Islamabad (Imran Y. CHOUDHRY) :- Former Press Secretary to the President, Former Press Minister to the Embassy of Pakistan to France, Former MD, SRBC Mr. Qamar Bashir analysis :
The government of Shahbaz Sharif is considering privatizing the Pakistan Steel Mill (PSM), however before doing so, it appears that the PSM’s books of account have been given a facelift. Interestingly, many unusual entries have been found in the 2021-22 financial statement when compared to the previous year. One such entry was the re-evaluation of property and plant, which was Rs. 489 billion in 2020-21 but unexpectedly increased to Rs. 751 billion, representing a gain of Rs. 262 billion labeled as “Remeasurement of investment property” at fair value. As a result, net comprehensive income reached Rs. 276.24 billion by adding profit of Rs. 7.1 billion and gratuity of Rs. 62 billion, which by any definition is a notional income, not hard cash.
Similarly, liabilities increased from Rs. 549.3 billion in 2021 to Rs. 838,67 billion in 2022, including the liabilities owed by the GoP of Rs.102 billion in principal and Rs.48 billion in interest, National Bank of Pakistan of Rs.38 billion in principal and Rs.38 billion in interest, and SSGCL of Rs.23 billion principal and a disputed amount of LPS on this amount.
The second eye-catching item was announcing an after-tax profit of Rs 7.45 billion in 2021-22, which can be seen at he Profit and Loss (P&L) statement in the audited accounts available at (http://www.paksteel.com.pk/Financial%20Reports/FAR2022.pdf).
In the P&L statement for 2022, sales were stated to be Rs. 3.998 billion, cost of sales to be Rs. (10.056 billion), and gross loss to be Rs. 6.058 billion. This loss was compounded by adding distribution costs (45 million), administrative costs (Rs. 4.156 billion), financial costs (Rs. 14.69 billion), and operating costs (Rs. 1.47 billion), resulting in a net loss of (Rs.20.36 billion). It’s fascinating to see how this loss was turned into profit.
In the profit and loss statement, the number for “other incomes” was Rs. 31.491 billion. The breakdown of other incomes is considerably more intriguing. It includes Rs. 291 million in revenue from short and long term deposits, Rs. 2.0 billion in scrap sales, Rs. 27.745 billion in gain from remeasurement of investment property at fair value, and Rs. 1.746 billion in miscellaneous profits for a net income of Rs. 31.491 billion.
According to the profit and loss statement its total income was declared at Rs. 31.491+.083=31.574 less total cost of the sales and expenses of losses 26.35 bn reaching to net profit of Rs. 5.083. This profit was increased to Rs. 7.15 billion by including deferred taxation of Rs. 2.065 billion. The reason for the addition of tax was given in note No. 37 which said that because the mill had not paid tax since 2016, the deferred tax was remaining with the mills and was therefore believed to be revenue. All sources of income were mostly notional and unrelated to the selling of the steel mill’s key products but the expenditures were real and tangible. Furthermore, it is clear knowledge that the mill has been losing money since 2008 and was shut down in 2015; how can it possibly be profitable?
A steel mill is key for economic and industrial development of any country. It provides raw material in a wide variety of products, including cars, buildings, roads, bridges, and other infrastructure. It provides basic raw material for making weapons and military equipment and hardwares and ensures regular supply of this essential element in times of war or other emergencies. It is recyclable and can be used and reused, conserving resources and reducing the amount of waste. Creates a significant number of direct employment in the mill and indirect employment in the supply chain and in the downstream industries. Decrease dependence on other countries for its steel supply and shielding it from vulnerability to supply disruptions and price volatility. A steel mill is a complex operation that requires a high level of technological expertise which help the country in training its human resources to further expand or setup new mills without requiring the assistance of other countries. Steel is a critical material to boost economic and industrial development and growth and prosperity of a nation, therefore setting up of steel mills has always been the top priority of any nation to achieve sustained economic and social development.
