PC defers decision on PSM deal

The Privatisation Commission (PC) board has deferred approval of transaction structure for the sale of Pakistan Steel Mills (PSM) owing to differences over classification of its core and non-core assets, which will be handed over to the new buyer.

The board was handicapped to take a decision after it found that some of the operating assets had been described as non-core assets by the valuator, Joseph Lobo, a senior official of the privatisation ministry told The Express Tribune.

The classification of assets by the valuator varied from the audited financial statement of PSM.

Board members were also divided on whether the government should sell up to 75% assets being transferred to a new PSM subsidiary - Steel Corp Private Limited - or opt for the sale of 100% stake, said the officials.

“Matters leading to the filing of the Scheme of Arrangement with SECP were discussed in the (board) meeting, which included updated financial reports of PSMC and its subsidiary, approval of the board for transferring utility connections to the newly formed subsidiary without encumbrances, approval for retention of the new subsidiary either by the Ministry of Industries or PSM and the potential size of divestment among others,” said a brief statement issued by the privatisation ministry after the meeting.

The board’s inability to approve the transaction structure highlights the challenges the government faces in forwarding its privatisation programme. In the past three years, the government has only sold barren land with no significant completed privatisation transaction.

Officials said that the valuator had described some of the core assets like plant, machinery and equipment as non-core assets.

In its summary, the ministry had sought the board’s approval of Steel Corp Pvt Ltd to be either retained by PSMC in light of approval of the PSMC board or its shares to be issued to the government of Pakistan in lieu of its outstanding loan to PSMC.

The board members were of the view that the subsidiary should be retained by PSM. But the financial adviser was of the view that PSM’s ownership of Steel Corp would make it less attractive for the buyers due to legacy issues. The ministry had also requested that a decision be made on the quantum or range of equity stake of Steel Corp to be divested - either 51-74% or 51-100%. A majority of the members were of the view that the government should not divest all its shareholding and one member was totally against the privatisation of PSM, said the sources.

Board Chairman and Federal Minister for Privatisation Mohammad Mian Soomro stressed that they were resolving pending matters in collaboration with the main stakeholders and Expressions of Interest (EOIs) would likely be invited by the end of current month.

The board was informed that the new subsidiary, Steel Corp Private Limited, will have authorised capital of Rs150 billion and paid up capital of Rs1 billion.

The PSM board in May this year, approved the valuation report of Joseph Lobo on valuation of assets ie plant, machinery and buildings for incorporation in the financial statement of half yearly audited accounts for the period ending on December 31, 2020.

As of December 2020, PSM’s total assets had been reassessed at Rs560 billion, including Rs536 billion fixed assets. The fixed assets include Rs351 billion worth of land, Rs42.8 billion factory building, Rs99.6 billion plant and machinery. The liabilities are assessed at Rs308.2 billion. These include Rs42 billion trader and payables, Rs73 billion interest accrued and Rs71.5 billion current long-term financing. In addition to that there are Rs59.5 billion long-term financing related liabilities, Rs9.8 billion gratuity scheme, and Rs41.7 billion deferred tax liabilities.

Out of these, Rs35.8 billion deferred tax liabilities will be transferred to new subsidiary that will subsequently be given to the new buyer.

In May, the board of directors approved and directed the management to carve out the total assets of Rs133 billion and total liability & revaluation reserve of Rs123.5 billion and transfer to the wholly-owned subsidiary. The Rs88.5 billion worth of plant and machinery had been proposed to be transferred to subsidiary, Rs41.5 billion worth of building and structure, Rs1.2 billion utility connections and Rs826 million deferred tax assets.

After transferring assets to the Steel Corp, PSMC will retain Rs426 billion asset and Rs269.5 billion liabilities.

The cabinet has approved transfer of identified core operating assets into a wholly owned subsidiary of PSMC through Scheme of Arrangement by Sale of Majority Shares of the newly formed subsidiary without transferring of full ownership to strategic private sector partner. The financial adviser highlighted nine corporate actions required to be completed and many of those have not yet been completed, the board was informed.

The PSM board has also approved tentative core land of 1,228 acres and its right of use will be awarded without entering into a lease agreement as per the standard terms to subsidiary until the strategic partner comes in. The draft land lease deed has been prepared by the advisors and shared with privatisation ministry.

Published in The Express Tribune, July 10^th, 2021.

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