May issue 2006

Despite the government’s insistence that the privatisation of the Pakistan Steel Mills (PSM) has been entirely transparent, economic experts, opposition parties and the plant’s employees are skeptical about the sale of this strategically important unit, for what they contend is a paltry sum. Critics maintain that the government has sold the main plant and the valuable land it is situated on at a throwaway price.

On March 31, 2006, the Privatisation Commission (PC) announced it had sold 75 per cent shares of the PSM, considered the key industrial unit of the public sector, for 21.680 billion rupees — ie. 362 million USD. The cost per share was calculated at 16.80 rupees.

The PC declared that the successful consortium, comprising Arif Habib Securities (Pakistan), Al-Tuwairqi (Saudi Arabia) and Magnitogorsk Iron & Steel Works Open JSC (Russia) had made the highest bid at an open bidding ceremony held in Islamabad under the chairmanship of then Privatisation Minister, Awais Ahmed Khan Leghari.

The fact that the government seemed to be in a hurry to dispose off its units can be gauged from the fact that on the same day as the bidding ceremony, the Privatisation Commission issued a Letter of Acceptance (LOA) to the consortium. Under this letter, the consortium had to deposit 25 per cent of its bid in 20 days and complete full payment in 60 days. The PC disclosed that so far it has received 5.420 billion rupees, in accordance with the stipulated schedule.

The runner-up among the bidders was also a consortium, comprising Noor Financial (Kuwait), Industrial Union of Donbass (Ukraine), Government of Ras Al Khaimah and Al-Jomaih Holdings (Saudi Arabia). Its final offer was 21.6 billion rupees (USD 355 million), at a rate of 16.50 rupees per share.

The critics’ main objection to the sale is the inclusion of the valuable land in the deal. They contend that the actual price of the land in the Steel Mills’ area is more than 20 million rupees per acre and, at that rate, the government could have earned 90 to 92 billion rupees from the land alone. Furthermore, they contend, even the cost of just the plant itself is higher than the price the whole package fetched.

The government claims that it has privatised only 4,547 acres of land on which the actual plant is located. Officials maintain that the PSM held a total of 19,000 acres of land and about 14,500 acres, with an estimated value of 800 million USD, have been separated from the transaction. The PC contends that this land will now be used by the government for appropriate projects.

Meanwhile, the Sindh government is contending that it has a claim on the PSM land as per the legal framework governing it. The Sindh government’s stance is that the land had been allotted to the federal government in the 1970s for the establishment of the Pakistan Steel Mills, but since the PSM no longer belongs to the federal government, the land should be given back to the province. The Sindh government’s plea, however, has been ignored in the corridors of power in Islamabad and the federal government is reportedly planning to hand over the land to the National Industrial Parks Development and Management Company (NIPDMC), which has been assigned the task of setting up new industrial parks across the country.

The government’s privatisation programme had already been under fire before the PSM deal, particularly after the sale of the Pakistan Telecommunications Company Limited (PTCL) and the Karachi Electric Supply Corporation (KESC).

In the case of the KESC, the highest bidder had failed to pay the required amount on time, so the government had to negotiate with the second highest bidder.

As for the privatisation of PTCL, the government faced major embarrassment when the main bidder, Etisalat, initially backed out of the deal. Subsequently, after renegotiating, the government accepted the UAE company’s terms and later handed over the company’s management to it.

The privatisation of the Pakistan Steel Mills has dealt the credibility of the government’s privatisation programme a final blow as there is a wide-ranging belief that the deal could have fetched much more than the sale price. “The plant could have fetched more money even if it was sold as scrap,” said Haq Nawaz Akhtar, a former Chairman of the Pakistan Steel Mills. “It is a pity that other countries are setting up new steel plants in the public sector and in Pakistan, profitable and running units are being sold at throwaway prices,” he added.

Akhtar, who was head of the PSM between 1981 and 1986, contended that the government should not have privatised the PSM at any cost. According to him there was certainly no compelling reason to privatise the mill which had, in fact, signed a deal with a Russian company to double its production within two years.