We also took this project on top priority and established Pakistan Steel Mills (PSM) which was incorporated in 1668 at the cost of Rs. 24.7 billion which commenced production in 1981. The mill was the biggest producer of steel in Pakistan and the only major manufacturer of flat and long bars and billet. Mills net assets included land measuring about 19000 acres out of which the plant and the machinery was located on 4457 acres of land (core land) besides the land of downstream industrial estates. The mill was initially profitable, however soon after it started facing issues due to our trademark inefficiencies, mismanagement, corruption, political interference, and over-employment. It was finally shut down in June 2015 during the last tenure of PML(N). Since its closure, the country has lost over $18bn in foreign exchange for import of steel products which used to be produced by the PSM. According to the audited Accounts, the mill is incurring losses since 2008-09 and upto the year 202-2021 it has accumulated total losses of Rs. 227.987 billion.
The Steel mill is indeed a bleeding wound which is becoming unsustainable specially one that it is closed second it is incurring losses on the average at Rs. 20 billion per year with accumulated losses of over Rs 227 upto 2021. Besides in its current shape there are no chances of its revival, as the technology used was outdated and inefficient, would need outright modernization and automations to become competitive which would require immense amounts of capital and is a time-consuming process. The mill is heavily indebted and without a regular earning source, there is no way to repay its debts, The mill has a history of poor management and financial mismanagement which cannot be easily addressed. Moreover, the country is currently facing daunting political and economic challenges including high inflation and a weak currency, dwindling foreign reserves and does not have enough liquidity to revive PSM.
Several governments attempted to unload this white elephant using various strategies such as Public Private Partnership (PPP), reorganization, disinvestment, and liquidation, but all were unsuccessful owing to political considerations or court involvement. The Council of Common Interests (CCI) voted to privatize Pakistan Steel Mills in 1997; however, in the year 2000, General Pervez Musharraf chose to reorganize and refurbish the steel mill, which temporarily propped up the company but failed to remain afloat. Mr. Shaukat Aziz planned to privatize it again in 2006, but the Supreme Court of Pakistan (PSM) blocked his plans with its decision in the case of Wattan Party and others versus Federation of Pakistan and others. The SCP’s larger bench declared the submission of the $ 362 million bid for privatization of PSM null and void, observing that the process was flawed and unfair, that the Privatization Commission of Pakistan (PCP) failed to: provide all bidders with access to the same information about PSM, that the PCP did not give all bidders equal time to submit their bids, that the PCP did not properly evaluate the bids that were submitted, and that the PCP did not follow due process in conducting the auction.
However, the government should come prepared this time, just as it did when it auctioned berths 6 to 9 at Karachi Port. Prior to doing so, the government enacted the Inter-Governmental Commercial Transactions conduct of 2022, which prohibited any court in the country from hearing an application, petition, or suit challenging any procedure or conduct performed or done, intended or purported to be undertaken or done under this Act.
The government can also look to the successful privatization models of the United Kingdom, India, Brazil, and Mexico, where similar actions were taken to address financial issues, modernize technology, and improve management before offering the steel mills for privatization.
The government should also select the most appropriate privatization model, which are: selling the mill to the highest bidder in the most transparent and fair manner, selling the company to another government, and circumventing litigation on the strength of the Intergovernmental Commercial Transactions Act, 2022. Management buyouts, in which the firm’s management team buys the company from the government, have proven effective on many occasions, as have employee buyouts, in which the company’s employees buy the company from the government.
Above all, the government should ensure that the buyer, whether local or foreign, has only one option to revitalize or reestablish a steel mill with equal or better capacity of producing steel and its byproducts, as well as bringing state-of-the-art technology through innovation, automation, AI, and modern management systems. It should hire or rehire agreed upon number human resources from Pakistan purely on merit and be free to bring in a certain number of trained, experienced, and highly productive human resources from abroad, and above all, it should prohibit the buyer from selling its land or making any other use of the Mill’s tangible and intangible assets other than related to the Steel Mill or its associated business processes.