ISLAMABAD: The Cabinet Committee on Privatisation (CCoP) headed by Prime Minister Advisor on Finance and Revenue, Dr. Abdul Hafeez Shaikh is likely to consider the long-awaited transaction structure of Pakistan Steel Mills (PSM) next week, well-informed sources told Business Recorder.
The entity is inflicting millions of rupees financial loss to the national exchequer every day as thousands of employees are getting financial benefits without any contribution and are being paid through loans from the federal government. And illegal occupation of PSM land is also going on due to connivance of officials and land mafia. The sources said, internal affairs of PSM, dysfunctional since June 2015, have worsened to a level that management has opted to sit in Islamabad instead of the premises of the mills. Only a few retired army officers are running the affairs as the Chairman of the Board who is an American national has already left Pakistan and communicates on webinar.
Finance Advisor, Dr. Hafeez Shaikh had convened a meeting of CCoP the third week of October 2020 but it was cancelled due to the demise of the mother of Minister for Privatisation, Muhammadmian Soomro. However, now Privatisation Commission has requested Finance Advisor to schedule CCoP meeting next week.
According to sources, Financial Advisors had proposed the following transaction structure options: (i) transferring of identified core operating assets into wholly-owned subsidiary of PSMC through scheme of arrangement (as provided in the Companies Act 2017) followed by the sale of majority shares of the newly-formed subsidiary (without transferring of full ownership) to strategic private sector partner; OR (ii) transferring of identified core operating assets to private sector strategic partner through concession/lease agreement for 30 years.
On July 27 and August 28, 2020, Minister for Industries & Production, Hammad Azhar and Minister for Privatisation/Chairman, PC co-chaired meetings to discuss impending issues and update the transaction structure options, wherein, a detailed presentation was made on key findings after due diligence besides highlighting features of transaction structure options proposed by the FA. Benefits, challenges and risks in each mode were highlighted while presenting a comparative analysis. It was highlighted that in either of the proposed transaction structures, core land area would be leased out on a similar pattern of earlier precedents, whereby, PSMC leased its land to private sector investors for setting up various industrial units. It was also emphasized that FA could not bring forward any domestic global precedent in support of transferring of PSMC core assets/operations through Concession/Lease Agreement.
Accordingly, a detailed presentation encompassing features of the transaction structure options, including ancillary details, was made to the PC Board in its 4th meeting held on Sep 2, 2020 whereby, after a detailed and threadbare discussion PC Board approved the following transaction structure to proceed with the privatization of PSMC and recommended it for consideration of the CCoP: transferring of identified core operating assets into wholly-owned subsidiary of PSMC through scheme of arrangement (as provided in the Companies Act 2017) followed by sale of majority shares of the newly formed subsidiary (without transferring of full ownership) to strategic private sector partner.
However, both Mol&P and PSMC remained part of nine transaction committee meetings, PC Board meetings and meetings co-chaired by Minister for Industries & Production and Minister for Privatisation held on July 27 and August 28, 2020 and were fully on-board in formulation and finalisation of transaction structure. MoIP, in a letter of September 8, 2020 forwarded PSMC of Sep 3, 2020) bearing subject "Transaction Structure-key issues and way forward", for necessary action.
MoI&P also communicated its observations on this issue in its letter of September 16, 2020. Furthermore, one of the PC Board members also highlighted concerns with respect to foregoing of potential tax reversals on account of carry-forward business losses incurred by PSMC on YoY basis and proposed to carve out non-core assets out of PSMC while leaving core-assets within PSMC and divesting its majority shares.
Accordingly, a detailed response to each of the observation of the MoI&P, PSMC and PC Board members was made for their perusal and acknowledgement besides submitting it to the PC Board, in a summary, in its meeting held on Sep 23, 2020, wherein, FA presented detailed responses to each of the observation.
The sources said, PC Board discussed in detail the viewpoint expressed by one of the Board Members (Ashfaq Tola, Member, PC Board) submitted through an email of September 15, 2020 regarding foregoing of potential tax reversals on account of carry-forward business losses incurred by the PSMC on YoY basis, proposing to carve out the non-core assets out of PSMC, while leaving the core-assets within PSMC and divesting its majority shares. In this regard, the FA and its sub-contractors, namely Deloitte and CLM, made a detailed presentation explaining that this aspect was discussed in detail in the transaction committee meetings and argued that the proposed suggestion made by the Board Member is not tenable, as it transpires from the projections prepared by the FA that the revived PSMC is not expected to earn any profits during the initial phase of commercial production, expected to commence from 2023, hence brought forward business losses and consequent tax reversal benefits would lapse during this period.
FA also presented year-wise amount of expected tax reversals before the PC Board for perusal and acknowledgment. It was further highlighted that in the PC Board approved transaction structure, PSMC will continue to act as a holding company (wholly-owned and managed by the GoP) and carried forward business losses and consequent tax benefits besides legacy loans, liabilities, assets excluding identified core operating assets, etc., will continue to make part of the PSMC financial statements. Therefore, tax benefits accruing from any adjustments against the carried forward business losses will remain available to the PSMC (owned and managed by the GoP as sole shareholder) and will not be divested/passed on to the subsidiary, whose shares will be divested to private sector.
The CEO, PSMC was apprised of the steps to be taken by the Mol&P, PSMC and PC to make the transaction successful. The CEO, PSMC while acknowledging explanations, ensured PSMC's full cooperation.
The MOI&P representatives did not attend the meeting and sent a letter of September 23, 2020 via fax received during the Board meeting. The contents of the letter were read out to the PC Board, whereby PC Board re-affirmed that it has resolved its recommendations independently, however, appreciated that since its recommendations will be placed before the CCoP, of which Minister for I&P is a member for final approval and it is of utmost importance that principal stakeholders hold consensus opinion. The Board resolved to communicate the responses prepared by FA to MoI&P for acknowledgement.
Accordingly, PC, in its summary, has requested the CCoP to consider the recommendations according to which privatisation of PSMC "transferring of identified core operating assets into wholly-owned subsidiary of PSMC through scheme of arrangement (as provided in the Companies Act 2017) followed by sale of majority shares of the newly formed subsidiary (without transferring of full ownership) to strategic private sector partner”.
Copyright Business Recorder, 2020
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