ENERGY
The Pakistan Engineering Company Limited (PECO), Lahore, once a flagship of national engineering industry and an industrial empire, is in shambles now. According to the audited financial statement for the year 2014-15, the company is unable to continue as a going concern. Its equity has eroded; currently the company has negative equity of Rs1.099 billion, which, according to the auditors to the company, “indicates the existence of a material uncertainty which may cast significant doubt about the company’s ability to continue as a going concern”.
The accumulated losses reached Rs1.165 billion till June 30, 2015, whereas government loans amount to Rs1.915 billion, which are outstanding for many years.
The PECO, a company listed on Pakistan Stock Exchange, was on the privatisation list for a long time. Nine attempts were made during 1991-2001 to divest PECO, initially total sell-off of government shares was planned, and later only the Badami Bagh land was auctioned in different lots, but without success.
Subsequently, Privatisation Commission (PC) dropped PECO from its sell-off list in September 2006, and it is no more included in the future upcoming transactions of the State-Owned Enterprises (SOEs). Interestingly, the company was declared quietly divested in 2003 without going through the process of privatisation and without obtaining permission of the PC, aside from any knowledge to either the Ministry of Finance or its controlling Ministry of Industries and Production.
It was during August-November 2003 that the private investor acquired 22 percent shares owned by National Investment Trust (NIT) it was not authorised to sell, and additional shares from the Investment Corporation of Pakistan (ICP) and directly from stock exchange under different names.
Gradually and steadily, a major corporate group acquired strategic shares in PECO, converting government’s majority shareholding of about 56 percent into minority shares of only 33 percent by June 30, 2004, thus owning PECO with current assets of billions of rupees, without having paid a single penny to the government. Today, State Engineering Corporation holds about 25 percent shares of PECO.
Over a period of years, the private investor has taken full control of PECO, while also taking the advantage of being an SOE, as its chairman and managing director are still nominated by the government. There are only three government-nominated directors on the PECO Board out of the total nine, the remaining belong to the private sector. Understandably, members of the Board of Directors from private sector practically manage all the affairs of PECO, influencing the appointment of chief executive as well.
In December 2011, the Board of Directors did not accept the government appointed managing director, a posting approved by the Prime Minister.
Pakistan Muslim League-Nawaz’s white paper on mega scandals and corruption of Pervez Musharraf government included a factsheet on PECO ‘case of back-door privatisation’, released on August 20, 2004.
According to the white paper, the chronology has been as follows, which speaks volumes for government’s interest in the matter: Aug-Sept 2003- NIT sells 1,179,530 shares and ICP 25,900 shares to the general public through stock exchange. The matter was taken up by State Engineering Corporation with NIT which failed to give any cogent reason for selling the shares of PECO.
December 2, 2003- Ministry of Industries writes to Ministry of Finance to instruct NIT and ICP to buy back the shares sold in order to enable the government to retain majority shareholding in PECO.
January 19, 2004- Ministry of Industries again writes to Ministry of Finance to inquire from NIT and ICP the position regarding sale of PECO shares.
March 6, 2004- Ministry of Industries writes yet another reminder to Ministry of Finance asking for the report
April 19, 2004- Ministry of Industries again reminds Ministry of Finance requesting a report. September 23, 2004- Ministry of Industries once again writes a reminder to Ministry of Finance for report.
Unfortunately, nothing was done by the government during these years. However, in November 2008, a sub-committee of the Public Accounts Committee (PAC) of the National Assembly (NA) ordered a probe in the matter. Consequently, the PAC (of the NA) had taken notice, in February 2009, of sales of “PECO shares valued at over Rs3 billion to individuals/groups for Rs80 million only”.
But, again there was no headway, though the case was with the National Accountability Bureau (NAB). On July 29, 2015 NAB had submitted an additional list to the Supreme Court pertaining to 29 mega corruption cases, describing the current status of inquiry in the sale of shares of the PECO by NIT, reportedly as "Management of the PECO was called for recovery of Rs600 million + interest till date - Management pleaded that sale proceeds of land of the PECO will generate more than the said amount which can be utilised to pay off loan - Agreement between accused and Privatisation Commission for sale of land has been finalised".
Prima facie, the investor has focused on acquisition of high-value real estate the company owns. Existing facilities of the Kot Lakhpat Works are spread over an area of 247 acres (1,976 kanal). In addition, it has free-hold land of 33 acres (over 263 kanal) at prime commercial area of Badami Bagh, assessed to have present market value of over Rs10 billion, which in the company books has a “fair value” of Rs2.63 billion only. To resolve the issue of transfer of title of land of PECO, the PC has been working on various proposals as they could not transfer land to the company until they clear Rs6 billion outstanding dues of PC as per directives of Ministry of Finance.
At the time of privatisation of PECO, Ministry of Finance had released Rs1 billion and PC released another Rs600 million to make payment to workers under golden handshake. Now mark-up and actual amount stands at Rs6 billion, which however is not reflected in the financial statements of the company.
Year over year, the performance of the company has deteriorated. Currently, the company is a single-product and single-customer unit, fabricating only electricity transmission towers; whereas its core operations including bicycle shop, pumps and motor sections, foundry, and general engineering workshop remain idle or closed down. PECO branded products such as bicycles, pumps and electric motors were synonymous to quality and performance for almost five decades.
Apparently, the owners had plans for re-commencing production of pumps and motors, but nothing has been done practically since take-over. In fact, the management has failed to take measures that could have ensured revival of the strategic industrial unit through modernisation and restructuring, and adopting a solid business plan with focus on technology transfer. The lack of interest on part of the management in company affairs is reflected in the fact that the Karachi-based group has not attended a single meeting of five meetings of the Board of Directors during 2014-15, and Managing Director/CEO Shafqat-ur-Rehman Ranjha, based in Islamabad as Additional Secretary in the controlling Ministry, holds the charge since February 26, 2014.
On the other hand, its operating assets like installed machinery, equipment, tools, cranes, auxiliaries etc as well as its stock, spares and inventories worth billions of rupees have been disposed of, phase-wise, in a non-transparent manner, since virtual take-over by the private sector. The practice however continues without any checks.
As many as 97 valuable machinery items were sold in 2014-15 to two private companies and an individual, on negotiation basis, at a throw-away price of Rs5.43 million. These included lathes, shapers, milling machines, drilling machines, grinding machines, boring machines, gear hobbing machines, hydraulic press, mechanical press, electric furnace, induction furnace and spot welding machine. An inquiry against ex-managing director and directors representing the investor for alleged corruption, corrupt practices, misuse of authority and embezzlement is being conducted by the National Accountability Bureau (NAB) that has re-authorised the inquiry on February 11, 2015.
Sadly, the government has consistently shown indifference and apathy to the unsatisfactory and disappointing state of affairs at PECO. This has resulted in multiple adverse effects on the national economy, such as loss of output, loss of revenue, industrial slowdown and economic regression, besides large-scale unemployment.
Over 3,300 engineers, other professionals, technicians and workers were laid-off under the Voluntary Separation Scheme introduced in PECO in 1995 and 2002. Currently, the company is void of having any engineer, professional, technician and other staff on its payroll on a permanent basis. At present staff and officers are employed on contract basis, whereas workers are engaged on daily wages through labour contractor. Obviously, there are no plans to develop human resources in PECO, termed vital for an engineering industrial unit, in particular.
The writer is ex-Chairman of State Engineering Corporation
