Facing trouble: PSMC privatisation to be a hot stove

Analyst cites political, financial and structural hindrances for government.

KARACHI:

The government has started making efforts to privatise Pakistan Steel Mills – the largest and the only integrated steel mill in Pakistan.

However, steel industry officials and market analysts say the exercise is mainly to satisfy the conditions of the International Monetary Fund (IMF) because the feeling is that it has a slim chance of overcoming the challenge.

On November 8, the Privatisation Commission published an advertisement requesting expression of interest (EoI) from investment banks for financial advisory services to assist the privatisation of Pakistan Steel Mills Corporation (PSMC).

“With the current politically-charged atmosphere, it seems very difficult for the government to take forward the process of PSMC privatisation,” Emerging Economics Research Managing Director Muzammil Aslam told The Express Tribune.

Analysts say the government has not completely come out of the political challenge that emerged three months ago after the long march and sit-ins in Islamabad. Moreover, Pakistan Peoples Party (PPP), one of the two main opposition parties in parliament, has adopted a policy of confrontation regarding the ongoing privatisation process.



“Nobody knows how and who is going to buy stakes in PSMC, but considering its troubled history of privatisation, it seems that the exercise is mainly to assuage IMF concerns on privatisation,” said Aslam.

Political challenges apart, the combined debt of PSMC, according to reports, has surged to a massive Rs120 billion in the last six years. With decades old machinery languishing without major repair work, it would be a challenge for any investor to carry on with the old plant and the political and financial baggage that PSMC offers, analysts say.

Aslam also said that one of the major problems with PSMC is its dual ownership — its land is owned by the Sindh government while the federal government owns the plant and machinery. This was one of the main reasons why PSMC’s privatisation process failed in the Musharraf regime and this is why investors are shying away.

In April this year, the Nawaz Sharif government approved a restructuring package of Rs18.5 billion for PSMC to achieve a respectable production target of over 75% by February 2015. However, now PSMC officials say the mill needs another Rs8 billion to overhaul some of the basic infrastructure. This will be a daunting task for the cash-starved government, but half way through, it has few options on the table, as it needs to sell it in operational condition.

Investor’s views

Owner of one of the country’s largest steel mills asked, “Why would somebody like me invest in PSMC if I can construct a state-of-the-art steel mill with that same amount of money?

“Setting up a new plant will also save me from PSMC’s unions, political problems and any other unnecessary government bindings.”

Speaking on the condition of anonymity, he said the government can still sell PSMC but it is bound to face serious political and financial problems.

“I do not think anybody from the private sector in the steel industry would buy stakes in PSMC, but yes there are some people having diversified invests can do it,” he said, while referring to some of the country’s largest business groups that are considered close to the PML-N.

With time, industry officials say, automation has almost completely changed the outlook of the world’s steel industry and the old blast furnace technology of PSMC is now almost obsolete in the world’s leading steel industries.

Giving an example of automation in steel industry, an official of a steel company said that there was a steel mill in Germany where about 1,450 employees used to work. After the takeover, ArcelorMittal – the world’s largest steel producer with a massive 91 million tons of crude steel annual output – is running that same mill with just 15 workers today.

“Despite numerous problems, the government is doing the right thing in attempting to privatise PSMC. This policy is much better than politicising this national issue as PPP has been doing it for years and even now,” he added.

THE WRITER IS A STAFF CORRESPONDENT

Published in The Express Tribune, November 17^th, 2014.

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