Was the Secretary Industries and Production in the Halloween mood when he informed the Senate Committee that the government proposed to revive the Steel Mills (PSM) by giving minority shares and management control to the private sector, "on the same pattern as PTCL"?
Was the peripatetic Secretary, who has been Secretary in-charge of close to a half dozen Ministries, deliberately playing the Shakespearean fool or did he really mean it? Surely he is familiar with the accountancy concept of a 'going concern'. Does he consider PSM to be a going concern? Or, does he have, consciously or not, some form of asset stripping in mind?
Can one really compare PSM's rigour mortis to the robust health that PTCL sported? The latter was a flourishing business at the time of its 'privatisation'; the former expired some time ago, except we steadfastly refuse to read its last rites.
The only thing in common between the two is real estate. In PTCL's case Etisalat is holding on to $800 million because some of the promised real estate has not been passed on to it. PSM sits on 19,000 acres, which, unsurprisingly, creates more than a passing interest among potential bidders.
To put the contrast into relief, consider in 2005 Etisalat acquired 26% of PTCL shares (and management control) at a bid price of $2.6 billion. A few months later, the government approved Arif Habib (AH) led consortium's bid of a paltry $ 348 million for 75% equity stake in PSM!
It bears reiteration, and believe it or not, at the time of AH consortium's bid PSM was a going concern. In 2004-05, it made a profit before tax of a little over Rs 10 billion, wiping out all the accumulated losses and ending up with a surplus of almost Rs 4 billion.
Also, the government agreed to pick up the tab for voluntary separation scheme (with a cap of Rs.15 billion). Additionally, there was stock in trade valued at Rs.10 billion, cash of Rs.8.6 billion, and GoP's commitment to refund advance tax of Rs.1 billion. All this alone (land or the four Thatta plants not included) adds up to more than AH consortium bid of Rs.21.68 billion!
We routinely vilify former Chief Justice Iftikhar Chaudhry for inflicting a huge loss on the exchequer by turning down government's acceptance of AH consortium's bid (as indeed we do in case of Reko Diq and Karakey). In the Supreme Court ruling on PSM privatisation we conveniently overlook the fact that the nine-member bench consisted of judges of great integrity and courage like Bhagwandas and Tassaduq Jilani, to name just a couple.
Also, the government was taking it seriously enough to have invested in the services of who-is-who of Pakistan's legal fraternity - Sharifuddin Pirzada, Hafeez Pirzada, Wasim Sajjad topping the list. Clearly, something big was at stake. Rumour has it former CJP Iftikhar Chaudhry's dismissal had a lot to do with the Supreme Court verdict in this case!
What happened following the bid cancellation is quite mysterious. By the time of the privatisation bid PSM had turned the corner, with high capacity utilization and a tidy profit stream. But it suddenly began to unravel. Was there something structurally wrong with PSM - its recent profitability more contrived than real - or was it 'allowed' to go down under?
It will not be terribly helpful to succumb to conjecture and conspiracy theories. The fact remains PSM is dead; of natural causes or poisoned is of little consequence. Can it now, Lazarus like, be raised from the dead is what matters.
While considering the revival prospects it may be equally relevant to reflect on should it be revived: what strategic national interests a functioning PSM would serve? It has been lying closed for the last five years or so. How did it make a difference to national interests? And if indeed there are strategic national interests involved are there no other, more cost-effective, solutions available?
PSM revival faces at least three significant hurdles: technical, managerial (HR issues), and financial.
PSM has a sub-economical size (1.1 million tons against a minimum economic size of 3 million); the technology is outdated and machinery and equipment in a sorry state of disrepair; it is heavily dependent on import of major raw materials (pig iron and coking coal - and getting the blends right is a tricky business).
At its peak PSM had a workforce of 27,900. Through attrition and other factors it has been reduced to around 11,000 now. The really serious issue is the almost complete depletion of the technically proficient workforce, mostly trained in the USSR. Where will the strategic partner get the mission-critical technical competence from?
PSM is now an insolvent enterprise. Employees don't get paid for months. No bank is willing to advance any money and Ministry of Finance doles out certain amounts with intervals of three months or more.
Towfiq Chinoy of International Steel estimates it will take around Rs 25 billion to get the machines moving again and to achieve the desired efficiencies.
In any event, Pakistan's steel industry has moved on. There has been a remarkable capacity expansion for both flat (for industrial use) and long products (for construction purposes).
Unlike the developed world where the demand for flat products far outstrips demand for long products Pakistan has an inverted pattern: only 39% of demand is for flat products.
PSM was envisaged to meet industrial demand of auto, defence, transportation, and white goods (appliances) sectors but because of the demand pattern its profitability depended on producing billets for the re-rolling mills.
The private sector seized on PSM's prolonged sickness to position itself for a large chunk of market share. Between Aisha Steel and International Steel, capacity for cold-rolled coils has gone up from 470,000 tons to 1,450,000; of galvanizing from 150,000 to 810,000 tons. In log products Mughal, Amreli, Majeed Steel and a host of others are poised to double their capacities for billets and bars, as will Crescent for pipes.
With an outdated uneconomical-sized unit that has serious manpower issues, requires a massive infusion of funds, and faces growing competition which private sector parties can the Secretary Industries 'trick' into buying a stake on the pattern of PTCL? The only thing that's likely to work is a 'treat'- giving it away virtually for free, land and all. [email protected]
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