PRIVATISATION
The prescription to convert a profitable State Owned Enterprise (SOE) into a loss-making entity is simple: put it on the privatisation list. Then delay the sell-off as much as possible. Receive offers from prospective buyers but do not decide on these offers for years. The company performance meanwhile will deteriorate, frustration among employees grows, orders under execution will be delayed as a result of low productivity, and there will be no new orders. Now the company is in red.
Advertise again to sell it off. Take no action on bids received for months on. Instead, offer a so-called financial package and/or a half-baked bail-out package, which does not work out. The company thus faces operational and liquidity problems, and is unable to pay even the employees’ salaries and wages. Now the company is ready for divestment - of dead assets.
A case in point is Pakistan Machine Tool Factory (PMTF), a strategically important hi-tech engineering industrial unit located in Karachi. The Cabinet Committee on Privatisation (CCOP) had approved on October 3, 2013 the government plans to privatise, fully or partially, through different modes, a total of 31 SOEs including three industrial enterprises, namely Pakistan Steel Mills (PSM), Heavy Electrical Complex (HEC) and PMTF. It was decided to initiate the process of privatisation for all 31 SOEs during the financial year 2013/14.
Later, however, the Privatisation Commission (PC) selected HEC to be divested on fast-track basis, but the whole exercise for its privatisation failed, while divestment of PSM and PMTF has been put on the back burner. Resultantly, these SOEs are not on the upcoming transactions of the PC, and have apparently been delisted, at least for the time being.
Nonetheless, the operational and financial damage to the PMTF has been done. In spite of repeated claims by the government, nothing concrete could be achieved to reform and restructure this strategic unit before its privatisation. Due to the financial constraints, the company has been unable to arrange for the working capital required for execution of orders in hand that include export of armaments valuing millions of dollars.
In March 2015, the company had requested the government to allow a package of Rs1.38 billion as soft-term loan, which was not approved. The adverse financial position of the company thus compounded, and it could not pay, since June 2015, the monthly salaries and wages to thousands of its employees, permanent and on contract.
In addition, overdue payment of gratuity and provident fund to hundreds of its retired employees over the last three years amounts to one billion rupees. In a belated move, however, the Economic Coordination Committee (ECC) of the Cabinet approved Rs96 million cash injection in September 2015 to clear personnel-related dues only for the period June-August 2015.
As financial health of PMTF did not improve, rather further deteriorated, the Senate Committee on Industries and Production recommended in November 2015 an immediate bailout package of Rs3 billion. This however was not acceded to by the government, and the company, once a profitable and viable enterprise, continues to bleed. The employees have not received their salaries now since September 2015. This is unfortunate that the government remains consistently insensitive to the grave situation, not even realising larger political and economic implications as a result of law and order situation likely to develop in the largest industrial hub.
The PMTF is the only industrial unit of its kind, which produces conventional and precision machine tools (including CNC lathes, CNC milling machine and CNC turning centre), automobile transmission components, die-cast parts and armaments. It has largely contributed towards industrialisation. Besides product designing and tool designing, it has integrated production facilities for forging, machining, pressure die-casting, jigs, fixtures and tools, sheet metal cutting and welding, CNC and machine rebuilding, etc. It was established in 1968 in collaboration with Oerlikon-Buhrle of Switzerland, world leaders in machine tools and defence equipment.
Organised under the aegis of the Regional Cooperation for Development (RCD), which is now known as the Economic Cooperation Organisation (ECO), PMTF was to cater to the requirements of machine tools in Turkey and Iran also.
However, Iran, followed by Turkey, created their own machine tool manufacturing facilities, both in the public sector. Today, Turkey ranks 16th among 28 machine tools manufacturing countries around the world, with production of conventional and CNC machine tools valuing over $650 million annually. On the other hand, Iran is among top five countries producing CNC machine tools, with remarkable background in the production of machine tools.
Ironically, Hindustan Machine Tools Ltd in India has expanded over decades to another six similar manufacturing units established countrywide, and has also set up separate manufacturing facilities for producing watches and precision machinery. All these units operate as public sector entities. India ranks 13th on the list of machine tool productions globally, with $720 million worth.
The decline of PMTF started when its privatisation process was initiated in 2005. Since then the company has gradually suffered a series of financial losses. PC had invited in September 2007 the Expression of Interest (EOI) for prequalification of prospective investors for acquisition of minimum 90 percent shares together with management control of PMTF. As per policy, PC had imposed the condition that interested parties should be engaged in manufacturing or engineering business who could demonstrate the ability to own and efficiently manage and operate PMTF. The bidders were also required to provide an undertaking to continue to operate the company’s manufacturing facility, and not to abandon, or cease to operate, or otherwise shut down the company’ existing facilities and processes. The investors’ response however was poor as they were interested only in its assets of real estate—226-acre prime industrial and commercial land of which 60-acres is vacant.
Likewise, government’s efforts to privatise it under the public-private partnership mode in 2009 did not yield any results. It was proposed to off-load 26 percent shares of the company on the basis of ‘rehabilitate, operate and transfer the manufacturing facility’. This proposal too ran into snags. Consequently, restructuring of the company, which also included diversification of products, was on the cards since February 2010 but there was no progress seen on its implementation.
Finally, the Cabinet Committee on Restructuring of State-Owned Enterprises (CCOR) approved, on December 4, 2011, the PMTF business plan, recommending enhancement of its credit limit by one billion rupees under the government’s sovereign guarantee. The Ministry of Finance however could not take any measures to effectively implement the decision.
The short-sighted privatisation policies of successive governments and long and unsuccessful privatisation process have adversely affected the company’s operations and financial health. There is however a silver lining seen as, in a latest development, the government is considering merging PMTF with the Pakistan Ordnance Factories (POFs). Reportedly, POF is conducting due diligence, technical as well as financial, aiming at to take it over. However, time is of essence.
The writer is ex-Chairman of the State Engineering Corporation
