ISLAMABAD: The government is undecided about privatizing the financially troubled Pakistan Steel Mills (PSM). The entity needs an injection of over Rs100 billion for restructuring and revival before it can be put for sale within 12 months.
According to sources, the government has realized that the accumulated liabilities of PSM are too big to be met through the sale of its current assets and any financial commitment to its revival carries a high degree of risk.
It is also considering carrying out a technical audit of the machinery and plants to verify claims that with financial support the mill would be able to run at 80% of its capacity, compared to the current 3%.
The audit would not only determine the status of the machinery but also suggest whether aged plants would be attractive enough for potential investors.
Sources disclosed that five options were placed before the Economic Coordination Committee (ECC) of the cabinet in a meeting on January 16. These included maintaining the status quo, selling assets, making attempts to revive the mill with no decision on privatization, keeping the mill ticking and privatizing within 12 months, or restructure and revive and privatize in one year.
A comparative statement covering all these possibilities in terms of cash and non-cash facilities was also presented to the ECC.
The last option is aimed at utilizing the time between now and the final phase of privatization to revive PSM’s activities. It also offers a chance to keep the mill in the public sector if restructuring is done properly.
In order to opt for this option, the government would need to pump Rs19.1 billion into PSM in a single tranche, provide sovereign guarantees (non-cash) for 120 days of letters of credit with National Bank amounting to Rs11 billion, undertake financial restructuring through parking Rs50.712 billion, offer voluntary separation scheme to 4,000 employees worth Rs14.167 billion and waive SSGC surcharge worth Rs6.56 billion.
Meeting participants told the ECC that PSM losses would start declining after restructuring and the mill would be able to return to profit by 2016. Debt-to-equity ratio would gradually improve, enabling PSM to borrow funds on its own instead of banking on the government.
Current ratios would also improve steadily and by 2018 current assets will exceed current liabilities.
They were of the view that rationalization of manpower would lead to savings of Rs15.5 billion over seven years, making PSM more attractive for privatization.
Depending on the management’s capability and a qualified and capable workforce, PSM’s revival could be possible, they remarked. The government will then have a choice either to sell or keep it as a state-owned enterprise.
The ECC was told that besides mitigating the government’s high risk exposure, the privatization should also bring dividends in the form of economic efficiency, better supply of products to the domestic industry and privatization proceeds for the government.
The ECC agreed that bad governance, overstaffing and financial and technical mismanagement had brought PSM to its present condition.
It was of the view that the PSM board of governors should consider all proposals for the revival and restructuring of the mill and share the plan with the Privatization Commission and the Ministry of Industries and Production.
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