Pakistan Steel Mills (PSM) is the largest corporate entity owned by the government with production capacity of 5 million tons. Privatization of PSM was initiated under the reign of former prime minister Shaukat Aziz, which was met with controversy. The Supreme Court held the privatization effort as defined process and procedures were not followed. Sale of the country’s largest industrial unit went down the drain whereas the matter was referred to the Council of Common Interests (CCI) who declared the $362 million transaction with the Russian-Saudi-Pakistan investors as null and void. At that time, PSM was operating at 18 percent capacity and a bailout package was requested for Rs12 billion to prevent closure of business. This plan was later dismissed by the government. In 2011, PSM mill was put under the management of government-ownership under the former prime minister Yousuf Raza Gilani. The government expanded and re-structured the board of directors from nine to twelve members. This move was widely appreciated in the public society and workers unions. PSM has 16,000 employees, most of whom are politically driven. There have been reports that payroll is run for employees who never came to office though have an employee status. The incompetence of people again is one of the reasons why the business has gone downhill. Since under the government-ownership, the steel mills infrastructure and available capacity was restructured and expanded. In 2012, Ukraine announced to provide the technological development and help in restoration of raw materials supply chain after viewing the performance of steel mills.
The story of PSM is no different from any other state owned company plagued with corruption, mismanagement, over staffing, noncompliance with internal policies and procedures. The government has been long after to privatize PSM but has failed to make any significant change. The bailout package has merely managed to keep the business afloat. From 2009 to 2013, PSM has received Rs40.5 billion in bailout money. Debt availed from lenders was simply used to meet fixed expenses than be invested on production and capacity. The capacity utilization of PSM reduced from 64% in 2009 to 7% in December 2013. PSM was a profitable venture until 2008, which is when steel prices took a nose dive. Due to political and external influence, raw material which mainly includes Iron Ore and Met Coke were procured at a higher price than the sale price. PSM resorted to bank lines to meet day to day operational expenses. When no cushion was left with the lenders for further withdrawals, the government started giving cash to PSM to keep the business afloat. No restructuring effort was made. Secondly, the senior management lost all discretion to make decisions since the government and people with vested interest in PSM saw enormous profit potential to deepen their own pockets. Whenever any senior executive made an attempt to make a difference, the management was immediately changed. Based on current issues faced with PSM, it would be next to impossible to find potential investors for the business.
The government wants to privatize PSM which would only be made possible if the company is made to stand at a pedestal where it becomes attractive for the buyers. The company has suffered a loss of Rs21 billion in the last 9 months. In order to help revive the business, Economic Coordination Committee announced a bailout package of Rs18.5 billion with an aim to increase the production capacity to 77 percent by June 2015. The aim is to increase production through procurement of raw materials which will help the business improve its profitability. It is estimated that if these levels are achieved, PSM will book profits after June 2015. The bailout package has been viewed as a positive if execution is done with utmost efficiency. The privatization process could take more than three years.
It is expected that any form of financial support will be used to meet liabilities and be set aside for procurement of raw materials. It is unlikely that any amount extended by the government will be used for replacement of old and worn out machinery, which will be left to manage by the new investors. Due to the existing debt burden and high reliance on short term and long term debt, it seems unlikely that key ratios such as current, interest coverage, debt, DSCR will within acceptable range anytime soon and may take at least three to four years at capacity utilization above 80 percent and operational cash flows enough to meet expenses and pay for existing debt. The financial aspect is as important as the non financial elements, which include issues with the organization under compliance, mismanagement and corruption. Management control needs to be given experienced and qualified people not under any form on coercion from external forces and be allowed to make key decisions. This will not be an easy task since there are many who have vested interests in keeping the business as it is today.
For the government, privatization of PSM seems to be a bigger challenge than PIA. Any bailout package will not yield result unless issues to internal to the company are addressed. Bailout seems to be a short term measure. PSM would not be able to borrow money due to the financial standing. If money is borrowed, it would simply be used to pay off existing liabilities leaving little for procurement and import of raw materials and keep the furnace alive. We have read numerous reports that PSM does not have money to pay salaries.
The government is good with making plans, execution has always been under question. If the above mentioned plans are executed without any glitch, the privatization will be the biggest of Pakistan success stories. The government seems to be on the right track if these plans remain afloat and continue through its execution phase. There is no question if capacity utilization reaches the levels as planned, PSM will remain a profitable venture and an attractive investment.