Khalid Anwar, counsel representing the winning consortium in the Pakistan Steels Mills (PSM) bid, is reported to have stated "the (PSM) mills privatisation was the biggest single direct foreign investment in the history of Pakistan.
"This statement is erroneous on two counts, firstly because the sale of 26% shares in PTCL was about seven times larger in monetary terms and secondly, and this is an important distinction, because the PSM transaction (or those of Etisalat and Habib Bank) cannot be classified as "foreign direct investment," which term implies a net inflow of foreign capital for the purpose of creating new assets and jobs.
On the contrary, the privatisation of Pakistan Steel Mills, and other major organisations, involves purchase of part ownership of running State enterprises; moreover, the transactions are marked not by the creation but by the retrenchment, at public expense, of thousands of jobs as a condition of the investors' purchase.
Speaking to the Press on June 4, Dr Salman Shah, Advisor on Finance to the Prime Minister, informed the Press that "our privatisation programme is one of the best in the world and...the Supreme Court's review of Pakistan Steel Mills sell-off case would vindicate the Privatisation Commission's decision."
Without going into comparisons of Pakistan's privatisation programme with that of other countries, it may be useful to examine the PSM transaction in the context of the management buy-out of two other profitable organisations viz. PTCL and Habib Bank, both of which also aroused controversy, but for different reasons.
In the case of PTCL, the problem arose because the bid price was too high. Etisalat had clearly made an overbid, its offer of $2.6 billion for a 26% stake being more than the combined sum of the next two highest offers. However, instead of walking away from a losing deal, Etisalat chose to make the next required payment of $220 million, and demanded renegotiation, placing the Privatisation Commission under enormous public pressure to forfeit Etisalat's advance rather than change the sale terms.
This placed the Government of Pakistan in an awkward position. Forfeiting the deposit and going to the next highest bidders would have resulted in an immediate reduction of a billion dollar in the value of the PTCL stake.
Forfeiture of a quarter billion dollar would also have affected relations with the friendly government of UAE (owners of Etisalat), which had sacked the company Chairman, relevant managers and financial advisors responsible for calculating the offer, but had signalled it would not like to be seen to default on its commitment.
Consequently, despite facing a barrage of criticism, the Government of Pakistan chose, quite correctly, to renegotiate with Etisalat, making to this company several commercial concessions, including extended payment terms, but preserving the value of the bid and thereby getting the best possible price for handing over management of this profitable State enterprise. There can be no dispute with such a transaction.
The privatisation of Habib Bank, on the other hand, created an outcry, not without foundation, that the deal was heavily loaded in favour of the buyers. It may be recalled that the public exchequer had expended Rs 18 billion to "clean up the balance sheet" and Rs 9 billion for staff severance, ie a total of Rs 27 billion, in order to receive Rs 22 billion as the price for selling a 51% stake in Habib Bank to the Aga Khan Foundation.
Such a transaction did not appear to make good economic sense, particularly when the bank had become profitable and the same management that had made it profitable was to continue in place. The revelation that last year the government conceded a tax rebate of Rs 9.8 billion to Habib Bank only adds to the suspicions about the original transaction. Because this refund pertains to loan write-offs that took place before privatisation, it means, in effect, that the Aga Khan Foundation benefits from a discount of Rs 4.9 billion on its purchase price. If this was part of the original agreement, it was not revealed at the time.
Interestingly, apart from the controversy regarding the sale price, the Habib Bank transaction has two other similarities with the Pakistan Steel Mills deal. The auctions for both entities involved only two bidders, each coincidentally offering a bid marginally over the reference price, thereby precluding cancellation of the auction.
Secondly, in both cases the entire process of accepting the bids, obtaining approval from the Cabinet Committee on Privatisation and issuing the Letters of Approval, were completed within 48 hours of the bidding.
In the PSM transaction, it would appear that the principal issue agitating the public mind is the valuation of the Mills' land and it remains unclear, from the published record or from the statements of the battery of former Law Ministers defending the transaction, what specific value has been attached to the 4,500 acres (out of the 10,500 acres on which the Mill is situated) reportedly transferred with the Mill.
According to Wasim Sajjad, the Saudi Al-Tuwairqi Group were recently allocated 220 acres, adjacent to PSM, for construction of a new steel plant and that this land was valued at Rs 245 per yard (Rs 1.1858 million per acre) as down payment, ie Rs 260.97 million up front; and Rs 250 per yard (Rs 1.21 million per acre) as annual lease, ie Rs 266.20 million per year for 60 years.
Since the PSM land is fully developed, with more than a 100 km of metalled roads and 80 km of rail tracks, it would obviously have a higher valuation. But using the Al-Tuwairqi allocation as a basis, the 4500 acres of PSM land can be calculated at a minimum of Rs 5.336 billion as down payment; whether any ground rent has been applied is not known.
It is also not clear from the available record whether in the Al-Tuwairqi allocation any penalties are payable to the government for loss of ground rent/opportunity cost if the investors decide to close down their operations for any legitimate reasons. This is an important price consideration when the value receivable is on a deferred basis.
The aspect of land value is seen, unfortunately, to generate much controversy in the PSM transaction, and some of it may be quite unwarranted. While there is no doubt that the cost of industrial land in and around Pakistan's major urban areas is much higher than the price asked from Al-Tuwairqi for their new project, it should be realised that those are speculative prices that render unfeasible genuine industrial enterprise.
In most other countries industrial land is provided at extremely attractive rates, sometimes free of cost, in order to attract investment, foreign and domestic, and the creation of jobs.
This fact has been recognised at the highest levels, President Musharraf chairing a meeting on February 28 this year to analyse a Board of Investment report on why $55 billion worth of investment offers, made over several years, could not materialise. One of the factors stated to be a major deterrent was the high price of industrial land and it is reported that the President issued instructions for this issue to be resolved on a fast track, within one month of the meeting.
This prompt action enabled the new Al-Tuwairqi Steel Plant, which is a major industrial investment, to come to fruition, with the investor saving on capital costs in gaining possession of the land and the government gaining by ultimately receiving, more accurately a promise of receiving, over Rs 15 billion as ground rent.
Of course, the management buy-out of PSM does not fall into the category of a new foreign direct investment so it is quite logical that concessionary terms for land do not apply to this case.
Perhaps the Privatisation Commission assumed that pricing the land at the prevailing market rates may have resulted in the project becoming attractive only as a real estate proposition, which of course was not the intention of the government.
This leads to the question of why, with no cash gain in the transaction, and the entity itself being profitable, the government should allow a management take-over of PSM at this point in time; the tremendous social cost of retrenching thousands of persons should have been a deterrent in itself.
Surely, the Steel Mills is capable, on the strength of its balance sheet, market monopoly and management of raising, through debt or equity, the funds required for upgrading its capability and capacity.
Besides, with Al-Tuwairqi having already been sanctioned a major steel project, the prudent course would have been to observe their management performance in that venture before handing over to this major national enterprise.
Despite what Dr Salman Shah says, it is difficult to see any logic in the government's privatisation plan. It continues to retain unprofitable and overstaffed entities such as PIA and WAPDA which are costing more than a hundred billion rupees annually in subsidy.
It continues to retain profitable, but overstaffed, entities such as Pakistan State Oil, National Bank and OGDCL which can fetch decidedly better prices. Under the circumstances, the pertinent question in the case of entities such as Habib Bank and PSM is not the value at which they were sold but whether they should been sold at all.