The future of Pakistan Steel Mills (PSM) remains uncertain, reminiscent of its position in 2015. Unfortunately, the caretaker government has declared PSM a non-viable asset, leading to the suspension of the privatization process for the country’s largest and only integrated steel mills. This marks yet another instance of PSM being removed from the privatization list. Instead, the Ministry of Industries and Production has been tasked with the challenging responsibility of reviving the non-operational state enterprise, inactive for over eight years.
The prolonged closure of PSM has significantly hampered the industrialization process in the country, adversely affecting the national economy. While the caretaker government has instructed the ministry to present future plans, no specific timeline has been provided to achieve the target for proposing a viable solution for PSM’s revival.
The much-anticipated privatization transition, ongoing for over four years, came to a sudden halt on October 6. The caretaker Minister for Privatization announced that three out of four potential investors had withdrawn their interest in acquiring PSM. The remaining bidder was excluded for transparency reasons, according to the Privatization Commission (PC). The given reasons for the withdrawals, citing a decline in steel demand and poor economic conditions in Pakistan and globally, do not accurately represent the actual situation. Total global production of crude steel in 2022 was 1,885 million tons, registering nominal growth over the past year.
In reality, PSM, with an annual installed capacity of over one million tons, caters only to domestic demand, which is considerably lower than the current demand for iron and steel products at 8 million tons per annum, expected to increase to 10 million tons annually in the coming years. To bridge the supply-demand gap, Pakistan imported iron and steel products worth $1.89 billion in 2022-23.
Recent statistics from the World Steel Association reveal that Pakistan, for the first time in decades, produced steel at the highest level of 6 million tons in 2022, ranking 27th among the top 50 steel-producing countries. On the other hand, a Road Show for Investment organized by the Special Investment Facilitation Council (SIFC) in Dubai from November 5-7 attracted a substantial number of global investors, indicating a positive investment climate in Pakistan.
Four prequalified Chinese companies, all state-owned, including Baosteel Group Xinjiang Bayi Iron and Steel Co, a Consortium of Tangshan Donghua Iron and Steel Enterprise Group, Tianjin Jianlong Iron and Steel Industrial Co, Maanshan Iron and Steel Co, and China Metallurgical Group Corporation (MCC), expressed interest in becoming strategic partners for PSM’s revival through technological upgrading and capacity expansion, willing to invest up to a billion dollars in the first phase. These companies conducted due diligence in March 2022. Until September 2022, these Chinese companies remained interested in buying a controlling stake in PSM and were in contact with PC. However, the caretaker government’s decision to annul the privatization process raises questions about missed opportunities for PSM’s revival with foreign investment.
This time, the interest of foreign investors to buy PSM was outstanding. The other two interested parties, namely Russia’s Metprom Group and Iran’s Espahan Steel Co (ESCO), were disqualified by PC. In total, there were eight global potential investors interested in acquiring PSM’s 51-74% stake along with management control, but six submitted Statements of Qualifications (SOQs) by the due date as per procedure. At the initial stage, another 13 investors, including another five from Russia, one from the USA, four from Ukraine, and three from Pakistan, had also shown interest in privatization of PSM.
The failure to privatize PSM exposes the Privatization Commission’s (PC) inadequacies in capacity, capability, and performance to efficiently process the transaction transparently and with due diligence, raising concerns about potential vested interests. Until a few months back, the nation was told that the privatization process of PSM was to be concluded shortly. On March 7, the NA Standing Committee on Industries and Production was informed by PC that privatization of PSM was at an advanced stage, scheduled to be completed by September 2023. Earlier, in February, PM Shehbaz Sharif had censured PC for not meeting its obligations on the PSM sell-off and directed to speed up the process. Was it all an eyewash, and the delay in the privatization process deliberate?
Despite previous assurances that the privatization process was advancing, the PC did not adhere to its own timeline for achieving various milestones. The Ministry of Finance’s document of March 3, 2021, titled “State-Owned Enterprises Triage: Reforms & Way Forward,” outlined a timeline for different steps in the privatization process. In this case, PSM was included in the privatization list on June 17, 2019, and PC was to hire Financial Advisors within six months. Financial Advisors were appointed on January 15, 2020.
Likewise, the Transition Structure was to be completed within six months after engaging Financial Advisers, but its approval was obtained in December 2020. Initiation of the Prequalification of Investors process for privatization was to be done within six months after approval of the Transition Structure. But the Expression of Interest (EOI) for prequalification was issued in August 2021, and Statements of Qualification (SOQs) were received in January 2022. The bidding process for privatization, the stage that never reached, was to be completed within six months after the prequalification process. These delays and lack of adherence to the timeline raise questions about the efficiency of the PC.
The proposal to revive PSM through comprehensive restructuring appears technically and economically unfeasible. There has been serious damage to the critical equipment installed, including the blast furnace, converter, and coke ovens, as the plant was abruptly and unplanned shutdown in June 2015. Therefore, major plant machinery and equipment, which was commissioned in the 1960s, has to be scrapped anyway. The required funds, approximately $100 million, for necessary repairs and working capital make this option impractical. Moreover, the lack of technical expertise in Pakistan to undertake these repairs suggests that a modern steelmaking technology approach is imperative.
Turning the pages of history, the PSM—coastal-based steel mills complex spread over 19,000 acres, was sold out in 2006 to a consortium of Saudi-Russian-Pakistani companies at a throwaway price of $362 million in a non-transparent manner. The Supreme Court of Pakistan annulled the privatization process. PSM was in profits until 2007-08 but turned into a loss-making entity in 2008-09 onwards and never recovered. PSM has been marred with poor governance, weak and corrupt management, overemployment, and political interference in its operational matters. These issues weakened its institutional, technical, and operational capabilities.
The government, therefore, decided to initiate the process for privatization again. Subsequently, the Russian and Chinese groups had shown interest in the acquisition of PSM, including Sinosteel Corp of China that had offered an investment of $778 million in PSM. The privatization process, which was to be concluded by December 2015, could not materialize. The renewed efforts for PSM privatization were made by PC in October 2021. Meanwhile, the cash-bleeding PSM continues to suffer losses estimated to be Rs 23 billion annually. As of June 30, 2022, the PSM had accumulated losses of over Rs 240 billion.
To avoid further delays in the revival of PSM and recurring huge losses, it will be advisable that PSM be given to the Chinese for its revival and transformation into a modern and efficient entity on a negotiation basis, as a project under the CPEC program. Pakistan is the third biggest recipient of Chinese development finance worldwide with a portfolio of $70 billion.
The writer is retired chairman of the State Engineering Corporation.