Caretaker Prime Minister Mir Hazar Khan Khoso will preside over the third meeting on Wednesday (today) on another Pakistan Steel Mills (PSM) bailout package, including the immediate release of Rs 11 billion for the Mills' revival. PSM has requested to be allowed not to deposit sales proceeds in the National Bank of Pakistan (NBP).
Official documents obtained from PSM show that the Mills suffered massive losses of Rs 72 billion (approx.) from the year 2008-9 to 2011-12. The Government extended support and provided bailout package(s) of Rs 40.5 billion to PSM during last four years for its revival. The last bailout package of Rs 14.6 billion (paid in four quarterly instalments) included Rs 4.75 billion for payment of mark-up on loan and Rs 6.75 billion for payment of defaulted L/C and other liabilities thus leaving a very meager amount of Rs 3.1 billion as working capital for raw material(s).
According to the PSM all previous bailout packages could not produce the desired results due to their piecemeal disbursement, clearance of old liabilities, and non injection of equity leaving a very little amount for procurement of raw material(s). .However, PSM has now requested for Rs 11 billion in one go to achieve the following: (i) Capacity Utilisation (CAPU) will be increased in phases from 15/20 percent to 80 percent up to June 30, 2014; (ii) operating loss will be reduced from Rs 1.7 billion average per month to Rs 0.2 billion per month by December 2013 on attainment of 70 percent CAPU. Operating loss will be reduced from Rs 17.8 billion (for the year 2011-12) to Rs 4.2 billion in 2013-14; (iii) personnel related cost will be fully paid during the period July-June, 2014; and (iv) cash flow statement covering the period between May 2013 and June 2014 indicates that the cash requirement for the year 2013-14, keeping in view the above projections, will be Rs 13.6 billion.
It is proposed that Rs 11 billion may be provided whereas short fall/deficit of Rs 2.6 billion will be raised/arranged by the Corporation from its internal resources. These figures are exclusive of Rs 5 billion required to pay the mark-up on previous loans obtained from NBP. In view of critical financial position of PSM, the projections are subject to the following, support from the government, which can facilitate the revival process effectively.
IMMEDIATE REQUIREMENT Provision of Rs 11 billion immediately as working capital required for purchase of raw material(s) to enhance the capacity utilisation and avoid closure of the Mill. The prior option is as equity whereas second option is as loan which is explained in the following way: (i) subordinated loan operated through Escrow Account against the funds to be immediately provided by GoP.
It is proposed by PSM that instead of forming a banks consortium by including HBL, and UBL, NBP should be asked to provide Rs 11 billion as working capital;(ii) however, the sale proceeds will not be deposited in NBP as PSM has to pay expenditure other than material such as salaries benefits, plant maintenance, payments of utilities, imprest and immediate unavoidable payments could only be paid from the surplus after retaining the working capital requirement when PSM attains 75 percent Capacity Utilisation; (iii) as agreed by MoP that Finance Division will ensure that Letters of Credit are opened timely so there is no disruption in production cycle. The existing L/C facility of Rs 3 billion has been enhanced by the Ministry of Finance to Rs 6 billion and the ministry of finance must instruct NBP immediately to open the additional financial facility of Rs 3 billion to allow smooth and increased flow of raw material(s); (iv) PSM has already made payment of Rs 3.5 billion against total amount of subordinated (Loan No 2 from consortium of five banks led by HBL amounting to Rs 7.767 billion) in 2007 ahead of schedule leaving a balance of Rs 4.2 billion. This should be considered as three instalments paid between June 2013 and June 2015. The instalment of balance subordinated Loan No 2 (Rs 4.2 billion) is due in June this year may be deferred for next three years with the service of mark-up by GOP as per agreed schedule. The payment of principal amount of instalment may be started from June 2016. Otherwise, PSM is likely to default on this account; (iv) current liability of SSGC is Rs 13.8 billion inclusive of surcharge amount of Rs 4.2 billion (approx).
The waiver of current surcharge amount and amount likely to accrue up to March 2014 may be approved, as an identical decision for waiver of surcharge liability of SSGC was taken in the Cabinet meeting dated April 25 this year. The PSM will make payments of running bills through its own cash flows. However, the past overdue amounts excluding the surcharge will be restructured and converted into instalments payable in 10 years starting from March next year; and (v) outstanding Loans of 36.5 billion from NBP will be converted to around 8 percent preference shares with a view to reduce cost, create fiscal space and de-leverage the balance sheet to allow other financial institutions to participate in PSM restructuring. Finance Division will facilitate in resolving taxation and other related issues to achieve this objective. The revival plan was placed in the PSM Board Meeting held on May 6 this year in Islamabad and the board resolved to request the Government to release the funds in one go, immediately to revive the Steel Mills. The sources said that some of the Board members, especially the Secretary Privatisation and the representative of Finance Ministry, raised queries over the new bailout package.