Pakistan Steel Mills Scandal

The process of privatization of PSMC stands vitiated by act of omission and commissions on the part of certain state functionaries reflecting violation of mandatory provisions of law and the rules framed hereunder which adversely affected the decisions qua pre qualification of a member of the successful consortium (Mr. Arif Habib), valuation of the project and the final terms offered to the successful consortium which were not in accord with the initial public offering given through advertisement’. Supreme Court of Pakistan in Steel Mill Case Pakistan Muslim League (N) House No 20-H streets 10, sector F-8/3 Islamabad. 051-2852663, 2852665; Fax No: 051-2852662

PAKISTAN STEEL MILL

104 billions were being looted

Stealing the Steel Mill!

Introduction

The Supreme Court of Pakistan in its historic judgment delivered in a public interest litigation has declared the sale of 75% shares of Pakistan Steel Mills as void and of no legal effect “as the process of privatization of PSMC stands vitiated by acts of omission and commissions on the part of certain state functionaries reflecting violation of mandatory provisions of law and the rules framed hereunder which adversely affected the decisions qua pre qualification of a member of the successful consortium (Mr. Arif Habib), valuation of the project and the final terms offered to the successful consortium with the initial public offering given through advertisement”. Pakistan Steel Mills Corporation (Pvt.) Ltd (the “PSMC”) was inaugurated in 1985 with the technical and financial assistance of the former Soviet Union and owns and operates an integrated steel manufacturing plant with the design capacity of 1.1 million tons per annum. The steel demand in Pakistan is approximately 4.5 million tones per annum.PSMC meets approximately the domestic demand of steel products. The shortfall is met through a large number of small private sector units in Pakistan and through imports.PSMC has a chequered history and has been plagued by mismanagement, corruption and overstaffing. It has been functioning at a lower capacity and with heavy losses in some years.

First Plan of Privatization

The privatization of PSMC was taken up in 1998 but was dropped and instead it was decided to undertake restructuring of the corporation.To offload the excess regular manpower from 20533 to 15000, PSMC introduced an optional Voluntary Retirement facility w.e.f. 25th May 2000. This scheme was funded by internal resources to the tune of Rs. 4.5 billion. A Memorandum of Understanding was signed with Russia, during the visit of the president of Pakistan to Moscow in February 2003, to enhance the capacity of PSMC from 1.1 million tones to 1.5 million tones per annum.

The Change of Heart

Inclusion of PSMC in the privatization programme again came under consideration of the Cabinet Committee on Privatization (CCOP) on 31-12- 2004 and it approved the proposal of Privatization Commission to conduct an Initial Public Offering of 10% of its shares to the general public. Within months, the government changed its mind without any cogent reasons and decided to sell it. The Board of Directors of PSMC was given indications for its privatization by sale (instead of IPO) to a private party but the Board opposed it. The government appointed a new Board which was summoned to the Prime Minister House on February 10, 2005 at 4:15 p.m. The Prime Minister disclosed that the purpose of the meeting was to inform the Board of Directors that: (i) the government wanted to privatize PSMC on a fast track; (ii) the schedule of privatization would be given by the Minister for Privatization within a week; (iii) a Financial Advisor would be hired by the Privatization Commission to facilitate the privatization process at the earliest. Pursuant to this desire of the Prime Minister, the obedient Privatization Division submitted a summary on “Inclusion of Strategic Sale (i.e. 75% of its stake) of PSMC Corporation in the Privatization Programme” The suppliant Cabinet Committee on Privatization (CCOP) considered the Summary and approved the proposal on 11-04-2005.

The Assets

Let us now look at the assets of PSMC. Out of total 19000 acres of land, the Government has offered 4457 acres of land for bidding purpose. The government hired M/S Sadar-ud-din Associates to evaluate the said land. It evaluated the price of the land at the rate of rupees 10-11 million per acre whereas its actual market price is more than 100 billions rupees. As per directive of Privatization Commission, PSMC prepared its balance sheet on 31-12-2005 according to which current and fixed assets ( raw materials, work in process, finished goods inventory and spare parts) on 31-3-2006 are: (i)Raw Material & finished Goods & Spare Parts of Rs. 12.40 billions; (ii) Book valued of Fixed Assets including plant but excluding land of Rs.13.04 billions. If we add the value of the 4457 acres of the land (Rs. 44.5 billions to 49 billions i.e. average amounts to approximately 47 billions), the total value of the PSMC amounts to, as per government’s own estimates, Rs. 72.5 billions. If we take the market price of the land, then it amounts to 125.5 billions rupees.

