scheme of arrangements, for transfer of specified assets into a new entity, and draft memorandum of association and draft articles of association for incorporation of new entity PIACL and Aviation Division to effect the segregation of core and non core business segments of PIACL. He further stated that since financial advisory services agreement had expired on October 3, 2017, therefore, Privatization Commission will have to undertake necessary actions to re-engage the services of Financial Advisors to proceed further with the privatization of PIACL.
Minister for Privatization submitted the following proposals for consideration of the Cabinet Committee on Privatization (CCoP on February 16, 2018): (i) transmission of scheme of arrangements/ order of PIACL, pursuant to section 4 of the PIAC (Conversion) Act may be completed within 3 weeks; (ii) the request by PIACL to federal government in accordance with section 4 of the PIAC (Conversion) Act may be issued, within 4 weeks; (iii) valuation of assets pertaining to airline business of PIACL may be carried out pursuant to sub-section 5 of section 4 of the PIAC (Conversion) Act within six weeks; (iv) advertisement seeking expression of interest from private sector partners/ investors for minority shareholding in PIACL to be issued within three months; (v) shareholders agreement may be executed to outline method to exercise management control by federal government, in line with best international practices; and (vi) PC may re-engage the services of financial advisors under same terms and conditions.
During ensuring discussion, following observations were made: (i) proposed restructuring plan for PIACL was very important, however, in view of the prevailing scenario of the PIAC, the confidence level of prospective investors towards this initiative has not been found very high. Further, proposed restructuring would require considerable time to materialize; (ii) present government has not enough time to complete proposed restructuring plan of this corporation. At this critical juncture when the term of present government is approaching completion, the proposal warrants a careful consideration; (iii) segregation of core and non-core business segments of PIACL was a good proposal. It was proposed to adopt the process of conversion, as a first step, towards transfer of assets. It was not advisable to support transfer of management control of airline business with 49% shares to a third party. Regarding re-engagement of the services of financial advisors, it was suggested to convene a meeting to discuss the matter in detail; and (iv) PIAC (Conversion) Act, 2016 was passed by the Joint Session of the Parliament unanimously in 2016. However, further action regarding its implementation has not been taken even after lapse of two years.
The sources said, Aviation Division assured to give a detailed evaluation of each asset of PIAC, its liabilities and revenue after working it out in consultation with stakeholders and will be presented to the forum shortly. It was asserted that further deterioration of PIAC was not affordable at all.
Some of the cabinet members argued that due diligence would be required to make the process of proposed restructuring plan transparent with realistic timelines. A detailed consultation would be required with PIAC for the said plan.
Prime Minister observed that PIAC has not remained a profitable organization as it has been generating immense losses since long which was not affordable for any government. This warrants remedial measures to stop further deterioration of a government entity; otherwise it will continue accumulating financial burden on public exchequer. He observed that PIAC was included in the privatization list of government entities in 2013. However, little has been done in this regard. He added that PIAC was not a positive asset company. Its management should be transferred after segregating assets & liabilities from the core aviation operation that will form an independent operating company, so that the new management gets a clean company.
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