The true cost of PIA privitisation
In the five years before privatisation, Pakistan International Airlines (PIA) experienced its most volatile financial period, with massive operational losses. The financial decline was rooted in years of overstaffing and inefficiency due to political interference and labour union pressure, Covid-19 related travel restrictions, and EASA flight ban following the failure of CAA resulting in revelations of fake pilot licenses, rising global fuel prices and the large rupee devaluation. But the financial collapse in 2023 was precipitated by the interest rate policy of the SBP raising rates to over 22 percent ostensibly to curb inflation but which crippled not only PIA but many corporations in Pakistan. While PIA and other corporations fell into crippling debt traps due to the SBP policy, commercial banks NBP, HBL, and BoP among others became the primary beneficiaries of PIA’s decline. By 2024, banks earned about Rs424bn over the previous 15 years far exceeding the original ‘principal amount’ of loans (Rs268bn). The airline was essentially a "money printing machine" for the banking sector.
Before the final "clean-up" for privatisation in 2025, PIA was kept alive through a complex and expensive survival strategy funded almost entirely by the Pakistani taxpayers. Even in privatisation the taxpayer has received no relief. In order to sell the airline, the government moved the bulk of the legacy debt to a "Holding Co" so the taxpayer is now officially the borrower, with servicing charges of Rs 32bn/year for the next decade to be paid in more taxes or charges.
While the privatisation was hailed as a success because the government "saved" the airline, it was at the expense of the taxpayer.
While separating the liabilities from an insolvent public corporation is the norm in privatisation globally, the terms given to creditors despite their role in the financial collapse of PIA is scandalous. The cleanup deal for PIA's privatisation is a classic example of ‘Socialising the Losses and Privatising the Gains.’ To make the airline attractive to the private sector, the government performed a financial "magic trick": it removed the wreckage of the past and handed it to the taxpayer, while giving the banks a risk-free, high-yield exit. The Bifurcation created a "Clean" Airline and a "Dirty" HoldCo. The 10-year debt restructuring agreement reached with a consortium of nine local banks is widely viewed as a massive victory for the banking sector but at the public's expense. There was no principal haircut. Banks received 100 percent of their principal (PKR268bn). Highly unusual for a "bankrupt" entity; usually, creditors take a 20–40 percent haircut in such turnarounds. The banks were also given a generous deal on interest rate. A fixed 12 percent per annum for 10 years, while lower than the 22 percent peak in 2024, it "locked-in" profit even as market rates started to drop in 2026. With long-term inflation projected at 5-7 percent over the next 10 years, it implies the commercial banks extracted a ‘real interest rate’ of 7-5 percent which is exorbitant for a sovereign-backed debt. Banks will collect PKR322bn in interest alone over the next ten years, which is more than the original loan amount they provided.
The "Revolving Door" Roles of Officials has raised concern in this lopsided arrangement. Officials who previously regulated the creditor banks and the capital markets negotiated a deal that disproportionately favoured the banks (via the 12 percent no-haircut deal) and the buyers (via the asset-heavy, debt-lite split). By converting commercial debt into a sovereign-backed bond at 12 percent fixed interest, the government has guaranteed bank profits regardless of PIA’s future performance. Even if the Roosevelt Hotel (held in the HoldCo) is sold for its $1 billion valuation, it will barely cover the interest burden leaving the burden of principal solely on the taxpayer.
The official announcement that the Arif Habib-led consortium won a 75 percent stake in PIA with a bid of PKR 135 billion, is misleading, and deceptive. The transaction is structured such that most of the total bid of Rs135bn never reaches the seller’s (government) pockets. The Government of Pakistan GOP will receive only Rs10.125 bn (which is the actual sale price) paid to the seller for ownership. The remaining Rs124.875 bn will be injected into the airline after the sale. Additionally, the buyer has committed to inject another Rs80bn into the value of their own asset and not to the seller. When Rs654bn in liabilities that the government took over to make the airline "sellable" is factored in, the state has effectively paid roughly Rs 644 billion to get rid of the airline; this is "divestment at a loss" designed to stop the "bleeding" of future subsidies.
To ensure compliance with the investment commitment by the buyer, the PIA privatisation deal includes certain enforcement mechanisms and an ‘employee protection’ mandate for 12 months. The buyer’s primary obligation is to transform PIA from its current "skeleton" state into a competitive regional player. The deal includes specific ‘Fleet Expansion Milestones’ that the Arif Habib-led consortium is legally bound to meet. The "teeth" in the deal are not about the price, but about the ‘Business Plan’ says the government. In exchange for the investment commitments, the Buyer has received a business with a potential that is scandalous, the reason why the "Fraudulent" Headline Persists. The Arif Habib conglomerate pays the government a measely Rs10.1bn (7.5 percent of the commitment) in actual cash. They spend the rest of the "bid money" (PKR-125bn) on themselves. With new planes, they capture the London slots profit. When LHR generates the estimated PKR 40–50 billion in annual revenue (which is the amount lost during the ban), the buyer will recoup their entire "Investment Commitment" Rs125bn in less than 3 years!
The biggest risk for the Arif Habib consortium are the EASA and UK DfT Safety Audits. While the bans were lifted in late 2024, they are "conditional." If the new private management fails a safety inspection in 2026, the routes could be shut down again. And EASA and DfT’s primary concern aren’t just PIA, but the Pakistan Civil Aviation Authority (PCAA). If the PCAA fails its ICAO USOAP audit in 2026, PIA could be grounded again regardless of its own performance.
The "Non-Core Assets"of PIA, now allocated to HoldCo—specifically the Roosevelt Hotel (New York) and Hotel Scribe (Paris)—are the government's (taxpayers’) only asset against the PKR 654 billion legacy debt. But even the sale or redevelopment of these hotels cannot fully offset the debt. In a "best-case" scenario, if the Roosevelt fetches $1 billion target after redevelopment, there will still be a shortfall of PKR250bn to clear the debt. And if the Roosevelt redevelopment takes the usual 8 years, the government will have added PKR 256bn in new interest costs at the exorbitant 12 percent agreed, before the "wealth" is even created thus burning out the asset completely in the interim. The two hotels working at full capacity cannot cover the cost of interest payments generated by the generous restructuring deal.
To eliminate the unjustified debt burden on taxpayers the government must return to Sovereign Debt Restructuring. One option is that instead of repaying the debt in cash, the government gives the banks equity stakes in the Roosevelt Hotel and Scribe Hotel JVs in exchange for cancelling the principal debt (Rs268bn). Another option would be that the current 12 percent interest rate is further cut to 7 percent otherwise, at 12 percent the debt will grow faster than the hotel's value. Essentially, with a 5 percent interest cut, the taxpayer would "earn" back the value of the airline every year.
The 2025 PIA privatisation successfully halted the airline's daily operational haemorrhaging but at a high moral and fiscal cost. The deal effectively socialised two decades of mismanagement, ensuring that while the private sector inherits a "clean" airline, the Pakistani taxpayer remains the primary financier of the legacy debt, paying a "premium" interest rate to a banking sector that has already seen historic profit growth from the decline of PIA.
The writer is a PhD Johns Hopkins, former IMF staff, Federal Minister of Commerce.
All facts and information are the sole responsibility of the writer