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Privatizing Pakistan Steel

The writer heads the Sustainable Development Policy Institute.

The Pakistan Steel Mills (PSM) corporation’s story presents classic case studies, both on why state-owned enterprises (SOE) fail, and why compromising transparency backfires in the privatization process of SOEs.

Pakistan Steel started its full commercial operation in 1984, eleven years after its foundation stone was laid. However, within 22 years – in 2006 (when it was operating on its optimum capacity for at least the last three years) – it was privatized to a consortium of foreign and local investors. The hasty process of privatization became controversial and the Supreme Court of Pakistan annulled its sale giving it back to public-sector management.

After remaining in profit during the eight-year period between 2000 and 2008, Pakistan Steel has been making losses since 2008/2009. During 2010-2015, its production output was less than 40 percent of capacity. During 2014, its output was lowest – six percent of capacity. It was finally shut down in June 2015.

The previous PML-N government’s efforts to privatize the PSM met with resistance from the then opposition benches in parliament including the PTI. The latter at that time could not realize that Pakistan Steel, after failed privatization and as one of the failed SOE, would one day turn into a major liability for it.

Going forward, any decision about the PSM should be taken with at least three major considerations: how much can the government spend on a closed down mill and till when? How to revive it without repeating the mistakes done during the 2006 privatization? And how to secure the future of PSM employees?

Let us see the cost of a closed-down Pakistan Steel Mills to taxpayers. Pakistan Steel has been shut since 2015. However, the government has been paying the salaries of PSM employees. The total expenditure against zero production on this count since 2015 is Rs55 billion (Rs35 billion in salaries – a monthly salary bill of Rs350 million; and Rs20 billion plus of accrued retirement dues). Government bailouts to Pakistan Steel till June 2020 was Rs92 billion. Adding recently paid arrears for retired employees (which has not been paid since 2012), and retrenchment package of Rs20 billion would take total funding by the government to the PSM in the last 20 years to over Rs130 billion.

The total debt of Pakistan Steel stands at Rs230 billion. Just for perspective, Rs230 billion is the total amount allocated for social protection for the current financial year. The government of Pakistan paid Rs12000 each to 15 million families during the first phase of Covid-19. The total amount spent on that count is Rs180 billion, 50 billion less than the PSM’s total debts and 50 billion more than government bailouts.

Bailing out a closed-down mega industrial unit is neither economically feasible nor sustainable in our current economic circumstances. The question that arises is: if the government had to spend billions in bailing out the mills, then why did neither the PML-N, nor the current government revive it? A simplistic answer is that reviving Pakistan Steel is not an easy process. The PSM requires a working capital of approximately $1 billion to $1.5 billion. Apart from working capital, it also requires expertise to fix the damage to the PSM that occurred due to the unplanned shut down while molten material was in the system.

Moreover, it requires vision and professional management to modernize, automate and expand Pakistan Steel’s production capacity to three million ton per annum; below that size the PSM is not viable and will always make losses. On top of it, revival requires a professional and dedicated management team that can expertly in running the PSM profitably and competitively.

Here it is pertinent to mention that during 1981-2006, Pakistan Steel saw 22 chairmen in 25 years. In 1990 alone, half a dozen chairmen came and went. Most of them had no prior experience in the steel industry.

Finally, a revival of the PSM would require a pro-steel mills tariff policy. One may argue that along with mismanagement, and politically motivated recruitments, a major factor behind the failure of the PSM was a flawed tariff policy on steel raw material and steel products. Serving some vested interests, this policy turned raw material for the mills expensive, and import substitution of the products produced by Pakistan Steel cheaper.

In the current circumstances, the PSM can only be revived under public-private partnership mode, or through selling its major shares to private investor/s. However, no investor was interested in investing in a unit with Rs230 billion losses, liabilities of 9000 employees, 671 court cases, and disrupted vital utilities and services necessary to operate PSM. Even if the government takes care of all the above-mentioned factors, the last factor for a successful privatization is its transparency.

In Pakistan, opposition parties have always resisted any attempt to privatize SOEs. However, in the case of the PSM, the non-transparent way the Shaukat Aziz government sold the PSM in 2006 proved many of the concerns of the critics of privatization right. In 2006, Pakistan Steel with a clean balance sheet, 4546 acres land at Port Qasim (at that time its price was estimated at Rs27 billion), a Steel Ore plant in Thatta district, water supply plant of 110 million gallons/day, thermal power plant of 165MW, an oxygen power plant, 72 km railway line, 14 locomotives of 800 horsepower each, and more than 100 railway wagons (the reported value of those assets at that time was around Rs100 billion) was sold at a price of Rs21.68 billion.

Learning from Shaukat Aziz’s mistakes, one way the PTI government can avoid getting the privatization of the PSM over politicized is by ensuring complete transparency of the privatization process.

It is no fault of the employees but it is neither sustainable nor economically feasible to continue to retain the employees of a (policy led) sick unit, which has been closed for the last five and a half years. Hence, I endorse the current government’s decision to privatize Pakistan Steel and to retire over 95 percent of its employees – totaling 8,400 in two phases.

The government is planning that all employees (workers and managers) will be paid a termination salary of one-month plus their total retirement dues (Provident Fund & Gratuity). According to government sources, the overall average amount of retirement dues per person is Rs2.3 million. This would eliminate uncertainty and anxiety of employees about their separation benefits. However, averages may be misleading. By providing a minimum severance package for the employees who have not served long enough, the government can reduce the pain of young employees who have not served long enough to accrue a decent provident/gratuity fund.

The government should also ensure that the maximum number of former employees of the PSM get facilitated through the prime minister’s livelihood loan schemes. Allocating a quota for former PSM employees in the federal government or when the PSM is revived, or giving them age relaxation for other government jobs would also enable some of them to get rehired.

Apart from loss of livelihood, loss of shelter is another concern for PSM employees. Pakistan Steel has housed many employees at Steel Town (in 3500 units) at very low rents (Rs500 per month for the smallest unit, and Rs9000 per month for the largest units) with subsidized utilities, education and medical facilities.

The federal government should facilitate those living in the smallest and small units to get benefit from the PM’s low-cost housing scheme/mortgage on low markup.

Likewise, employees of the PSM below a certain salary threshold may be covered under health insurance, on the lines of the KP Health Insurance Scheme.

The above mentioned measures may incur the federal government some cost but are necessary for considering the human dimensions of privatization, which would in turn help revive the PSM, a national asset that got destroyed by bad decisions in the past.

This article was originally published at: https://www.thenews.com.pk/print/756230-privatizing-pakistan-steel

Approved By SDPI