PIA buyers offered hefty tax exemptions

PM's adviser insists govt to net Rs55b from sale

ISLAMABAD:

The government offered substantial tax concessions to facilitate the sale of Pakistan International Airlines (PIA), which incurred losses of Rs500 billion since 2015, said Privatisation Adviser Muhammad Ali on Wednesday.

Speaking at a joint news conference with Information Minister Attaullah Tarar, Muhammad Ali displayed a presentation that implicitly held the three major political parties responsible for PIA's decline over the past 15 years. According to the briefing, PIA was profitable between 1989 and 2009, but started incurring losses from 2008 onwards.

The presentation highlighted that the airline's decline began during the Pakistan People's Party's (PPP) tenure from 2008 to 2013, and worsened during the Pakistan Muslim League-Nawaz's (PML-N) last five-year term. Ali said the airline's financial position had started deteriorating before 2009, marking the period from 2010 to 2020 as one of "financial distress."

The press conference was held to explain the rationale and structure of the privatisation deal. The government sold a 75% stake in PIA for Rs10.2 billion in cash, a day before the briefing.

Ali acknowledged that PIA's performance had deteriorated over the last 15 years. "From 2015 to 2024, the airline incurred losses totaling Rs500 billion," he said. According to his presentation, the losses were Rs33 billion in fiscal year 2014-15, rising to Rs45 billion, Rs51 billion, and Rs67 billion in subsequent years, with a total of Rs196 billion in losses during the PML-N's last four years in power.

During the first year of PTI's government, losses declined to Rs53 billion, further dropping to Rs35 billion in 2019-20. However, losses rose again to Rs50 billion in 2020-21, and jumped to Rs88 billion in 2022. The highest single-year loss in the past decade was Rs108 billion in 2022-23, when the PDM alliance was in power.

Ahmad Nawaz Sukhera, the former privatisation secretary, said on social media that PIA was set to be privatised in 2016, with strong market interest, but the process was stalled by a special parliamentary committee. He questioned whether the subsequent losses should be recovered from the parliamentary panel.

According to Ali's presentation, the new buyers got Rs191.2 billion worth of assets and Rs182.1 billion worth of liabilities. It has a positive equity of Rs9.1 billion. The new buyers also got Rs9.5 billion worth of cash and bank balances and Rs14 billion prepayments.

Ali said that the new investors have been given GST exemption on the induction of aircraft, engines and parts. He said no new tax will be levied for 15 years, including on PIA fuel. There is also a 15 years income tax exemption in payment of dividends to avoid double taxation, he added.

The Rs26.6 billion tax obligations, Rs7 billion loans and Rs12 billion worth plot has also been taken out of PIA. The FBR's Rs26.6 billion tax liabilities will be cleared by the new buyers in five years in four annual installments, according to Ali.

The adviser said that the new buyer would make Rs116 billion worth capital investment till 2029. In the first year, Rs35.6 billion will be invested, in the second year Rs37.4 billion will be invested, in the third year RS23.2 billion, in the fourth year Rs11.9 billion and in the fifth year Rs8 billion will be invested.

Ali showed that the PIA's high cost and revenue model was driven by overstaffing and inefficient fleet utilisation in the past.

The government has also given a commitment that it would not start a new airline but there is no such bar in the provinces, said Ali. He, however, said that the provinces should also not start new airlines.

The adviser shared that the airline industry contributes only 1.6% to Pakistan's GDP, which is low. "With a meager share of only 0.3%, the aviation industry is also not contributing towards employment in Pakistan," he said.

Ali said that macroeconomic variables such as rupee devaluation and rising interest rates further exacerbated liabilities. The PIA balance sheet is now free from long-term debt and substantial concessions in the taxation regime are built in the reserve price.

Arif Habib Corporation Limited-led consortium, which also included Metro Ventures (Private) Limited, Fatima Fertilizers Company Limited and City Schools (Private) Limited, acquired 75% of PIA for a total Rs135 billion but the government will get only Rs10.2 billion cash.

Ali shared that after the bidding process, the total value of PIA stands at Rs180 billion, i.e., Rs45 billion is the value of the 25% government's remaining stakes.

"If the buyer purchases this stake, the government will receive Rs45 billion. So the total economic value of the PIA transaction for the government is Rs55 billion," he said.

The bidder will invest the remaining 92.5% or Rs124.8 billion of the bid amount in PIA in the form of new equity via 'Rights Issue' in two tranches, i.e., two-thirds as an upfront payment (Rs83.25 billion) and one-third as the second tranche (Rs41.625 billion) to be invested within 12 months of financial close.

Ali said that the airline currently serves 30 destinations, while PIA has rights as a designated airline for 78 countries and has air service agreements with 97 countries. "PIA's biggest asset is its landing rights," he said.

Currently, the airline has 33 aircraft, including 16 A-320, 12 Boeing 777 and 5 ATR, but only 19 remain in operation, with a domestic market share of nearly 30%.

Ali said that Arif Habib wanted to acquire 100% stakes. To a question, the adviser said that the government would welcome the Fauji Fertilizer becoming a partner in the winning consortium due to its strong financial position and experience.