The divestment of Pakistan Steel Mills Corporation, commonly known as Pakistan Steel Karachi, has exposed the government to sharp criticism. The giant integrated steel-making complex - a profit making state enterprise - has been sold at a throwaway price of $362 million, or about Rs 22 billion, compared to its assets worth about $5 billion.
The government has failed to give any convincing argument in support of the hasty decision it took to sell off the complex at such a low price, which was earlier indicated by the Privatisation Commission (PC) itself to fetch three billion dollars.
Interestingly, the highest bid received for the Pak-American Fertiliser at Iskanderabad was of about Rs 20 billion, but the Pakistani investor withdrew his offer after learning that Pakistan Steel was being sold almost at the same price. The fertiliser factory, located in a remote area, was established in 1959 and revamped recently, and has no comparison whatsoever with Pakistan Steel. Likewise, the Karachi Electric Supply Co (KESC) was divested at Rs 20.24 billion. The new buyers have already paid the due 25% payment and consequently, have signed the agreement, on April 24, for the transfer of its strategic 75 percent shares along with the management.
To have a better understanding of the deal - that has now turned into a major scandal - first look at the privatisation process. In response to the Expression of Interest (EoI) issued by the PC, in all 19 foreign and domestic companies showed their interest in the proposal, by the due date, October 8, 2005, incidentally observed in Pakistan as the Black Monday due to the horrific earthquake.
Out of these, only 13 submitted the Request for Statement of Qualification (RSoD), which included investors from Kuwait, UAE, Switzerland, China and the Czech, besides the winning consortium from Saudi Arabia and Russia. Finally, the PC pre-qualified six companies for bidding, which was re-scheduled many times. In a belated move, however, these pre-qualified companies formed two consortia to participate in the bidding. This was against all ethics, norms and procedures and should not have been allowed by the PC in the first instance. The rumours are that the two consortia formed a cartel and manipulated the bidding. Thus the consortium of Tuwairqi Steel Mills of Saudi Arabia, Magnitogorsk Iron and Steel Works of Russia and Arif Habib Securities of Pakistan won the bid for Pakistan Steel.
The question is why the PC allowed this arrangement that restricted competition and was in violation of rules and regulations?
Furthermore, the PC had the option to offer 51 to 75 percent shares, as indicated in the Expression of Interest notice. Why then did it offer optimum shares to the winning consortium? In fact, the foundation for taking over Pakistan Steel by the new owners was laid sometime last year when Al-Tuwairqi were allowed to set up a new steel mill adjacent to Bin Qasim premises of Pakistan Steel. Their subsequent intensive lobbying proved to be fruitful.
In July 2005, they managed to sponsor a "workshop on investment opportunities in the Steel Sector of Pakistan" held in Islamabad, and thus availed the forum fully for giving wide publicity to the Group. Sometime in November last, Magnitogorsk Iron and Steel Works of Russia released a quarter-page advertisement in the national business newspapers claiming they were the most qualified technology partners to Pakistan Steel.
One wonders how the government allowed this kind of lobbying? Al-Tuwairqi are setting up a plant on 220-acres, for producing steel billets from scrap, located at Bin Qasim, with a total project cost of $300 million. There is, of course, no comparison of the assets and facilities of the two units currently dubbed having almost a similar investment cost. Al-Tuwairqi were given special incentives.
In January this year, the Central Board of Revenue declared Al-Tuwairqi project an Export Processing Zone, thus extending all incentives and facilities, but exempting it from the mandatory condition of 80% exports of total products. It is reported that Pakistan Steel covers an area of 4,545 acres that would be transferred to the new owners, and not the total 18,660 acres owned by the government. That is not factual.
The company documents reflect that the complex is, at present, spread over an area of 10,390 acres and the other 8,270 acres were reserved for future expansion. The core plant facilities, consisting of a sinter plant, iron-making plant, steel-making plant, billet mill, hot strip mill, cold rolling mill, galvanising unit, refractories plant and oxygen plant cover an area of 4,545 acres.
