Pakistan Steel Mills is not a national asset

Published: June 13, 2010
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Giving the company away for nothing would still be a profitable transaction

Giving the company away for nothing would still be a profitable transaction

KARACHI: The prime minister’s declaration that Pakistan Steel Mills is a national asset is something of an optimistic comment, to put it mildly. Over the past two years, PSM has lost over Rs45 billion. This is in addition to the fact that the corporation has been a perennial basket-case that has caused nothing but headaches for the government. And now, on Friday, the government announced a Rs25 billion bailout package for the company.

In the early part of the decade, the government began to restructure the company in an effort to sell it off. It hired Citigroup and JP Morgan as its advisers in the transaction. Through a series of complicated financial manoeuvres, the company began to show a profit, declaring a net income of Rs6.5 billion during the fiscal year ended June 30, 2005. But the turnaround was something of a chimera.

The government had agreed to take on the liabilities for the voluntary separation scheme (VSS), the plush retirement packages it has to promise to employees of government-owned corporations for leaving without getting violent. This became a bone of contention during the litigation subsequent to the closure of the transaction and caused the Supreme Court to suspect malfeasance and nullify the transaction.

It is entirely possible that the transaction was less than entirely above board. Yet the steel mill is such colossal loss-making machine that getting it off the government’s books at any cost is worth it, if for nothing else than the fact that the government will no longer have to finance expensive bailouts like Friday’s package, which is only the most recent in a long line of taxpayer-financed bailouts for the company. Getting Rs0 for the company is better than having to pay Rs25 billion. That much is an undeniable, mathematical fact.

In 2005, the government was still able to muster a $362 million bid for the company. It is likely to get far less now, if at all a positive sum. Indeed, giving the amount of opacity surrounding Pakistan Steel Mills’ finances, it would not be surprising if any bidder, in doing their due diligence, decided to ask the government for money to take it off their hands.

The liabilities of the company are not just those present on its balance sheet. The corruption of both its management as well as its workforce is by now a well-documented phenomenon. Any new management would have to spend billions just to get these people to leave and to hire new employees. As of right now, getting zero for PSM looks like a best-case scenario.

Published in the Express Tribune, June 13th, 2010.

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Reader Comments (3)

  • Shahryar Ahmed
    Jun 14, 2010 - 11:40AM

    Thanks to Pakistan’s Legal fraternity, we (tax payers) have to burden the weight of PS, when it was going for over USD 300 mm. By reversing the PS transaction (valuation done of Discounted Cash Flow basis) effectively giving out to all global investors to stay away from Pakistan.

    All for what? Just to get at The President out. It was all a game of vested interest (political) of The Sharif’s & so called independent judiciary. What a farce!Recommend

  • Bilal
    Jun 15, 2010 - 10:49AM

    Our legal fraternity may not posses a business mind and rightly so they did show their potential when the previous government’s sale at $ 360 million of PS was over turned. To determine the price of such humongous asset, it’s the first sale which makes the bench mark price. Had there been couple of Steel Mills in Pakistan, the last one might have fetched 3-4 times more than the value of the first sale price (obviously in a positive investment environment). Musharraf’s government downfall started with the dispute on sale of PS and now this government might get into similar fate. Perhaps it’s the heat of Pakistan Steel that can change the government and not the insane Pakistanis.Recommend

  • Ansar
    Jun 15, 2010 - 12:31PM

    Recap of Pakistan Steel cost to the nation:
    a)Value of scrapped PS Sale (Y2006) $ 360 million or Rs 30.6 billion
    b)Current estimated losses over Rs: 30 billion
    c)Bailout cost Rs: 25 billion
    Total loss to the Government Rs: 85.6 billion or $1 billion
    Classic case of Poor judiciary and bad governance.Recommend

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