Rs90bn investment limit set for Pakistan Steel buyer

ISLAMABAD: Estimating manpower rationalisation and its related costs at Rs51 billion, the government may set a minimum investment requirement of Rs90bn on top of bid price for sale of at least 51 per cent shares, along with management transfer of Pakistan Steel Mills (PSM).

A senior official of the Privatisation Commission told  that the privatisation board has discussed financial modelling of the proposed sale of the country’s largest industrial complex that has been a subject of corruption, mismanagement and inefficiency over the past decade. Its cumulative economic losses and liabilities are estimated to be more than Rs300bn.

The board would require further clarifications from the financial advisers and consultations with Finance Minister Ishaq Dar to finalise the ultimate model and transaction structure for the sale of PSM that has been on “zero production heat mode” since June 10 this year.

Officials said that the cost of Voluntary Separation Scheme for mandatory 33pc (about 6,000) employees layoff has been estimated at Rs16bn and would be borne by the federal government. On top of that, other liabilities have been put at about Rs35bn on account of provident fund, gratuity, compensated absence, arrears and accrued interests etc. for regular core manpower.

The company has a permanent staff of about 15,500 besides 1,500 temporary workforce.

The financial advisers have proposed that all liabilities should be settled against issuance of Pakistan Investment Bonds of equivalent value instead of taking a direct hit on federal budget.

An official said that since the botched privatisation in Musharraf’s era because of judicial intervention, the government had injected over Rs80bn in the company. Its losses stood at Rs19bn when the apex court ordered investigations into corruption during PPP tenure which have now gone beyond Rs150bn and its liabilities standing over Rs173bn.

The PC official said that the financial adviser — Pak-China Investment Bank — presented its privatisation model, recommending the government to set a minimum funding requirement of around $886 million for investment into PSM for revival and expansion of up to three million tonnes per annum capacity in three phases.

He said the new buyer would have to make a capital expenditure of $290m for repairs to take production level to 1.1m tonnes per annum (mtpa) in the first phase, followed by $300m for expansion to 2mtpa and $296m for expansion to 3mtpa.

After committing to this requirement, the bidders would then be required to bid on the purchase price for the acquisition of at least 51pc shareholding. The bidder with highest price offer is to be selected and given management control.

Officials said the financial advisers have recommended splitting the PSM and transfer all land and excess liabilities to the government through a new subsidiary company of the ministry of industries and production — the parent ministry of PSM.

Under this, core land of about 4,500 acres to be provided to privatised PSM under a 30-year rental agreement along with existing core infrastructure and plant comprising 20 units of concrete, earthworks, 330,000 tonnes of machinery, steel structures, electrical equipment, third largest unloading and conveyor system in the world and Asia’s one of the largest water reservoirs and 110MW power plant besides leasehold rights over two limestone and dolomite quarries in Makli and Jhimpir. In addition, there are also some major core operating units.

On the other hand, the government entity would take over 19,000 acres of land and non-core assets owned by the PSM including medical facilities, educational institutions, housing society, fruit farms, parks, commercial outlets and other such facilities along with workforce working there.

The government has also been asked to sell at least 51pc equity. This would protect the government by prorating any requirement fund contributions to finance required capital expenditure (capex) or initial working capital in future.

The only disadvantage of the 51pc share sale is that the government may not get a very high privatisation proceeds but the key advantage of this proposition would be minimum future costs, currently being provided again and again in the form of bailout packages and duty protections.

The advisers have put total assets of the company at Rs279bn as of March 31, 2015, of which Rs175bn belonged to the federal government and Rs104bn to the PSM. The total liabilities at Rs173bn include Rs134bn towards the federal government and Rs39bn on PSM.

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