ISLAMABAD: Finance Ministry and Privatisation Ministry have reportedly developed serious differences on the total stock of losses of Pakistan International Airlines (PIA) with the former stating that transfer of these liabilities would further increase government’s debt burden, well-informed sources told Business Recorder.
During discussion in a recent Federal Cabinet meeting on proposed “divestment of PIACL – legal segregation plan and transaction”, Ministry of Finance observed that the matter required further deliberation, as transferring of Rs 1.7trillion losses to the federal government would create significant financial burden for it, since it would have to service this additional debt especially when 75% of revenue already goes to service the present loans.
It was also apprehended that the proceeds from PIACL assets would not be immediately forthcoming and further borrowing was not advisable, as it would increase the overall debt burden. It was also highlighted that there was a need to further discuss the segregation transaction plan and to work out a structure for PIACL debt settlement in a horizontal cascade.
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However, in response, the Ministry of Privatisation clarified that the debt proposed to be shifted to the government was not Rs. 1.7 trillion, but Rs.623billion and that it was not unusual for governments to take over the liabilities of loss-making state-owned enterprises in order to optimiseprivatisation transactions. Regional examples were given to explain why not taking over the debt by the government would result in very low offers.
Cabinet members observed that the issue of PIACL’s performance was linked to its outstanding liabilities and that a liability of Rs 623 billion was being transferred to the government. One of the members suggested that only two assets of PIA could payoff these debts, and one of these was through proceeds of sale of the Roosevelt Hotel. To the proposal on amending the FBR law, it was opined that instead of amending the entire law of FBR, alternate options should be explored. Hold Co was supported as a more practical mode. The Ministry of Privatisation explained that the proposal was for an exemption from, not amendment in, section 57(2) of the Income Tax Ordinance.
It was further noted that the PC Board, after detailed deliberations and discussion on the draft restructuring report and segregation plan approved Option 1 - Hold Co model of the proposed legal segregation plan and Option -2 divesting 51% to 100% shares of the proposed transaction structure as recommended by the FA for presentation to the federal cabinet after incorporating following amendments, which have been duly incorporated by the FA in revised legal segregation plan: (i) retention of PIACL employees for three years post privatisation to be negotiated with potential investor; (ii) PIACL liabilities be updated to December 31, 2023 and be included in the draft legal segregation plan presentation to the cabinet; and (iii) if ancillary services (Engineering, Ground Handling, Cargo, Flight Kitchen, and Training) are not retained by the investor, they should be closed, since the government of Pakistan cannot afford funding additional losses liabilities from these services.
The cabinet was informed that the Supreme Court of Pakistan, in Human Rights Case No 11327-S of 2018, held as follows: “it is categorically stated by the learned Attorney General for Pakistan on instructions that for the time being no steps are being taken for privatisation of Pakistan International Airlines; however, if at any point of time such decision is taken, the Court shall be taken into confidence and should be apprised about it prior to taking any steps (contemplative or otherwise) in this regard.”
Accordingly, PC filed a Civil Miscellaneous Application (CMA) on January 11, 2024 to apprise the Supreme Court about the privatisation process for PIACL and the date of hearing was awaited.
In view of the draft Restructuring and Legal Segregation plan and Transaction Structure for divestment of PIACL and in terms of Section 5(n), read with Section 23 of PC Ordinance 2000 and rule 16 (1) (k) of the Rules of Business, 1973, approval of the Federal Cabinet was solicited to be followed by inviting of Expression of Interest from interested parties and fling of SOA with SECP, for the following proposals: (i) approval of the draft legal segregation plan and SOA for PIACL including transfer/ retention of liabilities and assets as recommended by the PC Board and specifically approval of (a) Option-1 (Top Co/ Hold Co Model) for corporate restructuring and segregation of PIACL; (b) option-2 for transaction structure, divesting 51% to 100% shares as recommended by the PC Board; and (c) for transfer of PEC employees on existing terms and conditions to new Company, i.e., Hold Co as recommended in the SOA; (ii) direction to Aviation division, PIACL, and Hold Co to undertake required corporate and regulatory actions to implement the SOA; (iii) approval for creation of new Hold Co Company for implementation of SOA and waiver of fee for authorised capital in terms of schedule 7 of Companies Act 2017; (iv) directions to CAA, PSO and FBR to issue requisite No Objection Certificate (NOCs)/ Consents for filing the draft SOA with SECP; (v) in principle approval for amendment in section 57 (2) of Income Tax Ordinance 2001 enhancing expiry period from 6 to 10 Years of deferred tax on unused tax losses of PIACL; (vi) approval of Bridge Financing of Rs 10 billion by CAA to PIACL, which PIACL shall repay by June 30, 2024 or financial closure of privatisation transaction, whichever is earlier.
The cabinet approved segregation of PIACL as per recommendations of Apex Council of SIFC. The Cabinet also decided that the finer details of restructuring of PIACL would be shared with the stakeholders in Cabinet Committee on Privatisation.
Copyright Business Recorder, 2024
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