No way out for PSM revival but to be privately owned

Published on 7th Nov, Edition 45, 2016

 

The future of Pakistan Steel Mills (PSM) remain undecided as the situation seems not willing to revamp industry, which was build and become much stronger for economic development of a country. PSM is one of several firms Pakistan put up for sale to revive loss-making entities that cost the government $5 billion a year.

There are no successful plans observed to set this national institution on the revival path. The Mills is unable to clear the bill of Rs900 million of Sui Southern Gas Company Limited and as a consequence its gas connection remains suspended for the last seven months. During the last two years, Pakistan Steel Mills suffered colossal losses of Rs8 billion.

Establishment of Pakistan Steel Mills in 1973 was widely welcomed as it laid foundations for economic growth. PSM witnessed periods of rise and fall but mostly it remained profitable despite political turmoil, large interference in its working and mismanagement.

It is sad that the country’s largest industry is being allowed to be drowned by the authorities concerned. The Pak Steel Mills is seeking bailout package of about Rs25 billion but the government is unwilling beyond releasing some amount after two or three months to pay salaries to the staff.

Expert opinion suggests the PSM can run as a profit-making entity because of huge demand for steel products provided it is allowed to run purely on commercial lines. This should include steps to eliminate corruption and misuse of powers by some officials, who have caused huge losses to the institution.
The government put the company up for sale, but unfortunately it couldn’t find a buyer. It struggled to get its privatization back on track after a series of setbacks.

The company has not produced steel at its 7,689-hectare facility since June 2015, when the national gas company cut power supplies. Political handling and competition from cheaper Chinese imports left PSM completely helpless. About 14,000 jobs were at risk, while the Pakistani economy needed industrial growth to provide employment for a growing population. Rs9 billion were needed to see the company through to June. The government had injected $2 billion into PSM since a failed selloff in 2006, but could not invest more capital.

The best option seems to be is to privatize so that private sector buyers inject capital to upgrade the plant and machinery, buy raw material and so on.

Funded by the Soviet Union in the 1970s, PSM was once the pride of Pakistan. It rapidly industrialized Pakistan and produce a basic building block for the future. Production had tumbled 92 percent over the past years as demand for steel tanked during the 2008 recession and customers turned to cheaper Chinese products.

International buyers showed little interest. Now PSM has only the land and infrastructure but no modern machinery to boost up steel production.

Sindh government officials visited the site this year but they left with financial feasibility documents but never called back.

The State Bank of Pakistan (SBP) has also expressed support to the proposed privatization of the Pakistan Steel Mills (PSM) that is currently facing deficit of billions of rupees.

 

Despite outdated technology being used in PSM, it has maximum productive potential so far. In spite of bailout package worth billions of rupees and permanent administrative and financial constraints, the steel mills has failed to achieve the goal of self-reliance.

Pakistan is still far behind with various countries of the world regarding per capita consumption of steel. International average of steel consumption is about 216.9 kilograms while this ratio is about 261.3 kg in Asian countries. The ratio is about 58.6 kg in India; however, in Pakistan it is limited to about 23.5 kg.
A Chinese firm has expressed interested in the sale of Pakistan Steel Mills (PSM) as government speeds up the privatization process on the back of International Monetary Fund reservations over the matter. The privatization process is likely to be completed during the ongoing financial year 2016-17.

The IMF has expressed reservations over the slow process of privatization of PSM, after which the government decided to complete the process on a fast-track basis by June 2017.

Pakistan even postponed plans to privatize power supply companies, and told the IMF it would not meet deadlines to sell PIA or PSM. Pakistan explored other sources of support, like ally China’s $46 billion for its planned economic corridor.

The federal government has been trying to minimize PSM’s financial constraints. The Sindh government has so far shown no interest in acquiring PSM. Even after the Supreme Court had finalized the privatization of Pakistan Steel Mills on June 23, 2016, the tax payers are still contributing over Rs100 billion for its employees’ salaries and other bills.

The accumulated losses of Pakistan Steel Mills are around Rs400 billion now.

The Public Accounts Committee (PAC) was informed that the debts and losses of the Pakistan Steel Mills (PSM) have reached over Rs170 billion and now the government have decided to privatize it. The committee was informed that even Russia and China had refused to revive the Mills, as it had incurred Rs22 billion losses so far this year. The committee was told that the mills was getting a marginal profit from year 2000 to 2008 and from 2008 till date the losses were increasing day by day. Only Rs2 billion was being provided to the Mills as subsidy which was spent on paying the salaries of employees.

The committee admitted that neither the past nor the present government had provided sufficient funds to the Mills to make it operational, as it needed a lump sum amount to start its operations. It is observed that 20,000 acre lands of the Mills valuing over Rs20 billion is more precious. The Mill was offered to the government of Sindh in October 2015 with all its assets and liabilities. However, despite a lapse of 9 months, the government of Sindh failed to respond to the offer.

Accordingly, the federal government has now decided to revoke its offer and to proceed with the privatization of PSM. The government has a plan to layoff daily wagers and contractual employees to bring down the expenditures incurred on salaries. PSM failed to achieve the desired capacity targets even after exhausting the entire amount of the bailout package.