July issue 2006
Reversal of Fortune
It took a decision by a nine-member bench of the Supreme Court and the reversal of the much-trumpeted privatisation of Pakistan Steel Mills for the Prime Minister to revive the long-awaited Council of Common Interests (CCI). In the wake of the Supreme Court decision, Shaukat Aziz convened a press conference to announce that he had forwarded the recommendation for the vital but so far dormant council to the presidency. Interestingly, he remained tight-lipped about the names, perhaps in a bid to save face in case some of his nominees were dropped from the list.
The birth of the CCI marks the opening of a brand new chapter of controversy, with the military regime feeling the heat ahead of a challenging election year.
The government was not as lucky in the case of Pakistan Steel Mills as it had been with regard to certain other privatisation deals. No doubt, the endgames of the PTCL and KESC deals were also embarrassing for the government, as was the pullout by the highest bidder in the Pak-American Fertiliser case. Thanks to the proactive workers of the steel mills, however, this hurriedly reached deal was reversed by the court decision.
Pakistan Steel Mills was to be handed over to the Arif Habib Consortium on May 29 for Rs 21.68 billion at Rs 16.8 per share. The consortium was supposed to acquire 75 per cent shares of the Steel Mills with management control, 4,457 acres of land with developed infrastructure including 110-kilometre metalled roads, a 70-kilometre railway track, a 165-megawatt power plant, a water treatment plant and a jetty.
However, the Supreme Court while halting the transfer of possession to the bidders, stayed the process of privatisation, first on May 24, till June 15 and then on June 14, pending a final decision on the case.
The consortium comprises the Tuwairqi Steel Mills, the Magni Togorsk Iron & Steel and Arif Habib Securities. The chairman, Watan Party barrister, Zafarullah Khan was the main petitioner in the case challenging the deal, for which the chief justice had constituted the larger bench.
The nine-member Supreme Court, after back-to-back hearings over the past few weeks, finally declared the sale of Pakistan Steel Mills to the three-party consortium null and void. Instead, it ordered the government to refer the matter to the CCI within six weeks.
It was indeed a shock to the government, which had already claimed credit for its successful privatisation policy during the Parliament’s budget session. The reversal of the $362 million deal left the Russian-Saudi-Pakistani investors, as well as the government, in a state of absolute shock.
“The March 31 Letter of Acceptance (LOA) and April 24 Share Purchase Agreement (SPA) with the bidders are declared to be void and of no legal effect,” the chief justice announced in a packed courtroom, marking the conclusion of four weeks of consecutive hearing.
The Privatisation Commission Ordinance 2000 was, however, not held as being against the Constitution, but the apex court’s short order said the process of PSM’s privatisation stood vitiated by acts of omission and commission on the part of certain state functionaries, reflecting a violation of mandatory provisions of law and the rules.
This adversely affected decisions like pre-qualifying a member of the successful consortium (Arif Habib), valuation of the project and the final terms offered to the successful bidders, which were not in accord with the initial public offering given through advertisement, the short order said.
The decision read: “We hold that the establishment and working of CCI was a cornerstone of the federal structure, which provided for protection of the rights of the federating units. Mindful that this important institution (CCI) is not functioning presently and taking note of the statement of Advocate Abdul Hafeez Pirzada, who is representing the federal government, that the process for making it functional was underway, we direct the federal government to do the needful expeditiously as far as possible, but not later than six weeks.”
“However, the approval for the privatisation of PSM by the CCI on May 29, 1997 continues to hold the field.”
“In view of the developments having taken place during the intervening period and the divergent stand taken by the counsel for the federal government that this approval was never recalled and the stand taken by the steel mills’ counsel that the matter of its privatisation was dropped subsequently, it would be in order if the matter is referred to CCI for consideration.”
On illegalities, the court noted that pre-qualified parties — the Arif Habib Group of Companies and Al-Tuwairqi Group of Companies — had entered into a consortium before the bidding process, but the third party, Magnitogorsk Iron and Steel Works Russia, joined hands with the consortium on the day of the bidding.
It also questioned the ORE-qualification of Arif Habib, a member of the successful consortium, who had been accused of being the largest beneficiary of the stock exchange crash in March, and has three damage lawsuits, three investigations and a first information report (FIR) in a criminal case pending against it. The Privatisation Commission Board had recommended the sale of PSM at Rs 17.43 per share, but the Cabinet Committee on Privatisation had determined the reference price at Rs 16.18 per share. The court questioned the low reference price set by the cabinet. It also said that the 4,457 acres of land, which was part of the Steel Mills, had not been included in its evaluation.