The non-core activities, like unloading facilities for imported bulk material, raw material handling facilities, coal handling plant, by-products plant and allied equipment, industrial water network and other services are located in the remaining area of 5,845 acres. (The water reservoir of 110 million-gallon capacity covers an area of 200 acres).
What would be status of the remaining land, on which these auxiliary services and ancillary facilities exist, one may ask? Will the government manage and maintain the vast area at its own expense to provide services to Pakistan Steel, or will it sell off later the additional land to the same group clandestinely? Likewise, its leasehold rights of 7,520 acres for quarries of limestone and dolomite in District Thatta (Makli and Jhampir) are of great value and, apparently, have not been accounted for.
Again, not many of us know that the current assets of Pakistan Steel also include besides the real estates in the residential and commercial centres of Islamabad and Lahore, those of another estate enterprise namely the Spinning Machinery Company at Lahore. The factory, which was a going concern when acquired by Pakistan Steel in 2002, is located in the prime industrial area of Kot Lakhpat. What will be the status of this factory and who owns it? It is said that Pakistan Steel's technology being obsolete, its divestment to the private sector was not attractive. If this was the situation, how could as many as 13 companies, mostly foreign key players in the steel business be interested in the deal?
It may be recalled that the government of Pakistan, in January 1998, had decided to enter into a joint venture agreement with the Chinese for the up-gradation, expansion and management of Pakistan Steel. A draft agreement was concluded between the two sides, according to which, the Chinese had agreed to become joint venture partner in Pakistan Steel, with an equity participation in the existing complex and also the 3-million tonne production expansion scheme. The agreement however was not signed. The offer was repeatedly extended by the Chinese, again in March 2003, to the then Minister for Industries and Production Liaqat Jatoi.
The steel process technologies adopted the world over are (i) open-hearth furnace, (ii) blast furnace (BF)/basic oxygen furnace (BOF) and (iii) electric arc furnace based on steel scrap. Pakistan Steel employs the most common steel-making technology-BF/BOF, as the world's maximum production of steel is through this process. The other technologies, employed in the coke oven, raw material preparation, billet mill, hot strip mill and cold rolling mill are basically the same as being practised throughout the world. The fact is that Pakistan Steel is a well-maintained plant. For the last four years or so Pakistan Steel had implemented, besides the capital repair work, the BMR programme, which included modifications, additions and revamping of different sections of hot strip mills and cold rolling mills, and adjustments at the billet mill.
IN ORDER TO GET A COMPLETE PICTURE OF THE DUBIOUS DEAL LOOK AT THESE ADDITIONAL FACTS:
-- Secretary Privatisation Tehsin Khan Iqbal was transferred, unceremoniously, on the second day of accepting the bid.
-- The contents and data related to Pakistan Steel has been removed from all website including www.paksteel.com.pk and www.privatisation.pk.
-- Within a week of acceptance of the bid, Pakistan Steel increased the prices of its various products, by about 5%.
-- Magnitogorsk Iron and Steel Works, a state-owned enterprise in Russia, are in bad financial health and enjoy a negative rating by the international rating agencies, even on finalising the Pakistan Steel deal.
-- Employees of Pakistan Steel have been offered the most attractive Voluntary Separation Scheme (VSS) package ever, that is 1:4 salary for its 15,000 employees, which would cost the government, or the exchequer, Rs 15.75 billion.
-- It is reported that Pakistan Steel carried an inventory of finished goods, spares and stores valuing Rs 12 billion, that of raw material Rs 7 billion and cash balance in the bank was Rs 7 billion.
-- The government has picked up the loan liabilities, including that of Rs 700 million annual interest, till the year 2013.
-- The Central Board of Revenue (CBR) has waived off outstanding tax liabilities of Pakistan Steel.
In a nutshell, the government has presented the Pakistan Steel complex to its new owners practically as a gift.