The board of Privatisation Commission (PC) on Monday approved the transaction structure for the privatisation of Pakistan Steel Mills (PSM), taking the first major step towards selling the country’s largest industrial unit amid a patchy road ahead.

The board recommended selling majority stakes in the range of 51% to 74% but left the final decision on the Cabinet Committee on Privatisation (CCOP). The financial advisors had presented two scenarios of selling either the majority stakes of up to 74% or selling 100% government shareholding.

It was the second board meeting in less than 10 days after the previous meeting ended inconclusively due to confusion over the operating assets and non-core assets. The valuators presented the revised lists of key core assets and an audited financial statement for the period ending December 2020, which would now become base for selling the mills.

The PSM is the country’s largest industrial unit but it remains closed since June 2015 after the then government decided to shut the unit due to uncontrolled losses coupled with its failure to privatize it.

The revised financial audit statements revealed Rs89.8 billion total “comprehensive income” of the PSM in the last calendar year ending in December 2020. This was due to the revaluation of the plant, machinery and property. After excluding the impact of the revaluation of the assets, the PSM incurred Rs8.7 billion loss-after-tax.

In the year ending December 2019, the PSM had incurred a loss of Rs8.5 billion.

The PSM has remained on the privatisation list for almost two decades. Although the board has approved the transaction structure, it will still require approval of the CCOP and the federal cabinet. The PSM labour union has also threatened to take the government to court.

The valuator submitted a new list of core assets like plant, machinery and equipment

The board has approved Steel Corp Pvt Ltd as the new subsidiary that will take over the core assets to be subsequently sold to the bidders. The board was informed that the new subsidiary, Steel Corp Private Limited, will have authorised capital of Rs150 billion and paid up capital of Rs1 billion.

The PSM board in May this year, approved the valuation report of Joseph Lobo on valuation of assets ie plant, machinery and buildings for incorporation in the financial statement of half yearly audited accounts for the period ending on December 31, 2020.

As of December 2020, PSM’s total assets had been reassessed at Rs558.9 billion, including Rs535.5 billion fixed assets. The fixed assets include Rs351 billion worth of land, Rs42.8 billion factory building, Rs99.6 billion plant and machinery. The liabilities are assessed at Rs307.1 billion. These include Rs42 billion trader and payables, Rs73 billion interest accrued and Rs71.5 billion current long-term financing. In addition to that there are Rs59.5 billion long-term financing related liabilities, Rs9.8 billion gratuity scheme, and Rs41.7 billion deferred tax liabilities.

Out of these, Rs35.8 billion deferred tax liabilities will be transferred to new subsidiary that will subsequently be given to the new buyer.

In May, the board of directors approved and directed the management to carve out the total assets of Rs133 billion and total liability & revaluation reserve of Rs123.5 billion and transfer to the wholly-owned subsidiary. The Rs88.5 billion worth of plant and machinery had been proposed to be transferred to the subsidiary, Rs41.5 billion worth of building and structure, Rs1.2 billion utility connections and Rs826 million deferred tax assets.

After transferring assets to Steel Corp, PSMC will retain Rs426 billion assets and Rs269.5 billion liabilities.

The cabinet has approved transfer of identified core operating assets into a wholly owned subsidiary of PSMC through scheme of arrangement by sale of majority shares of the newly formed subsidiary without transferring full ownership to a strategic private sector partner. The financial adviser highlighted nine corporate actions required to be completed and many of those have not yet been completed, the board was informed.

The PSM board has also approved tentative core land of 1,228 acres and its right of use will be awarded without entering into a lease agreement as per the standard terms to the subsidiary until the strategic partner comes in. The draft land lease deed has been prepared by the advisers and shared with the privatisation ministry.

Published in The Express Tribune, July 20th, 2021.

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