Roadblock in the air: Legal hindrance unearthed in PIA’s privatisation attempt

Under the PIA Act of 1956, its shares cannot be transferred to any other party.

ISLAMABAD:

In an interesting development, the privatisation of Pakistan International Airlines (PIA) seems improbable, at least for the foreseeable future, as the government would be unable to transfer management control of the national flag carrier to a strategic investor without amending the PIA Act of 1956.

The development goes against one of the conditions set with the International Monetary Fund (IMF). The government, among other targets, had put PIA on the active list of privatisation and the IMF had originally set December 2014 as the deadline that would see at least 26% stakes along with management control being sold to a strategic investor.

The deadline was then revised to June 2015, then December 2015 before the latest cut-off date of March next year. However, even that deadline is likely to be missed, said sources in the Ministry of Finance.

During the last few days, Finance Minister Ishaq Dar chaired a couple of meetings to find a solution to the legal hindrance that may derail the process of PIA’s privatisation, said the sources.

The legal obstacle

The ruling PML-N government lacks majority in the upper house of the parliament and cannot get any bill passed without seeking support of the Pakistan Peoples Party that has 27 senators and is opposed to the privatisation policy in the first place. The ruling party has only 26 senators and will need support of other parties to get the bill passed from the Senate.

The Privatisation Commission came to know off the legal hindrance during the due diligence process of PIA, which was carried out by the financial advisor that highlighted ill planning on part of the government to handle one of the most complex transactions to date.

A consortium, led by Dubai Islamic Bank, completed the due diligence process almost three months after its deadline. Non-cooperative attitude of the Aviation Division was also a reason behind the delay, said sources.

The government administers the national carrier under the PIA Act of 1956 that states it cannot transfer its shares to any other party. The officials said the government discussed the option of converting PIA Corporation into a public limited company by amending the law.

The sale of shares to a strategic investors and transfer of management control is only possible after amending the law. There was also an option to retain the PIA’s corporation status and introduce amendments to the extent of transferring the management control, sources said.

The other option is that PIA could be split into two entities - either through demerger or through sale of assets and transfer of liabilities to a new incorporated subsidiary.

“The demerger option is more time consuming, as it would require negotiating with 94 countries that are involved with PIA in any manner,” said Mohammad Zubair, the Privatisation Commission chairma, while talking to The Express Tribune.

Zubair said the legislation path was also “difficult, but doable”. He said the government is yet to take a decision.

To a question on meeting the IMF’s deadline, Zubair said the Commission was not worried as the country’s interests came first.

Sources said the government might promulgate a Presidential Ordinance to address the legal obstacle. However, they added the IMF would be sceptical to any such arrangement, as the ordinance would lapse within four months of its promulgation and the government will have to introduce a Bill to amend the 1956 Act.

PPP’s role

The PPP has been opposing PIA’s privatisation. Senate Chairman Raza Rabbani of the PPP has been a vocal opponent of PIA and Pakistan Steel Mills’ privatisation.

In addition to legal challenges, the government is also facing problems in resolving inter-ministerial differences, as the Aviation Division is not in favour of privatisation.

It has been pursuing a restructuring plan and has acquired 14 jets on lease in recent years and desires to add seven more including three Boeing 777, ER 300.  

Published in The Express Tribune, August 30^th, 2015.

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