Payments of Undue Loans

PSMC loans were restructured. It was asked to pay, (as it is better to pay off all due and undue loan before the death), its entire loan which waseven due for payment after year 2013. Interestingly, the post dated cheques were issued to settle the bank loan amounting to Rs. 7.77 billion while the Ministry of Finance had agreed to bear the interest thereon. The said loan was payable by 2020 in seven equal installments beginning from the year 2013. Why all this? Probably, the bankers do not like liability.

Profits of PSM

PSMC had also wiped out its entire accumulated losses by the year 2004-05 and posted a net profit of rupees 3.938 billion. In the next year it rose to Rs. 6 billions.Hardly, any other state enterprise of its nature in whole of Pakistan can boast of such achievements.

Valuation

The Privatization Commission commissioned Citigroup Global Markets Limited (which associated A.F. Ferguson, Orr Dignam & Co. and Corus Consultant) in connection with the proposed sale of a 75% of stake in PSMC. The Citigroup submitted a report with a disclaimer that the report has not been prepared with a view to public disclosure. In preparing this report, City Group ‘relied upon’ the accuracy and completeness of the information received by it from PSMC or Corus Consulting without independent verification thereof. The report further said, ‘Such estimates, projections, targets or forecasts involved significant assumptions and subjective judgments which may or may not prove to be correct and there can be no assurance that any estimates, projections, targets or forecasts are attainable or will be realized. No representation or warranty, express or employed, is made by CGML as to the accuracy, completeness or fairness of any information contained in this report and, so far as is permitted by law and except in the case of fraud by the party concerned, no responsibility whatsoever is accepted for the accuracy or sufficiency thereof or for errors, omissions or misstatements negligent or otherwise, relating thereto. This report should not be regarded as constituting an opinion as to be fairness or otherwise of any offer for an equity stake in PSMC, nor relied on as a basis to proceed, or not to proceed, with a formal offer for an equity stake in PSMC’. So this is the report on which the whole exercise of the determination of reference price, bidding etc is based. It does not need a special knowledge to declare that the report is not worth the paper on which it is written. This trash should have been put into a dust bin rather than making it the sole basis for the sale of our invaluable and strategic family silver.

Reference Price

The Citigroup submitted its report to the Privatization Commission on 30-3-2006 based on cash flows forecast developed till FY 2015 and without valuation of the 4457 acres of the prime land. On the same day, yes on the same day, the PC examined the report ( 200 pages of detailed figure work) and submitted its summary to the CCOP on the same day. The minutes of the cabinet meeting dated 31-3-2006 reveal that Privatization Division informed the CCOP that the Financial Advisor (Citigroup) has recommended a value of US$ 375 million for privatization of PSMC on 100% equity basis. CCOP was informed that FA’s valuation of US$ 375 million for 100% equity stake is based on the average of the following three valuation methodologies [ (i) Discounted Free Cash Flow Analysis (ii) Public Multiple Analysis (iii) Precedents Transaction Analysis] with a 10% discount. CCOP was informed that the Privatization Commission has recommended a total value of US$ 500 million for 100% equity stake of PSMC (also considering current market value of the total assets). According to this, the Reference Price for 75% equity stake (1,290,487,275 shares) works out to US$ 375 million i.e. Rs.17.43 per share (calculated at the rate of Rs. 60 per US$). The CCOP ignored the recommendations of the Privatization Commission and approved the valuation of US$ 464 million based on DCF stakes.On the basis of the above, 75% equity stake worked out to US$ 348 million i.e. 16.18 per share. The Committee in contradiction to the rule 4 (2) The Privatization (Modes And Procedure) Rules, 2001 (Upon selection of a highest ranked bidder as specified in sub-rule (1), the Board shall refer the matter for approval, or rejection of such highest ranked bidder with full justification, to the Cabinet) approved in advance (before the bidding) to issue the Letter of Acceptance (LOA) to the successful bidder if their per share price is equal or higher than the reference price. And Pakistan Steel was never consulted for the fixation of the reserved/ sale price.

