Tough decisions

INDUSTRY

Pakistan Steel Mills (PSM), which had ceased its operations abruptly on June 10, 2015, is once again in the news. The National Accountability Bureau (NAB) has decided to initiate an inquiry to ascertain reasons and to hold responsible for dismal state of the nation’s strategic and largest industrial undertaking.

PSM had been marred with poor corporate governance, weak and corrupt management, over-employment and political interference in all administrative matters, which weakened its institutional, technical and operational capabilities. Resultantly, the PSM was turned from a profitable organisation (until 2007-08) into a loss-making entity in 2008-09 onwards by the then government of the Pakistan Peoples’ Party. During this period a total loss of Rs104 billion was inflicted. Its average capacity utilisation had declined from nearly one million tonnes per year (MTPY) in 2007 to 0.022 MTPY in early 2013, having dipped to zero in October 2013.

On the other hand, the government has not yet taken any corrective measures to put the plant back into operation. PSM production operations had come to a standstill more than two-and-a-half years ago when Sui Southern Gas Company (SSGC) disconnected its lifeline gas supply due to non-payment of Rs35 billion dues. Since then the PSM is causing about Rs22 billion financial loss every year, besides bringing about other issues such as non-payment of salaries to its employees, loss of production at an opportune time when the CPEC (China-Pakistan Economic Corridor) infrastructure projects require millions of tons of steel annually, and, consequently, immense loss to the national economy.

With the virtual closure of PSM, reliance on imports has increased, and this trend is likely to continue, given the conditions. Also, there has been serious damage to the critical equipment installed including blast furnaces and coke ovens, due to closure of the mills, which is at the risk of becoming permanently dysfunctional. Clearly, decision on the fate of the only integrated steel complex is not on the agenda of the government, which simply provides bailout packages, from time to time, primarily to finance outstanding salaries of some 13,000 employees. It is estimated that salaries amounting to Rs10.8 billion, and additional Rs15.82 billion as pension to the retired employees, would be required by June 30, 2018.

For more than two decades, PSM had plans to undertake major BMR and to gradually expand its designed production capacity from 1.1 MTPY to 3 MTPY. A number of technical and commercial exercises were done since 1993, and the project PC-1 was finally approved in March 1998. Since then, Russia, China and the western countries made comprehensive BMRE proposals to the government to transform PSM into a modern and efficient entity that employed latest steelmaking technology, and even offered equity participation. But, alas, subsequent governments could not act to achieve any tangible physical progress.

Indeed, the subsequent governments had failed to act as a catalyst or as an investor in PSM — which has created a strong technical base for the engineering industry — or as a regulator of the steel sector, which is termed the backbone of infrastructure of any country. Inconsistent policies and apathetic attitude of the government towards affairs of the ailing PSM added to its financial and operational problems. Sadly, the government does not seem serious to decide about PSM’s revival or its privatisation, which has been on the cards for decades, having changed its stance a number of times. The Privatisation Commission listed PSM among 16 state enterprises, identified for privatisation a long time back under the category of “divestment with management control”, but without any action plan.

Sometime in January 2017, the government had approved a plan to lease out PSM for 30-years, with the Chinese, Iranian and Pakistani companies showing interest in taking over the 19,000-acre complex, and bidding process was to be initiated by May 2017. Privatisation Commission chairman had said that about 5,000 employees would be retained by the new investor while the remaining would receive an attractive separation package. Under the lease agreement, proposed incentives include a 10-year tax holiday and duty-free import of plant and machinery.

The government was to propose a regulatory duty of at least 35 percent on steel products for a period of five years to promote the local steel industry. The government would settle all of PSM’S liabilities before signing an agreement with the investor. Nonetheless, there has been no headway in this direction even after a lapse of one year. Now, the Federal Minster for Privatisation has informed the National Assembly’s Standing Committee on Industries and Production on November 23, 2017 that the government was considering PSM to be leased out for 30 to 60 years. Interestingly, this is in the backdrop of a recent proposal by the Sindh government to make rehabilitation of PSM a CPEC project.

Here, one is reminded of having lost an excellent opportunity in 1998 to restructure and rehabilitate PSM, and to make it viable, financially and commercially. As a result of years-long development between Pakistan and China at government levels, it was decided to sign a bilateral agreement related to PSM’s BMRE during the visit of Prime Minister Nawaz Sharif to China in February 1998. Consequently, a high-level delegation, led by the secretary, Ministry of Industries and Production, which consisted of a technical team of Pakistan Steel among others, visited China during January 18-25, 1998.

The objective was to conclude draft contract agreement with the Chinese. After extensive and prolonged discussions the delegation had with the Chinese Minister of Metallurgy Industry and chairman/president of China Metallurgical Corporation the comprehensive contract agreement was concluded and initialled.

The Chinese had agreed to offer most attractive package, financial as well as technical, for executing the expansion plan. The above arrangement was worked out on the basis of indicative total cost of the expansion project estimated to be $1,900 million. The total cost of machinery and equipment was agreed to be $1,151 million, including the cost of a 300MW capacity power plant. The Chinese corporation had agreed to become joint venture partner in PSM, with equity participation in the existing complex and also in the expansion scheme.

The Chinese were to arrange $1.10 billion for the project, out of which $1,000 million was loan and the balance $100 million, equity. The Chinese had agreed to favourably consider PSM's request for a State Credit of $300 million from the Chinese government. Furthermore, the Chinese had agreed to make its best efforts to arrange an additional equity of $100 million from its western partners who were to supply modern automation system and controls etc for the expansion project. A large portion of mechanical and electrical/electronic equipment to be supplied would have been of Western-Japanese origin.

The scheme also covered diversification of the PSM products, shifting the emphasis from its present production of long and flat products to high-grade products and additional products like the deep-drawing, tinplate and electrical steel sheets etc.

This agreement, scheduled for signing along with other agreements during the visit of the prime minister was not signed somehow. No reason was given to the Chinese as to why this item on agenda, which was finalised and agreed to jointly by the two sides, was deleted by the Pakistan side at the last moment.

The writer is former chairman of the State Engineering Corporation