Bailout: Govt promises guarantees for fresh Pakistan Steel loans

The mill seeks Rs6b from banks to buy raw material and stay afloat.

ISLAMABAD:

The government has decided to provide guarantees to Pakistan Steel Mills (PSM) in its bid to acquire Rs6 billion loans from a consortium of banks required to run the once profitable enterprise that incurred losses of over Rs40 billion from 2008 through 2010.

The decision was taken during a meeting of the Cabinet Committee on Restructuring held here under the chairmanship of Finance Minister Dr Abdul Hafeez Shaikh on Friday. The committee discussed various recommendations for improvement in the working of PSM.

Currently, the value of PSM assets is less than its liabilities. Under the State Bank’s prudency regulations, banks cannot entertain loan requests from an enterprise with a negative equity that compelled the finance ministry to extend guarantees. In case, PSM fails to service its debt it will become the liability of the federal government.

An official of the finance ministry said the decision would not have any implications for the budget and the purpose of extending guarantees was to provide working capital to PSM to keep the unit afloat at a time of restructuring.

The PSM management has sought immediate financial assistance of Rs6 billion for procurement of raw material – coal and iron ore. PSM had expressed fears that if the assistance was not provided then the mill might shut down.

In January, the cabinet committee approved Rs7 billion bank guarantees but asked the management to reduce the number of employees by 3,000 through normal attrition.

A handout released by the finance ministry stated that the cabinet committee discussed the business plan proposed by PSM. The mill was seeking injection of Rs11 billion for substantial restructuring of existing loans and also demanded reduction in customs duties on imported raw material but no decision was taken.

The meeting discussed implementation of the capital expenditure plan and decided to finalise it before the end of December.

Earlier, the PSM management informed the panel that it had remained a profitable organisation from 2001 to 2008. However, in 2008-09 it suffered a loss of Rs26 billion, while another Rs11.5 billion was lost in 2009-10. PSM is currently running below 20 per cent capacity and in order to reach break even it should be operated at 70 per cent capacity, said the finance ministry official.

While the management attributed the financial losses to the global crisis, analysts believe that massive corruption and nepotism led to the downturn as evident from corruption cases in the Supreme Court.

In the presentation, the PSM management said the current crisis was because of low capacity utilisation, liquidity crisis, steep rise in international coal price in 2008 and some governance issues.

Rs600m for Railways

The cabinet panel also discussed the problems of Pakistan Railways. In a significant move, it decided to appoint its chief executive officer and chief financial officer through advertisements. The official said the process would be completed in next three months.

The committee decided to provide Rs600 million to the railways to pay Wapda dues. It once again directed Pakistan State Oil (PSO) to enhance credit limit of the railways to Rs2 billion provided the railways gave priority rights over its revenues to PSO. It underscored the need for the railways to timely pay salaries and pensions.

Published in The Express Tribune, November 26^th, 2011.