Govt proposes risky terms for PIA

Buyer-favoured terms allow partial payments, debt-based investment in 3 years

ISLAMABAD:

The government has proposed buyer-favoured terms for the sale of majority stakes in Pakistan International Airlines (PIA), offering to accept partial purchase payments for the acquisition of majority stakes and allowing debt-funded investments over a period of three years.

Under the proposed terms, the buyer will have the option to pay approximately one-third of the total sale price in cash and settle the remaining amounts against PIA’s payables, according to individuals familiar with the draft agreements being finalised for the sale.

The draft agreements also include a provision for a three to five-year pause on dividend payments to shareholders, as reported by government officials.

Background discussions with members of the PIA Holding Company Limited (PIAHCL) board and officials involved in the airline’s privatisation process revealed that the draft Shareholders Agreement, Sale Purchase Agreement, and Subscription Agreement do not fully protect the federal government’s rights.

A briefing on the draft Shareholders Agreement was given to the PIAHCL board on Monday, chaired by former central bank governor Tariq Bajwa. The Privatisation Commission and financial advisors shared the main features of these draft agreements with board members, according to sources. The federal government has been attempting to sell majority stakes in PIA, but the transaction has faced significant delays. Initially scheduled for privatisation in February and then in August, the new target date is now mid-October.

The federal government has authorised the sale of 51% to 100% of PIA stakes to buyers along with management control. Six parties have been shortlisted and are currently conducting due diligence on the airline. PIA reported a loss of Rs75.7 billion in the fiscal year 2022-23, making it the fourth highest loss-making government-owned firm, according to the finance ministry.

Sources indicated that the buyer might make a partial payment in cash to the government and settle the remaining amount against financial obligations for which the federal government is responsible. However, there are concerns that the federal government may not settle these obligations promptly.

The government has already allocated about Rs630 billion to the PIA holding company, with the finance ministry servicing this amount to the extent of commercial banks, with the remaining to be covered by privatisation proceeds and dividends.

The secretary privatisation did not respond to a request for comments.

Sources said the draft agreement proposes that the buyer can make the required investment over three years. Some board members opposed this, arguing that PIA urgently needs the investment, which should be made within the first year. It is estimated that the investor will need to invest $700 million to turn the loss-making entity into a profitable one.

Another buyer-favoured condition allows the buyer to take on debt for these investments. The financial advisors and Privatisation Commission have proposed that the buyer be permitted to take on 70% debt for investment purposes, with the remaining amount to be invested through equity.

In this scenario, the buyer would need to invest only $210 million from its own funds, with the remaining $490 million raised through debt likely secured against PIA’s assets.

The finance ministry has opposed the debt-led investment proposal, arguing that it would adversely affect the balance sheet of the PIA holding company. They believe the buyer should make equity investments, as any permission to acquire debt for investment plans would increase the company’s volatility.

The counter view is that the government would secure bank guarantees to ensure the buyer makes the required investments. However, there have been instances where foreign companies failed to fulfil investment commitments despite providing guarantees during privatisation.

The draft agreement states that the investment amount guarantee would be an irrevocable, unconditional, and on-demand commercial bank guarantee in favour of PIAHCL, equal to one-third of the investment amount.

The financial advisors have also proposed making the investment plans part of the Shareholding Agreement instead of the Subscription Agreement. This would again favour the investor, who could not be penalised for any breach. Fulfilling investment obligations under the Subscription Agreement would strengthen the government’s position in taking action against breaches.

Additionally, the proposal stipulates that the new buyer will not sell its stakes during the holding period, which could be three to five years. After the holding period, the buyer can sell the stakes through the stock market. However, during this period, the buyer would not be required to make dividend payments, adversely affecting the government’s plan to settle PIA’s debt through privatisation proceeds and dividends.