Since the bid offered by this consortium was found to be higher than the bid of other competitors, it was accepted and the LOA was issued on the same day, March 31, 2006, followed by the agreement on April 24.
The order noted that the privatisation commission had extended benefits to the purchasers like handing over the stock in trade in the units worth Rs10 billion and cash worth Rs8.559 billion lying in its account out of which post-dated cheques for about Rs7.67 billion had already been issued to clear the liability of loans, which were due for the years 2013 to 2019. Likewise, the tax of Rs3 billion has already been paid, out of which Rs1 billion will be refunded to the purchaser on taking over the unit. Thus the total loss incurred by the government in this manner works out to Rs18 billion. Above all, the government has accepted the liability to pay compensation of Rs15 billion to workers under the golden handshake scheme, the order said.
The short order also holds that it is not the function of the court, ordinarily, to interfere in the policy-making domain of the executive. “However, the process of privatisation of the PSMC stands vitiated by acts of omissions and commissions on the part of certain State functionaries reflecting violation of mandatory provisions of the law and rules framed under these, which adversely affected the decisions, pre-qualification of a member of the successful consortium (Arif Habib), valuation of the project and the final terms offered to the successful consortium, which were not in accordance with the initial public offer given through advertisement,” the court held.
Barrister Zafarullah Khan of the Watan Party — who had challenged the sale of 75 per cent stake and handing over of management control of the PSM to the consortium comprising Russian Magnitogorsk, Saudi Al-Tuwairqi and Arif Habib Securities for $362 million (Rs21.68 billion) at a rate of Rs16.8 per share — told reporters after the unanimous verdict: “The decision will prove to be a source of strength for the people of Pakistan, help build the image of the judiciary and further strengthen its independence.”
Many analysts, as well as government officials,fear the Supreme Court verdict against one privatisation decision would be read as a reversal of the entire privatisation process, thus opening a Pandora’s box of petitions challenging every single sale made since the early 1990s.
Since 1991, 160 transactions have taken place, netting a total of Rs 395 billion. There have been repeated delays, too. It was only in 2002 that privatisation picked up again and since then 33 deals amounting to Rs 302 billion have been completed.
Most agree that the decision may also augur well with the investment climate as the Supreme Court has conditioned each new privatisation with the approval of the CCI.
However, there are strong voices within the bureaucracy as well as the treasury benches that have privately asked for revision or scrutiny of other deals such as those involving PTCL and KESC.
The government had gone many extra miles to please Etisalat, the highest bidder for PTCL, which has been using delaying tactics in fulfilling its financial commitments towards the privatisation of the telecommunication corporation.
Constitutionally speaking, an unsettled matter in the CCI is required to go to a joint session of parliament which would then debate the fate of an under consideration deal. Keeping in mind the high gear approach of the government, the long constitutional route to privatisation, especially of entities like Pakistan Steel, amounts to a ‘mere waste of time.’
The backers of the privatisation process fear nasty consequences to a timely policy just because of one shadowy deal. The bloc believes that the Supreme Court decision may scare off future bidders who will now think that no final deal in Pakistan is really final. For them, the privatisation process may fall prey to disgruntled losing bidders and ‘status quo’ friendly labour unions.
Certain circles analyse the reversal of the PSM privatisation in the context of national security on the basis of published reports that an Indian-born steel baron is keen on acquiring the Russian component of the consortium that purchased the steel mills.
The opposition, ranging from the PPP to PML(N) and the MMA, has not only welcomed the reversal of the privatisation deal but also applauds the creation of the CCI, which General Musharraf always remained indifferent to. The delayed but inevitable debacle may infuse a wave of confidence amongst the frustrated labourers and political activists who have been waiting for such an opportunity to vent their anger.
The Pakistani group involved in the shot-down deal has high-powered connections in Islamabad’s power corridors. It is not a coincidence that the president and prime minister have stopped referring to the country’s investment climate in the light of the changed outlook in the stock exchange. The shadowy PSM privatisation scam has had an adverse impact on domestic financial markets and may ring a warning bell for prospective investors in the future.