Earlier, the Privatization Commission (PC) had approved HEC reserve price as Rs 500 million against expected proceeds of Rs 1,475 million as worked out by the PC-appointed financial advisors on the basis of appropriate market value of land, machinery and other assets. Approval was also obtained by PC to sell the huge industrial complex to the sole bidder, against the rules, procedures, norms and precedence. Ironically, the bidder has not accepted reserve price, and PC has failed to negotiate sale price with the party. Consequently, the matter has been referred now to the Cabinet Committee on Privatization (CCOP) for a final decision. prefix = o ns = "urn:schemas-microsoft-com:office:office" />
In all, three parties were qualified to bid in response to the current divestment process that has been going on for more than a year. These included Fauji Fertilizer Company, Elahi Group of Companies and Cargill Pakistan Holdings; though none has the experience or background of running a similar or any engineering industrial unit that should have been the pre-requisite for pre-qualification. The due diligence was carried out by all the three parties but only Cargill participated in bidding on due date. Given the conditions, it seems that the prospective investors were interested only in valuable real estate belonging to the HEC, as the factory is located in a front-line industrial estate, with all requisite infrastructure facilities.
In such case, manufacturing of sophisticated electrical equipment could come to a halt, and related technology it assimilated and corresponding expertise it developed over the decades will go down the drain, impacting the growth of power sector. Privatization of six major engineering industrial units of State Engineering Corporation since 1992 has produced dismal results. Total proceeds of these six transactions amounted to a paltry sum of Rs 140 million, or $1.38 million in today's price, which was hardly ten percent of their total assets, notwithstanding annual revenues of tens of millions rupees these state-owned enterprises (SOEs) generated during pre-privatization period.
These were prime industrial units and most of these were profitable at the time of divestment. Karachi Pipe Mills, Pakistan Switchgear and Textile Machinery Co are closed ever since private investors took over, while Metropolitan Steel Corporation and Quality Steels have, of late, started nominal operations after closure for many years. Pioneer Steel Mills is the only unit in business since its take-over at a token price by original owner before nationalization of the mills.
The HEC was established at Hattar Industrial Estate in the Khyber Pakhtunkhwa with the Chinese economic and technical assistance at a cost of Rs 1.16 billion. Its installed capacity is to produce 148 Nos. power transformers of capacity ranging from 6.3 MVA to 40 MVA for 132 and 66 kV electricity transmission systems, which is translated into factory’s total production capacity of 3,000 MVA. Spread over an area of 291,374 sq. meters (72 acres), the factory has integrated and largest engineering, production and testing facilities—-the only of its kind in the country—-procured from China, Germany and Switzerland. It has indeed made Pakistan self-reliant in the electrical capital goods required for power sector.
The company secured orders for new transformers in strong competition with manufacturers in Germany, Bulgaria, Romania and China. Product diversification has been on cards, and recently the HEC has developed high-module step-down transformers of 160 MVA and 250 MVA. An average yearly sales is of Rs 800 million, while it suffered losses in some years primarily due to low capacity utilization and on-going privatization process. Currently, total assets of HEC are worth Rs 1,694 million, whereas total liabilities are only of the size of Rs 486 million, and total manpower strength is 222 that would be offered Golden Handshake Scheme (GHS) or Voluntary Separation Scheme (VSS) by the PC.
Engineering industry is highly capital intensive and involves long gestation period. There are high costs of technology and building-up of inventory of imported materials and components for a long time. The HEC is one of the high-tech industries of great strategic importance, and requires to be dealt differently, allowing public sector to continue to play its role in the industrial development and achieving self-reliance in strategic areas. Realizing the need of adopting a different methodology to divest HEC, instead of a direct sell-off, it was decided in 1990s to explore the possibilities of establishing a joint venture with world-renowned companies already active in a similar field. The spadework to identify such companies and to invite them to agree to invest in the HEC both as equity and technology partner was done by the State Engineering Corporation.
Concerted efforts were made in this direction, and logically, first a proposal was made to the Chinese partners, in the last quarter of 1995, to convert their loan into equity participation, thus taking over the management. The proposal was discussed at the government level also and, subsequently, at the Pak-China Joint Economic Commission meetings held at Beijing and Islamabad. Though the initial response of the Chinese was encouraging, there could be no further headway. Then, the major global key players in the field were contacted, and, fortunately, three giants namely Siemens, ABB and Skoda showed their individual willingness in the late 1996-early 1997 to form a proposed joint venture with the HEC, in a bid to finally acquire the HEC through privatization.
Since then the complex has been on active privatization list by PC, but efforts to divest it repeatedly failed due to short-sighted policies of the government and long unsuccessful privatization process, having adversely affected the company's performance too. PC initiated privatization process in November 2005, when response from the multinational companies like Siemens Pakistan, ABB Switzerland and Areva T&D France was forthcoming.
Most of these companies had completed due diligence at that time, which is considered essential prior to making investment of this size and nature. In response to advertisement released in May 2006, PC therefore received EOIs and statements of qualification from ten interested parties including Siemens, ABB, Areva, Iljin Heavy Industries (South Korea), Pak Electron (PEL), Imperial Construction (ICC), Noor Financial, Shahzad International, Sahfi Associates and Lahore Propylene Industries.
However, it was only in November 2008 that the CCOP approved company’s valuation and allowed the bidding. Most of these companies had meanwhile lost interest, and only PEL, Iljin and another local company participated.
Again, PC could not take a decision and re-invited proposals in April 2010. This time three companies namely Alstom Grid, Areva T&D and Niagara Mills (Faisalabad) submitted EOIs. In July 2011, transaction structure for the HEC was finalized but there was no further headway towards privatization process, due to reason not made known, until January 2014 when EOIs were invited once again resulting in a single bid, from a palm oil importer. What a shame!
The writer is chairman of The Institution of Engineers, Pakistan