Govt finally cuts loose 'white elephant' PIA

Arif Habib Consortium places highest bid of Rs135b; Govt gets only Rs10b, rest to be reinvested in airline

ISLAMABAD:

The government on Tuesday sold its 75% stakes in the Pakistan International Airlines (PIA) for Rs10.1 billion cash to business tycoon Arif Habib-led consortium, marking the completion of the first major privatisation transaction in two decades by offloading the white elephant.

The consortium of Arif Habib, Fawad Ahmed Mukhtar, Gohar Ejaz and Aqeel Karim Dhedhi — Pakistan's renowned businesspersons — placed the highest bid of Rs135 billion for the 75% shares in the 13th round of open auction. It beat another cash-rich consortium led Muhammad Ali Tabba.

The Air Blue was disqualified for the open bidding after it offered Rs26.5 billion, which was nearly three-fourth less than the minimum price of Rs100 billion.

The government had set a very low minimum price, even compared to the last failed attempt when it asked for Rs85 billion for 60% shares when the entity had negative equity.

Out of the Rs135 billion, the government will get Rs10 billion ($36 million) and the remaining amount will be invested in the Pakistan International Airlines (PIA) by the successful bidder, said Muhammad Ali, the adviser to prime minister on privatisation after the auction.

It was the second attempt to sell the PIA in over one year and marks the first successful transaction since 2005 when the government had sold K Electric –the country's largest power distribution company.

Prime Minister Shehbaz Sharif had desired that the PIA should be sold for Rs200 billion.

During the Cabinet Committee on Privatisation meeting, which approved the minimum sale price, one of the cabinet ministers advocated selling PIA at any cost to get rid of the bleeding entity.

The government took out Rs670 billion from the books of PIA, which will now be serviced by the taxpayers. For the current fiscal year, the government has estimated Rs35 billion in debt servicing cost, which will continue for at least six more years.

From the start, the Arif Habib Group took an aggressive approach compared to the only competitor, who was initially conservative and added Rs250 million in each of the first eight rounds of auction.

After the eighth round, the Muhammad Ali Tabba group sought a half an hour break to internally consult before finally "congratulating Arif Habib" when he raised the price tag to Rs135 billion.

To make the second attempt successful, the government had also waived off 18% sales tax on aircraft lease, gave Rs36 billion tax credit to the bidders and extended the timeframe to clear the current over Rs33 billion liabilities of the Federal Board of Revenue (FBR) and the Civil Aviation Authority (CAA).

The bidders valued the 100% shares of the company at Rs180 billion or $640 million.

The privatisation advisor said that the winner would have to deposit two-third of the bid money within three months and the remaining amount in one year. He said the government would not transfer the shares equal to one-third of the price until the successful consortium pays all the dues.

Muhammad Ali said the successful bidder will have three months' time to show interest to acquire the remaining 25% shares of the PIA at a 12% premium on the bid price. The adviser said that the successful bidder would have the option to bring in two new partners, including an international airline.

There is a high possibility that the Fauji Fertilizer may become the fifth partner in the consortium, according to the officials who are privy to the development.

The government's desire is that after four years the PIA should have 40 functional aircraft and its passenger load should increase from 4 million to seven million annually, said Muhammad Ali.

PIA Employees should not have any fear as all the good employees would be retained and compensated, said the winner Arif Habib. He said that the existing employees would be given confidence and they should run the airline.

The government has also separated the medical liabilities of the PIA employees and parked those in the PIA holding company, which are now serviced by the taxpayers.

The government has barred the new owner from firing any employee for a maximum period of one year. The winner has also been given ample time to clear the liabilities of the FBR and the CAA.

We are planning to add 18 more aircraft and depending upon the traffic load our plan is to take the total number of fleet to 64, said Habib. The PIA is currently flying only 18 aircraft out of the fleet size of 34.

Muhammad Ali said the PIA's liabilities had again started piling up and there was a risk that after clearing over Rs650 billion from the balance sheet, the amount can again alarmingly increase.

The Economic Coordination Committee (ECC) of the Cabinet on Tuesday approved Rs2 billion or over $7 million to clear the tax liabilities and make principal loan repayments of Roosevelt Hotel, New York, which is owned by PIA Investment Limited.

The successful privatisation transaction of the PIA may open the avenues for the sale of other entities.

The PIA sale would also boost the confidence of the local investors who shied away in investing more in Pakistan due to unfavorable business environment.

The PIA currently has less than 6,900 permanent employees in addition to 2900 contractual employees.

It has privileged access to many busiest world airports, including Heathrow, London. The national flag carrier has 170 pair slots in various global destinations, including to the Gulf countries, North American and Europe.

"I have always maintained that regardless of which consortium emerged successful, Pakistan would be the ultimate winner and today's outcome fully vindicates that belief," said Prime Minister Shehbaz Sharif in his congratulatory message.

The premier said the strong participation of our leading business groups and some of Pakistan's most seasoned and respected investors is a powerful vote of confidence in our economy and its future.