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Pakistan Steel Mills Corporation

28 December, 2012

ISLAMABAD: The Privatisation Commission (PC) has approved withdrawal of the review petition filed against the Supreme Court's judgement, which annulled the privatisation of Pakistan Steel Mills Corporation (PSMC).

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ISLAMABAD: The Privatisation Commission (PC) has approved withdrawal of the review petition filed against the Supreme Court's judgement, which annulled the privatisation of Pakistan Steel Mills Corporation (PSMC).

Prayer was made in the review petition to correct various errors of fact and law along with numerous observations made in the judgement which if left unexamined and uncorrected were liable to affect the entire process of privatisation, the continuous bleeding of scarce fiscal resources of the federal government in revitalising PSMC demands re-assessment of the present status quo of privatisation of PSMC.

Realising the above, the PC board in its meeting held on October 5, 2012 after thorough deliberation consented to the withdrawal of the said review petition after soliciting consent of the co-petitioners and Law Division. The PC board also directed that Supreme Court be apprised of the compelling reasons for its withdrawal. Accordingly, the co-petitioners have been requested to provide their consent in this regard before forwarding a reference to the Law Division.

According to the PC, PSMC was incorporated as a private limited company and commenced its production in 1985. PSMC has designed capacity of 1.1 metric tonnes per annum to manufacture standard grade of steel and can cater to about 20 percent of country's demand if operated on 100 percent capacity utilisation. Owing to inefficiencies, in management, overstating and outdated technology, PSMC continued to operate below economical capacity and never posted profits except during years 2001-2007 and declared dividend of Rs 1 billion in year 2007 alone, primarily due to surge in international steel prices.

In accordance with prescribed rules and regulations framed under PC Ordinance 2000, the process for the privatisation of PSMC was processed in 2005-06 and appointment of financial adviser (FA) was made. EoI for privatisation of PSMC was advertised in August 2005. Nineteen EoIs were received; 13 parties' submitted pre-qualification documents and nine parties were pre-qualified after due process. In accordance with the rules, standard practice followed by PC in the past and the instructions notified in advance bidding was held on March 31, 2006. Consortium of Al-Tawariqi Group (Saudi Arabia), Magnitogorsk Iron and Steel (Russia) and Arif Habib Group (Pakistan) gave the highest bid of Rs 16.80 per share (totaling Rs 21.68 billion or $362 million) to acquire 75 percent shares along with management control against reference price of Rs 16.18 per share (totaling $348 million). The aforesaid bid was admitted and Letter of Acceptance (LoA) was issued to the successful bidder and the requisite Share Purchase Agreement (SPA) was signed on April 24, 2006.

Subsequent to the signing of SPA, privatisation of PSMC was challenged in Sindh High Court, Karachi and the Supreme Court. Thereupon, the Supreme Court vide its short order dated June 23, 2006 declared the LoA dated March 31, 2006 and the SPA dated April 24, 2006 as void and of no legal effect. The Supreme Court held, “The process of privatisation of PSMC stands vitiated by acts of omission and commission on the part of certain state functionaries reflecting violation of mandatory provisions of law and the rules framed there under which adversely affected the decisions qua pre-qualification of a member of the successful consortium (Arif Habib), valuation of the project and the final terms offered to the successful consortium which were not in accord with the initial public offering given through the advertisement. For the foregoing reasons, the LoA dated March 31, 2006 and the SPA dated April 24, 2006 as void and of no legal effect.”

The detailed judgement was released on August 8, 2006 and the review petition was filed for the review of the earlier judgement of Supreme Court on June 23, 2006 and August 8, 2006. Although said review petition was admitted for hearing however it remains pending adjudication since 2006.

In the ensuing years, PSMC suffered huge losses to the tune of Rs 26.5 billion for the year ending June 30, 2009 followed by loss of Rs 11.5 billion and Rs 11.4 billion in the year ended June 30, 2010 and 2011 and still continues to bleed. These losses were mainly due to inadequate and inconsistent supplies of raw materials owing to non-availability of funds translating into lower capacity utilisation, which ultimately led PSMC to the severe liquidity crunch. To encounter the aforesaid financial conditions, PSMC utilised its cash reserves of Rs 9 billion and Rs 8 billion of employees' funds.

In 2009, the government constituted Cabinet Committee on Restructuring (CCoR), which inter alia focused, reviewed and recommended financial and administrative restructuring of PSMC. PSMC with negative equity in the year 2008-09 requested the federal government in May 2009 for Rs 10 billion as capital injection in addition to facilitate it in the provision of bank loans amounting Rs 10 billion to restore its raw materials stock and be able to maintain its production capacity. The government of Pakistan did not inject capital however approved a bailout package of Rs 10 billion, comprising Rs 8 billion term loan and Rs 2 billion as running finance, through consortium of banks. The aforesaid financial assistance was utilised in adjustments of the outstanding L/Cs by the banks (Rs 6.5 billion) and PSMC was left with in sufficient amount of Rs 3.5 billion for fresh L/C to improve the raw material stocks. Again in the year 2009-10, PSMC demanded approximately Rs 25 billion whereas the government of Pakistan allowed Rs 10.6 billion only which were adjusted against the outstanding L/Cs (Rs 5.1 billion) leaving Rs 5.4 billion for the fresh L/Cs for the procurement of raw materials and hence there was no turnaround in the affairs of PSMC.

Besides aforesaid bailouts and financial assistance other initiatives and reforms plans for the rehabilitation of PSMC undertaken by both Ministry of Production and Finance Division (Economic Reform Unit) under the guidance of CcoR like indigenisation of raw materials, appointment of new independent board of directors, separation of the offices of the chairman and CEO, revaluation of fixed assets, initiating the revival of MoU with the Russian company including technical audit of the PSMC for capacity expansion up to 1.5 metric tonnes per annum, organisational restructuring including hiring of professionals etc could not bring the desired outcome and yet revival of PSMC is far off. The operational and financial conditions of PSMC continued to deteriorate and recently its production has dipped below 15 percent capacity, well below the break-even of 75 percent to 80 percent of production capacity, thus causing an estimated financial hameoraging of Rs 1.6 billion per month. Accumulated losses of the company have crossed the mark of Rs 56 billion (March 31, 2012), negative equity of Rs 23 billion, outstanding liabilities increased to Rs 67 billion (March 31, 2012), deficit in gratuity funds plan assets of Rs 6 billion and outstanding contribution of Rs 3 billion to employees provident fund trust and additional adverse impact of Rs 1 billion per annum on account of regularisation of over 5,000 employees in FY 2010.

Despite the administrative and financial efforts made under the CCoR revival of PSMC is yet far away as PSMC management is finding it extremely difficult to adhere to its proposed business plan(s) primarily due to the insufficient and untimely release of the requisite funds. Notwithstanding the aforesaid bleak financial and administrative conditions, PSMC contains the potential to be revived subject to provision of sufficient funds; competent professional management; independent and entrepreneurial decision-making etc. It is worth mentioning that despite the aforementioned status of PSMC, various international private or state owned steel related corporations have expressed their interest and inquired about the PSMC either to the Ministry of Production, Board of Investment, Finance Division or PC.


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