Galvanising Pakistan Steel: Russia offers $350m loan to revive ailing unit

Links financing with award of multibillion-rupees contract to state-owned firm.

ISLAMABAD:

Russia has linked financing for Pakistan Steel Mill Expansion project with the award of a Rs30 billion contract to its state owned firm without having to go into the bidding process.

According to reports, due to low capacity utilisation, Pakistan Steel is currently facing accumulated loss of about Rs40 billion and the total liabilities as on September 15, 2011, were Rs55.5 billion.

Pakistan has accepted Russia’s offer and the multibillion-rupee contract will be awarded to Russian state owned firm VO Tyazhprom Export. This is against the rules laid by the Pakistan Procurement Regulatory Authority but sources say that the president or the prime minister are expected to relax the rules in this case.

According to documents available with The Express Tribune, the Russian Federation will provide a loan of $350 million for the mill expansion project under which its production capacity will be enhanced from the existing 1.1 million tons to 1.5 million tons per year.

During the president of Pakistan visit to Russia on May 11 to 13, 2011, the concerned officials of the delegation held a meeting with the Russian state-owned firm in connection with the expansion of Pakistan Steel through technical assistance and concessionary financing by the Russian Federation.

Completion of the expansion project will contribute significantly in the turnaround of the mill through increased market share and substantial improvement in its financial condition. The augmented profitability and cash flow as a result of the implementation of the expansion program will also be helpful in meeting the expenses for further full-fledged expansion up to three million tons per year.

With the sub-economic design capacity for producing 1.1 million tons per year of raw steel, its low production, low capacity utilisation resulting in low sales and mounting losses, Pakistan Steel did not have a good future. No investment had been made to catch up with maintenance and mandatory repairs, which eventually resulted in the deterioration of machinery and equipment. The excessive surplus manpower, mounting liabilities, poor work discipline, and lack of culture of accountability made the situation worse.

Therefore, in order to arrest further downslide of the mill and to facilitate its turnaround, the then government in May 2000 approved a restructuring plan for Pakistan Steel. As a result, Pakistan Steel underwent a remarkable transformation from an ailing unit to a financially viable entity, though, as a result, useful trained manpower was drained out.

Documents further reveal that Pakistan Steel set up with the techno-economic assistance of the then Soviet Union has good mechanical equipment but is weak in instrumentation and control system. This has resulted in inefficiencies and inaccuracies. Although the plant has been in operation for the last 30 years yet it has been unable to achieve capacity a sustained basis.

Keeping in view that current demand of steel in the country is around 5.5 to 6 million tons per year, the present government has accorded priority to the expansion of Pakistan Steel from its existing capacity of 1.1 million tons per years, the documents add.

Published in The Express Tribune, October 10^th, 2011.