Bidding

On the same day i.e. 31-3-2006, the bidding took place. Its process is also intriguing. In pursuance of request for Expression of Interest, 19 parties applied for pre-qualification out of which, nine were qualified. Out of these nine, the following six pre-qualified parties formed two bidding consortiums ( rest lost interest or were compensated) )and took part in the bidding: 1. Al-Tuwairiqi (Saudi Arabia), Arif Habib Securities (Pakistan) and Magnitogorsk ( Russia). 2. Noor Financial Investment Company (Kuwait), Government of Ras Al Khaimah, (UAE), Industrial Union of Donbass (Ukraine) and Aljomaih Holding Company, (Saudi Arabia) Under the law, these consortiums could not take part in the bidding on the following two reasons: (i) as per ‘Instruction to Bidders’ issued by the Privatization Commission on March 11, 2006, consortiums could be formed before submission of Statement of Qualifications (SOQ) whereas these so called consortiums were cobbled after the SOQ; (ii) actually the winning/ first consortium was made on 20th day of April 2006 i.e. 20 days after the bidding. But the Privatization allowed this consortium to participate in the bid rather it had already got approval from the CCOP to issue LOA to it. Why? Only God knows. There is another interesting fact that the name of the constituents companies of the bidding consortium is different than the actual consortium later formed on 20-4-2006. Now Al-Tuwairiqi was replaced by Al-Ittefaq and two following offshore companies were added into it: (i) ATG Holdings Mauritius Limited (ii) MMK Holdings (Asia) Limited. Despite the courts repeated instructions, the legal documents of these companies were never submitted in the court.

Purchaser different than Bidder?

• The bidder consortium consisted of (i) Al-Tuwairiqi (ii)(ii) Arif Habib and (iii) (iii) Magnitogorsk But the Share Purchase Agreement was executed between the Pakistan and PSMC SPV (Mauritius)
• Arif Habib Securities
• Arif Habib s/o Habib Haji Shakoor.

The following became the guarantors of the agreement: (iv) ATG Holdings Mauritius (v) Al- Ittefaq (vi) MMK Holdings (Mauritius) (vii). Magnitogorsk. The following points are worth consideration: (a) Why and under what law, companies were changed? Why bidders were different and agreement was made with different parties? (b) one person signs on behalf of first five parties (i to v) and another person signs for (vi) and (vii); © PSMC SPV was registered as a special purpose vehicle offshore company with capital of four dollar just to avoid tax. It also means that in case of a problem, its liability will be limited to four dollars (d) Privatization Commission did not check the documents of three Mauritiuscompanies and did not submit these in the Court; (e) It appears that, like consortium, these have been registered after the bidding;
(f) How come Arif Habib s/o Habib Haji Shakoor became buyer in its personal capacity as he neither figure in EOI and bidding nor in the consortium, actual or dummy?

Judgment of Supreme Court of Pakistan!

The nine member special and larger bench of the Supreme Court of Pakistan heard the case for 16 days from 9 am to 1.30 pm.The government/buyers were representedby a team of the senior most lawyers including Syed Sharif-ud-Din Pirzada, Mr. Hafeez Pierzada, Mr. Khalid Anwar, Mr. Waseem Sajjad ( i.e. four former Law Ministers)and the Attorney General. The honorable court announced its short order on 23-6- 2006 wherein the Letter of Acceptance (LOA) dated 31st March 2006 and share purchase agreement dated 24th April 2006 were declared as void and of no legal effect. I quote hereunder a few lines from the judgment to confirm the story: “On the very next day, CCOP determined the reference price of the share @ Rs.16.18 less than the value suggested by Privatization Commission @ Rs.17.43 per share, whereas final bid was accepted @ Rs.16.80 per share.” “It may also be noted that as against the above price, the GOP as well as Privatization Commission has extended following benefits to the purchaser: i) The stock in trade in the Unit worth about Rs.10 billion, to be handed over to the purchaser, ii) The cash worth about Rs. 8.559 billion lying in its account, out of which post dated cheques of about Rs. 7.67 billion have already been issued to clear the liability of loans, which were due form the year 2013 to 2019. iii) The Tax of Rs.3 billion has already been paid, out of whichRs.1 billion will be refunded to the purchaser on taking the possession of the Unit. iv) Total loss to Government in this way works out to Rs.18 billion (net)(10.00+7.67+1.00) v) Above all, the Government has accepted the liability to pay compensation of about Rs. 15 billion to the worker as Golden Hand Shake Scheme, which will be another loss to the State.”

