Slim prospects for PIA privatisation

ISLAMABAD:

The government disclosed on Thursday that out of six selected parties, only two appear serious about acquiring Pakistan International Airlines (PIA). The entity may not fetch as good a price as was possible during the last attempt to privatise it eight years ago.

In a briefing to the Senate Standing Committee on Privatisation, the secretary of the Privatisation Commission further revealed that the shortlisted parties have requested more time for due diligence and finalising financial models, despite the extended deadline of October 1st.

Out of the six shortlisted parties, "two parties were seriously active" during the due diligence process of PIA, said Secretary of the Privatisation Commission, Usman Bajwa. The committee meeting was chaired by Pakistan Muslim League-Nawaz (PML-N) Senator Talal Chaudhry.

"We believe that two to three parties are delving into details and moving towards the financial bid stage," said Bajwa, who is handling the transaction process directly. "We also believe that other parties might join these consortiums," he added.

The secretary further informed the committee that the parties have raised objections regarding the applicability of Pakistani law in case of an investment dispute and have requested the option for international arbitration.

The government has shortlisted Fly Jinnah, Air Blue, Arif Habib Corporation, Blue World City, Pak Ethanol (Pvt) Consortium, and YB Holdings Consortium for the privatisation of the airline, which has incurred Rs500 billion in losses over the past eight years. The secretary did not disclose the names of the two serious parties.

The government initially planned to privatise the airline by June-July but later extended the deadline to October 1st. The prime minister has refused to grant another extension, despite bidders requesting more time to finalise their financial models, according to Bajwa. Chaudhry questioned whether the government can conclude the privatisation transaction by the extended deadline.

Responding to a question, the secretary noted that had the government privatised PIA in 2015, the price would have been significantly higher than today. This statement indicates that the government has low expectations of securing a good price despite having cleansed PIA's balance sheet of Rs623 billion in liabilities.

PIA's total liabilities amounted to Rs843 billion, of which Rs623 billion have been transferred to a holding company, now the responsibility of taxpayers.

The PML-N government had halted the PIA privatisation process in 2015, leading to a Rs500 billion loss since then. The secretary stressed that the success of the PIA privatisation is crucial for the overall success of the government's privatisation agenda, which primarily includes power distribution companies.

Sources indicated that the financial advisor has not fully priced PIA's international routes and landing rights, which could also impact the bid price. Bajwa mentioned that PIA's audited financial accounts up to April 2024 have been provided to the bidder who requested the latest statements. He added that the government is striving to complete buyer-side due diligence by this month and finalise the terms of the privatisation by mid-September.

"But it all depends on how deeply the bidders want to go," Bajwa said, regarding the submission of financial bids.

"It seems likely that the government may need to extend the privatisation deadline again," said Chaudhry.

The secretary of Privatisation noted that investors have also raised questions about the proposed terms of the privatisation. He mentioned that the government has offered to sell between 51% and 100% of the shares. Most parties are interested in acquiring 75% or more shares, he added. One party has indicated a willingness to acquire 100% of the shares, two parties are interested in 51%, one in 75%, and another in 80% to 90%.

Based on feedback from the shortlisted parties, the government will aim to agree on a single percentage for the sale, the secretary said.

The interested parties are also reluctant to invest the $500 million, which has been estimated by PIA as part of the business plan, said the secretary.

Bajwa noted that the buyer will need to inject Rs80 billion in the first year to keep the airline operational and will also have to clear another Rs220 billion in liabilities. In addition to these investments, the buyer will also need to invest $500 million.

When questioned about the relevant law in case of a dispute, the secretary of privatisation said that at least two parties have expressed a preference for international arbitration and law, but the government will try to ensure that the agreements are governed by Pakistani laws.

Pakistan has had negative experiences with international arbitration in the past, having faced penalties of up to $6 billion. However, foreign investors are hesitant to trust the Pakistani judicial system. Notably, no foreign investor has shown interest in acquiring PIA.