Ailing steel mill: Govt offers NBP land and SSGC bonds to settle PSM debt

Financial advisers have proposed government may settle liabilities by selling non-core land


Shahbaz Rana January 28, 2017
PHOTO: FILE

ISLAMABAD: The government has begun negotiations for settling liabilities worth Rs100 billion of Pakistan Steel Mills (PSM) and offered to clear dues of banks and a gas utility company by giving them land and borrowing from market.

Finance Minister Ishaq Dar held a meeting this week to find a way out, as the government’s decision to hand over the closed industrial unit on lease to prospective investors hinges on clearance of its balance sheet. The gross liabilities of the PSM stood at Rs206.6 billion as of September last year out of which payables to the National Bank of Pakistan (NBP) and Sui Southern Gas Company (SSGC) amounted to Rs100 billion, said sources in the Ministry of Finance.

The government has offered the non-core land to NBP against its Rs54.8 billion dues while the SSGC has been promised that it will be given interest bearing bonds against its total payables of Rs44.5 billion, said the sources.

The financial advisors hired for conducting the PSM privatisation transaction have proposed that the government may settle the liabilities by selling non-core land and utilise the proceeds for settling remaining liabilities of the bank and the employees.

The PSM has about 4,444 acres core land that will be given on lease to investors while the remaining about 7,880 acres of land is proposed to be sold. The estimated value of this land is Rs69 billion at the current market value, said the sources.

PSM’s fate

All the liabilities on PSM books have to be settled or restructured before any agreement is signed with the investor for giving the mill on lease for a period of 30 years, said the sources. The mill has been closed for about two years after the SSGC disconnected the gas supplies on non-payment of Rs18 billion dues.

Now, the SSGC is demanding Rs44.5 billion including Rs25 billion late payment surcharge, said the sources. The government will have to ensure resumption and availability of all utilities, especially gas, before any agreement is signed with the investor.

The sources said that during the meeting the representatives of the NBP and the SSGC sought time to review the government’s proposal.

The government was committed to finding a way forward and resolving the issues of PSM liabilities, said Finance Minister Ishaq Dar. He urged the Privatization Commission and Ministry of Industries & Production to ensure effective coordination in order to resolve the outstanding issues of PSM.

The government is also reviewing the option of laying off surplus employees of the PSM and would offer them a golden handshake, the sources said. They said that the PSM has strong workforce of about 12,500 employees.

It is proposed that core employees currently estimated at around 10,700 may be rehired by the investors. The government expects that at least half of them may opt for golden handshake.

However, there was a possibility that prospective investors may not rehire even the core staff due to efficiency issues.

The financial advisors have proposed a new transaction structure, suggesting giving the PSM on lease for 30 years. The investor will pay a concession fee to PSM as a percentage of its revenues.

According to the proposal, the PSM will lease core assets to the Investor including land, plant & machinery and building. No asset will be sold. All non-core assets will remain with PSMC which shall continue to manage them.

Only portion of core employees will be retained and the PSM will take care of the remaining employees. The investor may do capital investment via used machinery or invest via cash to revive the operations of the company.

The investor will form a new company under Pakistani laws and this company will be allowed to operate the plant at PSM premises, through the Concession Agreement. The investor would not be allowed to mortgage existing assets of PSM to raise finance, unless approved by the government. The entire working capital will be the investor’s responsibility and will be committed upfront by the investor.

The investor will also provide revival plan of the plant to PSM before bidding and the government will have the right to monitor the operations of investor and ensure compliance with terms of concession agreement.

The investor will commit complete overhaul of steel mills operations to achieve 1.1 million tons per annum existing capacity in shortest period possible. He will commit achievement of at least 50% capacity utilisation at the end of two years and 85% capacity utilisation by end of the first five years of the lease period.

Published in The Express Tribune, January 28th, 2017.

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COMMENTS (2)

quatro | 7 years ago | Reply More smoke and mirrors. PSM has negative net worth as it's liabilities exceed the value of it's assets. The plants been closed for more than 2 years and has 12,000 plus employees still on the payroll. Nobody wants to buy or lease an antique Steel Mill which has significant labor issues .... doesn't matter how you try to cosmetically re-structure it. . Fire the employees today - hire one consultant (preferable foreigner) to sell off the remaining inventory (that should take less than 2 weeks) - hire another consultant (preferable foreigner) to sell off the land (that should take less than 6 month) - shutter the plant and and hire a 3rd consultant (preferably a foreigner) to arrange for scraping the facility (that should take less than six month). Take the proceeds and use it to equitably payoff debt and unless the govt has guaranteed the remaining debt tell the credit holders that they are SOL. . BTW - something similar should happen to PIA which is another open wound bleeding Pakistani taxpayers.
Midas | 7 years ago | Reply Is this the price for the second Qatari letter? If the PSM is closed then why are they buying coal from various companies? Or is this coal being used by another steel mill in Pakistan?
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