‘Conscious of the mandate of Article 153 and 154 of the Constitution, we hold that the establishment and working of the Council of Common Interest (CCI) is a cornerstone of the Federal Structure providing for protection of the rights of the federating units.Mindful that the important institution is not functioning presently, and taking note of the statement made by the council for the federal government Mr. Abdul Hafeez Pirzada that the process for making it functional is underway, we direct the federal government to do the needful expeditiously as far as possible but not latter than 6 weeks.—- — -by way of propriety it would be in order if the matter is referred to the counsel of common interest CCI for consideration’.( EDITOR’S NOTE:Article 153 deals with the constitution of the CCI. Article 154 mandates the CCI to formulate and regulate policies in relation to matters in Part II of the Federal Legislative List. The Part II of the Federal Legislative List includes ‘Development of industries, where development under Federal control is declared by Federal law to be expedient in the public interest; institutions, establishments, bodies and corporations administered or managed by the Federal Government— -all undertakings, projects and schemes of such institutions, establishments, bodies and corporations, industries, projects and undertakings owned wholly or partially by the Federation or by a corporation set up by the Federation. In other words the privatization of PSMC should have been placed before CCI.) ‘The process of privatization of PSMC stands vitiated by act of omission and commissions on the part of certain state functionaries reflecting violation of mandatory provisions of law and the rules framed hereunder which adversely affected the decisions qua pre qualification of a member of the successful consortium (Mr. Arif Habib), valuation of the project and the final terms offered to the successful consortium which were not in accord with the initial public offering given through advertisement’.

Conclusions

It is not difficult to judge that the ‘deal’ has been managed from the day one to benefit certain people. Leaving aside ‘acts of omission and commission, out of which some have been mentioned and the rest will be precisely documented by the highest court of the land in its detailed judgment, let us calculate the final figure. a)The Steel Mills has been sold for 21.68 billions. b)The buyers have been given benefits of 17.67 billions. c)If half the employees take or are sent on golden hand shake (PSMC Chairman is on record that 50% employees will opt for this scheme), government will further pay Rs. 7.5 billions. If all opt for the scheme, then it will pay Rs. 15 billions. d) In other words, the buyer(s) are paying Rs. 21.68 billions whereas government is giving then Rs. 25.17 ( if half employees) to 32.67 ( if all employees) billions. e)The net transfer of national resources to the buyers would be Rs. 3.49 to 10.99 billions. f)Let me remind you, this simple calculus does not include the humble price of the 4457 acres of prime land which is of 100 billions rupees. g) All put together, the ‘clean’ government serving the poor toiling masses of the Islamic Republic of Pakistan has gifted, as a token of love, Rs. 103. 49 to 110.49 billions to one of its ‘poorest’ citizens in the ‘larger interest’ of the nation.

There are some issues which need to be pondered upon:

