With hopes for the sale of the Pakistan Steel Mills (PSM) Corporation fading because of the lack of investors and a whopping sum of $1.4 billion required to upgrade the public entity, the caretaker federal government is now planning to set up an export processing zone (EPZ) on its land.
The cabinet had recently scrapped the process of privatising the loss-making PSM and backed the option of setting up an EPZ on its land. Sources told The Express Tribune that the technical due diligence report had indicated that an investment of $584 million would be required to revive the PSM plant to its existing capacity of 1.1 million metric tons per annum (mmtpa), with a potential for further expansion to 3mmtpa needing up to $1.4 billion.
The cabinet was informed that the PSM was listed on the active privatisation list through its decision on June 17, 2019. It was further stated in a recent meeting of the cabinet that on November 12, 2019, the Privatisation Commission (PC) Board had approved the appointment of a financial advisory consortium (FAC) comprising the Pak-China Investment Company Ltd (PCICL) and Bank of China International (BOCI) as joint lead financial advisers.
After fulfilling the procedural requirements, the PC signed a financial advisory services agreement (FASA) with the PCICL and BOCI on January 10, 2020. The privatisation ministry explained that the financial advisers had prepared the due diligence reports and the transaction structure.
They were presented before the transaction committee and PC Board for a thorough discussion, it added.
Consequently, on the recommendation of the PC Board, the Cabinet Committee on Privatisation (CCoP) approved the transaction structure on December 24, 2020. It was ratified by the federal cabinet on December 29, 2020. The Expression of Interest (EOI) process led to the pre-qualification of four interested parties by the PC Board in its meeting held on 20th January 2022.
These parties included BaoSteel Group Xinjiang Bayi Iron and Steel Company Ltd (BaoSteel); Tangshan Donghua Iron and Steel Enterprise Group Company Ltd (Donghua); Tianjin Jianlong Iron and Steel Industry Company Ltd and Metallurgical Construction Corporation (Jianlong and MCC); and Maanshan Iron and Steel Company Ltd (Maanshan).
After signing the confidentiality agreement with the pre-qualified bidders (PQBs), access to the virtual data room was provided to all of them on March 9, 2022 to conduct buy-side due diligence. Soon thereafter, Jianlong and MCC expressed its disinterest in a meeting held in May 2022. BaoSteel and Donghua visited Pakistan to conduct an on-site visit of the PSM plant, the Iron Ore and Coal Berth Jetty (IOCB), and the steel mill’s allied infrastructure in June and August 2022.
However, both BaoSteel and Maanshan withdrew their interest, citing the slowdown in the world’s economic conditions, which had adversely impacted the global steel demand, coupled with Pakistan's debilitating macroeconomic outlook, with particular concerns relating to difficulties in importing raw materials as well as the Foreign Exchange Regulations of the country’s State Bank.
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The privatisation ministry further said the matter was then discussed in the 6th apex committee meeting of the Special Investment Facilitation Council (SIFC) on October 4, 2023, in which the decisions were made. It was decided that the recommendation of the PC to annul the current bidding process for the privatisation of the Steel Corp (which had only one bidder) was approved.
The case was to be moved to the PC and federal cabinet. The options of closing the PSM Corporation and auctioning its plant as well as equipment or re-operationalising it with any mode of private sector participation were to be examined in the working group. It was also decided that a way forward was to be presented to the next executive committee.
A committee comprising the ministers of industries and privatisation, and the Sindh chief minister was to recommend the optimum use of the land of the PSM for industrial purposes, either through a special economic zone (SEZ) or EPZ. The privatisation ministry maintained that after that, the PC Board in its meeting held on October 6, 2023 deliberated the issue in detail.
The PC Board was of the opinion that although Donghua expressed its continued interest, the withdrawal of three other PQBs left it with a single-bidder scenario, which not only denied a competitive process but also raised questions on the transparency of the transaction of a very significant magnitude. It was further explicated that given the current circumstances, the single-bidder aspect in particular, which could pose issues about a fair market value and transparency, proceeding further with the transaction would not be justified.
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Additionally, the technical due diligence report indicated that an investment of $584 million would be necessary to revive the PSM plant to its existing capacity of 1.1mmtpa, with the potential for further expansion to 3mmtpa requiring up to $1.4 billion.
The recent advancements in the steel production technology have significantly altered the industry’s dynamics.
Attention was also drawn to the technical due diligence report submitted by Sinosteel (a technical sub-con of the FAC) as well as the plant and machinery valuation report handed over by Iqbal Nanjee (valuator firm acting as a sub-con of the FAC).
Valuations conducted by the FAC and PSM Corporation had shown substantial disparities in the price of the plant, machinery, and building, complicating the prospect of a fair determination of reference price and implicating the bidding process.
The PSM Corporation’s accumulated losses amounted to Rs206 billion in fiscal year 2022. It was also highlighted that the issuance of a no-objection certificate (NOC) and vacation of charges against the PSM Corporation’s assets by the Sui Southern Gas Company SSGC was still pending.
The ministry was of the view that in light of these complexities, it would be prudent to terminate the current privatisation process, allowing the government to make a more informed and appropriate decision, avoid additional costs, maintain fairness in market valuation, and uphold transparency.
It was also suggested that the industries and production ministry should take the lead in determining the future course of action in consultation with other relevant stakeholders. The privatisation ministry added that additionally, there might be an opportunity to develop an EPZ on the PSM land – a process that should be pursued through the industries and production ministry.
The decision of the PC Board was shared with the cabinet. The PC Board, after deliberations, approved to annul the current process for the revival of PSM, i.e., the divestment of Steel Corp (Pvt) Ltd, with only one bidder.
Furthermore, the ministries of industries and production and privatisation might consider other viable options for the entity.
The privatisation ministry said the views of the industries and production ministry had also been obtained in terms of rule 18(4) of the Rules of Business, 1973. The privatisation ministry presented the proposal for the annulment of the current process for the revival of the PSM, i.e., the divestment of Steel Corp (Pvt) Ltd with only one bidder.
Consequent to the approval, the PSM Corporation might be delisted from the active privatisation list and the PC recommended the development of an EPZ on the steel mill’s land.
The industries and production ministry, under whose domain the issue falls, will consider the viable options for the entity in consultation with the relevant stakeholders. The cabinet considered the summary titled 'Pakistan Steel Mills Corporation - Annulment of Bidding Process and Delisting from Privatisation Programme' and approved the proposal.