Most affected by this deal are the mill employees. Thousands of PSM workers are worried about their future in the new set-up and fear widespread retrenchment. Although the government claims that it has offered an attractive package to the employees, representatives say they are not satisfied with the offer. “The government assurances have no credibility, because it has not protected the rights of workers of any of the other privatised units,” said Abdul Sattar Butt, General Secretary of the Pakistan Steel Employees Action Committee. For example, he said, after the privatisation of Habib Bank, PTCL and Naya Daur Motors, the new managements terminated the services of many workers, despite agreements and assurances to the contrary.

The Employees Management Group (EMG), one of the bidders for the PSM, could not muster the funds required to even reach the final stage of the process. Sattar Butt disclosed that the reference price was too high for the EMG which was why they decided to sideline themselves. Although the reference price has never been officially disclosed at any stage, unofficial sources maintained that the pre-bidding reference price of the PSM was an estimated 75 billion rupees. However, the government claims that the bidding price matched the reference price.

The PSM, with a designed production capacity of 1.1 million tonnes, was incorporated as a private limited company in 1968 with technical assistance from the then USSR and commenced full-scale commercial operations in 1984. The Pakistan Steel Mills complex includes coke oven batteries, a sintering plant, blast furnaces, steel converters, bloom and slab casters, billet mill, hot and cold rolling mills, a galvanising unit and its own power generation unit of 165 MW, supported by various ancillary units. Located about 40 km south-east of the financial capital of Pakistan, Karachi, and in close proximity to Port Bin Qasim, the mills have access to a dedicated jetty, which facilitates the import of raw materials.

Besides the main plant, the privatisation transaction also includes the sale of other assets like the steel ore plant in Thatta district, a 110 MGD water reservoir plant, a thermal power plant, an oxygen plant, a 72 kilometre railway track and 14 800 horse-power locomotive engines in running condition with over 100 railway wagons. According to Butt, if the value of those assets is calculated, the total cost reaches more than 200 billion rupees.

He disclosed that the PSM’s thermal power plant, after fulfilling the requirements of the steel plant and residential areas of Steel Town and Gulshan-e-Hadeed Phase-I, is selling electricity to the KESC. The oxygen plant meanwhile, provides oxygen to various industries and hospitals.

Apart from the costly prime land, Butt maintained that the mill’s present inventory of raw material in store stands at around seven billion rupees and an inventory of finished steel products, of almost equal value, is also lying at the plant, which will all be transferred to the new management. According to him, the mill’s sale of product currently amounts to 3.5 billion rupees per month.

“The total assets of the mills are valued at more than 150 billion rupees and the government has sold the entire plant, along with the precious land, for only 21.7 billion rupees to its favourite parties,” maintained Butt.”We have now asked the government to sell the unit to us at 25 billion rupees,” said Butt, adding that the employees have managed to rustle up 17-18 billion rupees on account of gratuity and provident fund. However, the government is not ready to accept any such offer. A spokesman for the Privatisation Commission said that now, when the privatisation process for the PSM has been successfully completed, certain individuals with “vested interests” were suggesting new and out-of-process offers which could not be considered either justifiable or appropriate by any economic writer, analyst or critic.

Arif Habib, head of Arif Habib Securities, said that their consortium would invest 60 million rupees in the PSM within a short period of time to increase the existing production capacity of 1.1 million tonnes to 1.5 million tones. He said running such a huge industrial unit with only 1.1 million tonnes production was not feasible, so the consortium has to increase the plant’s production.

However, some senior economists and people associated with the steel business contend that apart from the controversy regarding the privatisation itself, there is a concern about its probable fallout: an increase in the prices of steel products, particularly the material used in construction. “The privatisation of the Steel Mills is the transformation of a public monopoly into a private monopoly, providing no benefit to the common man,” said Dr. Asad Saeed, a senior economist and Director, Collective for Social Science Research.

There is further anxiety among steel traders because the PSM has been handed over to the same Saudi group which plans to set up a private sector steel manufacturing unit near the Steel Mills. President General Pervez Musharraf, in fact, performed the ground-breaking ceremony of the 130 million USD Tuwairqi Steel Mills (TSM) in the Port Qasim area just a day before the bidding for the PSM.

All the criticism and concern notwithstanding, the privatisation deal has been finalised, and the new management is all set to take over the mills. Another blatant example say critics, of how the family silver is being disposed off, without even the family’s by-your-leave.