PIA’s core functions to be carved out as govt looks to sell stake

Govt aims to park over Rs150b legacy loans, non-core assets in another company

ISLAMABAD: Amid questions over the modus operandi, the federal government announced on Monday to carve out the core functions of Pakistan International Airlines (PIA) - the air transport business - within three months to make the national flag carrier attractive for privatisation.

The move is aimed at parking over Rs150 billion in legacy loans and non-core assets of PIA in a company and selling the core business to private parties. But the biggest opposition to the government’s plan is the time frame, as it has only five months before completion of the five-year constitutional term.

Privatisation Minister Daniyal Aziz made the announcement at a press conference, emphasising that the Pakistan International Airlines Corporation (Conversion) Act, 2016, which had been unanimously passed by parliament about 21 months ago, gives these powers to the Privatisation Commission.



Aziz is looking to execute an implementation plan on carving out legacy loans and non-core assets that former finance and privatisation minister Ishaq Dar kept at his desk for five months without approving it.

Aziz said that under the parliament act the exercise of separating the core and non-core functions of PIA has had to be completed within two years of the enactment of the law and this deadline was going to end in April this year. The minister said that public sector enterprises were causing, on average, annual losses worth Rs600 billion that have to be plugged to ensure a sustainable high economic growth rate.

The air transport business of PIA will be carved out and then evaluated by financial advisers before its privatisation, said Aziz. He said the non-core business of PIA will be put into another company along with the liabilities, which he estimated at over Rs325 billion.

The balance sheet of the airlines will be cleaned to convert the current negative equity of over Rs174 billion to positive equity, said the minister while addressing a hurriedly called press conference. He said hotels and other properties will be separated.

PIA was on the active list of privatisation that Pakistan agreed to implement under the three-year International Monetary Fund programme but the government backed off after the opposition parties refused to support the move.

“We are turning on the lights again and restarting the privatisation programme from where it had been left,” said Aziz while revealing his intentions to push the PIA privatisation agenda. The minister cited sub-clause 5 of clause 4 of the PIA Conversion Act 2016 that states, “The federal government shall carry out valuation of the assets of the company, and its subsidiary carrying on air-transport business, by a recognised valuator before transferring any shares of these companies to a third party.”

He said that the fresh bid to privatise PIA had nothing to do with the upcoming general elections, arguing that the Privatisation Commission got this mandate from parliament. In July 2016, the Cabinet Committee on Privatisation (CCoP) had directed the Privatisation Commission to segregate core and non-core business segments of PIACL, in consultation with the Aviation Division and PIACL. The financial advisers had submitted a draft implementation plan to the Privatisation Commission for carving out legacy loans and non-essential assets of PIACL.



Background

In March last year, the Privatisation Commission had submitted the implementation plan to the then Minister for Finance and Privatisation with the request to convene a meeting to discuss it. But Dar never returned the plan and the finance ministry returned the note to the Privatisation Commission after his exit, according to the Privatisation Commission documents.

In 2014, the government had hired a Dubai Islamic Bank (DIB)-led consortium as financial advisors. The Privatisation Commission has already paid $2.2 million to the financial advisers as retainer fees and Rs1.7 million as out-of-pocket expenses. The revised Financial Advisory Services Agreement with the financial advisers expired on October 3, 2017. The Privatisation Commission on Monday held a video conference with DIB to review the possibility to extend its expired contract.

Aziz said that the government wanted to complete the exercise by April this year and the services contract of the DIB-led consortium could be extended to save time.

The financial advisers had completed phase-I of the transaction that included formulation of restructuring and divestment strategy and its implementation, while phase-Il included facilitating private sector partnership in the core operations of PIAC and successful closure of the transaction could not be done due to the government’s back-pedalling.

Hurdles along the way

But a legal hurdle could frustrate the government’s fresh move to privatise the loss-making airline. The sub section 4 of the section 4 of PIA Conversion Act of 2016 restricts the federal government from transferring management control of the airline business of PIACL and retaining at least 51% shares in the entity.

The Privatisation Commission’s documents stated that the incorporation of this provision disturbed the flow of the transactional process.



But the privatisation minister insisted that this was not “substantive clause of the law” and was only an “explanation”. He said that when the time to privatise the entity would come, this hurdle could be overcome. He did not explain how the government plans to overcome this legal hurdle, which if done in an inappropriate way could land the Privatisation Commission in a court of law.

The only option in front of the government was to introduce an amendment in the PIAC (Conversion) 2016 Act.

Meanwhile, the Senate Standing Committee on Finance Chairman Senator Saleem Mandviwalla has warned the PML-N government to “not try to sell PIA to its favourites”. The PPP will stop every effort of the government to privatise PIA and it will not allow PML-N to sell the national assets to its own men”, he added.

But the privatisation minister challenged the PPP to disclose the names of the PML-N favourites, claiming that he would not allow any wrongdoing in the transaction.

Published in The Express Tribune, January 16^th, 2018.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.