Privatisation of state assets is a global phenomenon and has its own pros and cons. If it improves efficiency, quality, productivity, jobs then it should be adopted. If it is just an attempt to increase government revenue, it is not a good idea at all. In the economic perspective, under the prevailing economic conditions it may be considered an odd time to privatise any assets, let alone planning to sell any major concern.
In the last 24 years, this is the third time that Pakistan Steel Mills Corporation (PSMC) is being considered for privatisation. Such indecisiveness is rarely found globally and reflects on incompetency or gradual neglect of our institutions by the national leadership. We are witness to the sustained annihilation and obliteration of our national institutions over the last many decades. Unfortunately, from the very inception, PSMC suffered heavily due to corrupted political and professional culture. Overstaffing, poor management of financial liabilities, lack of work discipline, low-capacity utilisation, inefficient operations and maintenance, creation of mafias and non-accountability are a few to mention. Before commenting on the current privatisation recommendations, I find it is pertinent to briefly provide the background history of Pakistan Steel Mills.
An organisation that was established in 1968 but hardly achieved its full scale production in 1984 was considered for privatisation in 1997 by the Council of Common Interests (CCI) for the first time. For multiple reasons this privatisation did not materialise and later in 2000, the new government introduced restructuring of the PSMC with a goal to make it a financially viable entity. Other than repair, maintenance and financial restructuring of the mills, this initiative also included right sizing of the manpower and equity offer to the private sector. This restructuring paid off and after paying Rs. 11.35 billion as principal amount on debt in 2003, the PSMC earned net profit of Rs. 6.0 billion with annual sales of more than 30.0 billion rupees in year 2004-5. At this stage, ironically, the ministry of privatisation and investment through the approval of privatisation board advertised the privatisation of PSMC again. Obviously, the privatisation was challenged in the Supreme Court of Pakistan. The apex court observed serious violation of law and gross irregularities with regards to sale of PSMC and consequently stopped the government from privatising it.
The Supreme Court of Pakistan, in its verdict on the PSMC privatisation case in 2006 declared that 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 thereunder. Here is a synopsis of a few major observations made by the court in its detailed verdict.
The guidelines provided by the privatisation board on the valuation exercise of the PSMC were not followed. All sorts of ‘due diligence’ was prepared on the basis of unaudited financial statements prepared on book value. It is worth noting that in such cases the market value of the assets is reckoned globally. The report did not undertake independent exercise in respect of accounting, tax and other aspects of the matter. Additionally, the valuation recommended by the financial advisers reflected only the core operation of PSM. It did not include surplus land and assets. The non-core land and assets which were being unbundled from PSMC had worth more than the replacement value of the plant. It was found that the PSMC was being sold at far less than it’s worth and associated assets.
Contradicting the initial advertisement, several incentives and concessions worth more than 33 billion rupees were extended to the successful bidder. These included stock in trade of 10.0 billion rupees, commitment by the government to clear the debt liability of Rs. 7.67 billion, up to 15 billion claim of the workers opting for voluntary separation scheme and refund of 1.0 billion rupees paid in advance as tax to the government of Pakistan.
The financial advisor companies had recommended to include market value of the total assets of PSMC, however, it was ignored by the Board of Privatisation Commission. The Supreme Court also highlighted the indecent haste exercised by the privatisation commission and Cabinet Committee on Privatization (CCOP) as they approved the report submitted by financial advisors in a single day. The SC in its verdict mentioned that CCOP’s decision not only disregarded the mandatory rates but also all material which was essential for arriving at the fair reference price. The CCOP not only ignored inclusion of net assets while valuing the project but also reduced the share price by more than a rupee (from 17.43 to 16.18).
The Discounted Cash Flow method was adopted for valuation of the assets that clearly favoured the buyers. The pre-qualification process was also not transparent. The highest bidder was a consortium of companies that failed to apply within the due date and had not undergone the test of scrutiny.
The above stated observations by the SC are enough evidence to highlight the nepotism, destruction of merit and transparency prevalent in our houses of power. This is also to remind the current government to abstain from committing such omissions and injustice while dealing with PSMC, else the suffering will continue. It is customary for a government to make efforts and adopt procedures that ensure fair market value of its assets. Let me refer to an excerpt from a World Bank report that stresses on the principles for assessing the market value of assets. It says, “The government on the other hand has a fiduciary responsibility to its citizens when it privatises an asset. It is entrusted to sell privatise-able assets at or above their fair market value, and must take every precaution to ensure that this happens. Agreeing to sell state assets below their market value is tantamount to favouring a buyer, and it deprives the state of needed financial resources. While this may sometimes be politically desirable—for example, in the case of employees of privatised companies—transparency is crucial. Thus the size of discount offered should be determined and publicly disclosed.”
We are a populous country where job creation should be a priority to support people. While it is expected that the government may generate a few million US dollars in the short term from privatisation, do we have a guarantee that this privatisation will be productive and we will not be facing another type of mafia or exploiter imposed on us! While we have seen improved PTCL after privatisation, the Karachi Electric is a counter example. In the Middle East, most of the major concerns are state owned yet they are the most productive organisations. People prefer to work in the government sector in these countries. So mere privatisation is not the solution unless we commit ourselves to good governance, merit and transparency as they are prerequisites for growth, efficiency and development.
In the wider national interest, a better solution would be that the government fulfils its promise of restoring the state-owned institution on its footing, or else give preference to its employees for the ownership. It is known that in 2005 the PSMC workers were also interested to participate in the bid but they were asked to deposit US $30 million as earnest money which they could not arrange obviously. However, about 18 billion rupees belonging to employees were lying with the management. A similar example in which employees were preferred could be quoted from Turkey where the government was finding it hard to run a state-owned steel mill. The employees showed interest in running the concern privately, agreeing that the government practically gifted the mills to a consortium of its employees charging just one Lira as token money in 1995. Following privatisation, all the company’s shares were distributed to the people domiciled in that district. Now, this company is engaged in the production and sale of iron, steel and coke products and operates via 8 subsidiaries and affiliates.
I hope that the government will fulfil its fiduciary responsibilities towards its citizens and strategic assets of the state. Rebuilding national institutions is a difficult yet achievable task, the prerequisite for which is commitment, competence, honesty, right planning and true execution.