Dar rescues PSM from questionable transaction

Saving possibly Rs33 billion, Sindh govt proposition to acquire PSM to be considered

ISLAMABAD:

Finance Minister Ishaq Dar has saved his government from a huge financial scandal, as he unearthed a move to quietly transfer Rs33 billion contingent assets to buyer of Pakistan Steel Mills (PSM), which is on top of privatisation list. 

In a meeting of Cabinet Committee on Privatisation (CCoP), Dar on Friday picked a major discrepancy in the transaction structure of the PSM, which the Board of Privatisation Commission had approved just a day before for the final approval of the CCoP, according to officials.

Dar rejected the PC-Board transaction structure, which entailed transferring benefits of Rs33 billion deferred tax assets to the buyer of the PSM, confirmed a top official of the Ministry of Finance to The Express Tribune. Dar is a foreign qualified Chartered Accountant -an experience that helped him expose the “ill-prepared” transaction structure.

The officials did not comment whether there were ulterior motives behind the move. The Chairman of the PC Board, Mohammad Zubair, was aware of the Rs33 billion contingent assets.

“There were two opinions whether Rs33 billion deferred tax assets should be on balance sheet or off balance sheet. My view was that it should be kept off the balance sheet and then subsequently used as a marketing tool,” said Zubair, while talking to The Express Tribune.

Dar was said to be upset after seeing the work of the PC-Board and he reportedly grilled the PC officials for such unprofessional work, they added.

The officials said the consortium of financial adviser (FA), which had proposed the transaction structure to the PC Board, did not even mention the Rs33 billion deferred tax assets in the corporation’s balance sheet. The FA did mention roughly Rs3 billion income tax and sales tax refunds in the balance sheet, they added.

The ill-prepared transaction structure left no option for Dar but to offer the country’s largest industrial unit to the Sindh government on as-it-is-basis.

“The CCoP decided that as the Sindh Government had expressed interest to acquire the Steel Mills, the provincial government may be offered to acquire the PSM with all its assets and liabilities”, according to an official handout issued by Ministry of Finance.

PSM is running at 1% of capacity despite an injection of over Rs22 billion by the government for enhancing capacity utilisation to 77%.

Potential scandal

In its draft illustrative balance sheet as of June 30, 2015, which was presented to the PC Board, the FA had shown the total assets of the PSM at Rs243.5 billion, said the official. They said the balance sheet did not mention Rs33 billion contingent assets.

By including Rs33 billion deferred tax assets, the total assets were Rs276.5 billion.

Of the assets, the FA had estimated the value of land at Rs150 billion, which it suggested that should remain with the federal government. It proposed that the remaining assets of Rs93.5 billion or 38% of the total assets should be transferred to the buyer.

The FA had estimated total liabilities at Rs183.5 billion, recommending that the government should pick Rs142 billion liabilities.

The official said that on the basis of the PC-board approved structure, the buyer would have placed the bid on the basis of PSM’s net assets of Rs52 billion. Had Dar not noticed the discrepancy in the transaction structure, the net benefit to the government would have been around Rs20 billion, said the official.

The official said the issue of extending Rs33 billion benefits to the buyer of the PSM came for discussion during the PC-Board meeting, which was held on Thursday. Some of the Board members had vehemently opposed the Board’s move to quietly pass on these benefits to the buyer. However, they were voted out in the meeting.

Financial Adviser Selection

The PC Board had hired FA consortium led by Pak-China Investment Bank. The questions had also been raised over the manner the PC selected the FA. Initially, the consortium was comprised of Pak-China Investment Bank, Grant Thornton consulting, Tyazhpromexport, RIAALAW and AASA Consulting, which obtained only 48 marks.

Later on, the Pak-China Investment Bank dropped some partners and included AF Fergusons and Company, Abacus Consulting and Iqbal Nanjee & Company. This time the PC gave it 83 marks in a questionable process, as one of the members took the presentation through audio link, which led to disqualification of other contender. Dar on Friday also came hard on FA, questioning the depth of the financial analysis it had done.

FESCO

The CCoP approved the transaction structure of Faisalabad Electric Supply Company (FESCO), allowing the Commission to invite bids for 74% equity sale, said the Finance Ministry.  The FESCO transaction structure had been presented to the CCOP few weeks back, which Dar held for its analytical review. Initially, the CCOP had objections over valuation of land and its treatment.

Published in The Express Tribune, October 3^rd, 2015.

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