(i) The honorable court has earned the laurels of the common citizens. It may lead to the restoration of confidence of the people into our judicial system as without proper dispensation of justice, we cannot survive as a nation. (ii)Does this damning judgment of the nine lordships of the highest court of the land will lead to the rolling of some heads? And it must. (iii)The government always claims ‘corruption free good governance’ and alleges corruption on part of the previous governments led by Benazir Bhhutto and Nawaz Sharif. At the most, there are still mere accusations that are still under trial in lower courts. Here the highest court of the land has given a final judgment of ‘acts of omission and commission’. Will the Goebbles of the present ‘savior government’ explain to the nation about their tall claims? (iv)There is ‘rule of cartels’ in Pakistan: cement cartel, oil cartel, sugar cartel, bank cartel, land cartel, stock exchange cartel, drug cartel, steel cartel etc. Have these cartels been created in ‘larger national interest or it is a mere coincidence? (v)The whole Pakistan appears to be on loot and boot sale. Previous governments sold ‘dead and sick’ units of lesser importance. This government is selling very profitable and strategic corporations without any clear cut policy considering national interests. Should there be a national privatization policy and legislation after a fair and thorough debate? (vi)National Accountability Bureau hounds petty officials on allegations of small corruptions. What would be the attitude of NAB about this proved corruption of not very small amount i.e. Rs. 103.49 billions? Let the NAB start action not only against the culprits involved in the Steel Mill but also in other case like Habib Bank of Pakistan which has been sold at an amount equal to its just two years profits. (Barrister Zafarullah Khan)

Steel Mill but also in other case like Habib Bank of Pakistan which has been sold at an amount equal to its just two years profits. (Barrister Zafarullah Khan)

What a Steal?
Dr Farrukh Saleem: June 11, 2006: the News Pakistan Steel Mills Corporation (PSMC) on the auction table.

PSMC going for Rs21.68 billion. PSMC going for Rs21.68 billion. PSMC going for Rs21.68 billion. PSMC gone for Rs21.68 billion. Pakistan Steel Mills Corporation sold for Rs21.68 billion (75 per cent shares for an equivalent of $360 million). What a deal! What a steal? Our treasury now expects Rs21.68 billion in return for selling 75 per cent of Pak Steel’s shares. Of the Rs21.68 billion, the Government of Pakistan (GoP) has agreed to pay a maximum of Rs15 billion in ‘golden handshakes’, ‘special golden handshakes’ and a voluntary separation scheme (VSS). According to Lieutenant-general (retd.) Abdul Qayyum, Chairman of Pakistan Steel Mills Corporation, around 50 per cent of the some 13,000 employees would “accept golden handshakes.” If the chairman is right then the GoP will pay back an amount of Rs7 billion, leaving the treasury with Rs14.68 billion. Of the Rs14.68 billion left with the treasury, the GOP has already deposited a post-dated cheque in the amount of Rs7.67 billion to clear off past liabilities. That leaves the treasury with Rs7.01 billion. Of the Rs7.01 billion, the central board of revenue (CBR) has waived off taxes in the amount of Rs1.82 billion leaving — mathematically speaking — the treasury with Rs5.19 billion. For the benefit of the buyer, PSMC has an inventory of ‘stores and spares’ valued at Rs.1.86 billion. For the benefit of the buyer, PSMC has ‘stock-in- trade’ valued at Rs9 billion. For the further benefit of the buyer, PSMC has a bank balance of Rs8.880 billion (as of Balance Sheet dated December 31, 2005). Its total current assets are valued at Rs21.78 billion; a wholesome Rs100 million over and above the price paid by the buyer (remember, the buyer has acquired 75 per cent shares). Wait there is more. Privatisation-related documents claim that PSMC sits on 4,457 acres of land. Depending on who the valuator is the value of land ranges from a low of Rs20 billion to a high of Rs45 billion. The fact of the matter, on the other hand, is that PSMC complex is spread over 10,390 acres while an additional 8,270 acres are reserved for future expansion. Then there is a massive 165 megawatt powerhouse with a replacement cost that ranges from a low of Rs5 billion to Rs10 billion. There also is a dedicated jetty, 110 kilometres metalled road, 70 kilometres railway tracks and a captive market (Pak Steel is the only integrated iron and steel works in Pakistan). Now a bird’s eye view of how efficient our government machinery really is: The bidding for PSMC took place on March 30. The board of the privatisation commission approved it on March 31 (the board consist of the chairman, the secretary and six other members; one-third of the members constitute a quorum). The same day the board forwarded a summary to the cabinet committee on privatisation (CCOP). The CCOP met and approved the sale the same day. The same day, CCOP authorised the privatisation commission to issue a letter of approval (LOA) to the buyer. The same day, an LOA was handed over to the buyer.

Wasn’t Pak Steel established at a cost of $2.5 billion?