Govt seeks IMF nod for Rs26bn tax exemption to privatise PIA

ISLAMABAD: The government has sought approval from the International Monetary Fund (IMF) for a Rs26 billion tax exemption to make Pakistan International Airlines (PIA) more attractive to potential investors.

The move comes as PIA’s privatisation efforts face yet another challenge, with the tax relief being one of the major demands from prospective buyers. Privatisation Minister Abdul Aleem Khan, while briefing a parliamentary panel on Monday, disclosed that the sale’s success depends on critical tax exemptions and financial adjustments to make the PIA an attractive investment for potential buyers.

The revelation came during a Senate Standing Committee on Privatisation meeting, chaired by Senator Talal Chaudhry here. It was informed that among the primary demands from the investors was an exemption from the advance general sales tax (GST) on induction of new aircraft into the airline’s fleet. This measure is expected to reduce operational costs and improve PIA’s financial health.

In addition, the government has to address the airline’s negative equity of Rs45 billion. This will involve carving out legacy liabilities to ensure a clean financial slate for prospective investors before the transaction was finalised.

The IMF’s endorsement of the tax relief and liability restructuring plan is critical, as the global lender’s approval influences Pakistan’s broader economic framework under its Extended Fund Facility (EFF) programme.

The cash-strapped national carrier, weighed down by Rs45 billion in negative equity, has become a hard sell for prospective buyers. Investors have set three non-negotiable conditions including a Rs26 billion tax waiver; waiving Rs10 billion in bridge financing costs and transfer of PIA-owned property in Islamabad worth Rs12 billion.

“We had conveyed these demands to the government, but the Federal Board of Revenue (FBR) and finance ministry stonewalled these demands, leaving the privatisation process in limbo. They did not support us,” the minister said.

Aleem Khan said, “As a businessman, I am saying there is great potential. The government just needs to be bold-hearted while selling. “We will have to make its balance sheet neat, then the local and also international investors will be attracted.

“If a country or an investor buys the PIA, nobody will take responsibility for our shortcomings? We have already conveyed these concerns to the government, but some things are beyond my control,” he added.

Committee Chairman Talal Chaudhry commended the minister’s leadership but expressed frustration over delays. “If you would have advocated strongly, the government would have listened to you,” Chaudhry remarked, adding that the successful privatisation of PIA would enhance his legacy.

Aleem Khan defended his role, explaining he joined the process mid-way. “Even India took five attempts to privatise Air India. This is a complex process,” he said, drawing comparisons to global privatisation efforts.

The minister criticised Ernst & Young (EY), the consulting firm advising on PIA’s privatisation, over its performance. “We need an advisor with airline industry experience for future projects,” he said. “Next time, we will hire a new consultant. The EY is a reputed consultant, but we did not get what we were expecting from them.”

When asked about payments to the EY, Privatization Commission Secretary Usman Akhtar Bajwa confirmed to the panel that the EY had received 45 per cent of the consultancy fee. The worth of the contract of the government with the EY was Rs1.95 billion (US$6.96 million).

When the committee chairman asked whether there was any out-of-box solution like G2G or G2B, the minister said that the prime minister held discussions with various international leaders during his visit and also discussed it. Talks are ongoing at their level to get a G2G deal.

He said “we will again start the process and if the numbers are positive [positive equity], then the new investors will be attracted”.

The Privatisation Commission secretary said the ministry and the FBR had conveyed them that under the IMF’s framework, they could not help in the process. The FBR could not proceed without the IMF approval, he added.

Bajwa said: “The prime minister has instructed us to prioritise the matter, and engage the IMF, as without its concurrence, the deal is stuck. “We held a meeting with the Fund on Nov 15 and informed it about the critical asks, including waiver of 18 per cent GST and negative equity. The Fund promised that it will respond soon. “Without these two asks, we cannot go to privatisation. We are waiting to hear from them [IMF],” Bajwa said.

He disclosed ongoing negotiations with entities such as Abu Dhabi Ports, expressing optimism about PIA’s potential. “The PIA operates on several profitable routes, making it an attractive proposition,” he noted.

Talal Chaudhry raised a question about whether renegotiated Independent Power Producer (IPP) agreements affected PIA’s privatisation. The secretary clarified that while no investor explicitly mentioned the issue, one party suggested placing the PIA agreement under the English Law, possibly reflecting concerns over the agreements.

The Privatisation Commission is simultaneously working on privatising power distribution companies (DISCOs), with financial advisers being appointed and a World Bank report on the sector expected in two weeks, Power Division additional secretary informed the committee.

“Privatising DISCOs is challenging,” he said, noting that the Power Division must address nine critical issues before proceeding. The World Bank’s report will guide future actions. Bajwa said the government plans to engage a financial advisor for these transactions by the end of November. The Power Division and the World Bank are also involved. The first phase will focus on the outright sale of IESCO, FESCO, and GEPCO. The financial advisor will conduct due diligence, incorporating input from the World Bank and engaging with potential investors.