Saturday, January 8, 2011

Pakistan Steel Mills: Government decides to back Rs7b loan bid

Pakistan Steel Mills: Government decides to back Rs7b loan bid

ISLAMABAD: The government has decided to provide sovereign guarantees to back Pakistan Steel Mills’ bid for obtaining loans totalling over Rs7 billion from a consortium of banks required to restructure the once profitable entity that has recently incurred losses of Rs38 billion.

Sources from within the ministry of industries and production said that once the audited accounts of PSM are finalised, the management will enter into negotiations with a consortium of banks – led by National Bank of Pakistan. The accounts are expected to be settled by mid-January.

The federal government has recently extended a short-term loan of Rs3 billion to the entity with an aim of ensuring maximum utilisation of production capacity, which has dipped to a new low of 30 per cent.
Currently the value of PSM’s assets is less than its liabilities. Under the State Bank’s prudency regulations, banks cannot entertain loan requests from an entity with negative equity. However, officials who have seen the unaudited accounts expect the book value of PSM to once again become positive.

The government will extend the sovereign guarantees as part of a plan approved by the cabinet’s committee on restructuring public sector enterprises. It is vital to note, however, that under the law the value of guarantees extended by the government cannot exceed two per cent of the total size of the economy in any given financial year.

Finance ministry figures show as of December 31, outstanding guarantees had risen to Rs563.4 billion – more than three per cent of the total economy size. Of the total, guarantees worth Rs322.8 billion have been given in the local currency, while Rs240.6 billion are in foreign currencies.
If PSM fails to pay back the amount, it will become the federal government’s obligation to service the debt, similar to what happened with the power sector.

Though formal negotiations are yet to start, PSM management expects that the minimum cost of debt in excess of Rs7 billion will be 13 per cent per annum, according to the officials. At present, PSM pays Rs1 billion in interest annually.

The government constituted the cabinet body to overhaul eight bleeding public sector entities which result in annual losses of Rs243 billion. Minister of State for Finance Hina Rabbani Khar recently said that PSM’s restructuring plan will be tabled in the next cabinet meeting for final approval. The opposition has demanded that the government restructure bleeding entities instead of levying new taxes since a significant part of revenues is spent to pick up losses of these organisations.

The officials said the government is likely to announce a new chief executive officer for the entity by the end of this month. As per the new arrangement, the offices of CEO and the chairman of the board of directors will be separateAfter the appointment is finalised, acting CEO Imtiaz Ahmad Lodhi will revert back to his position of finance director.

Pakistan Steel Mills remained a profitable entity till the end of Musharraf regime and officials attribute its downfall to political appointments at the top-level management. PSM suffered a loss of Rs26 billion in 2008-09 and another Rs11.5 billion during last financial year. During the current financial year the gap between its revenues and spending is at an average of Rs3.5 billion per month.

It should be noted that one of the former CEOs of the mammoth organisation is under custody on allegations of corruption.
“If the PSM runs on full capacity it will take at least four years to pay off the Rs38 billion losses,” said Lodhi while talking to The Express Tribune.

The government has shelved the plan to sell 20 per cent stake in PSM. The management has decided the entity will first be turned profitable and then, if required, shares will be floated in the stock market.
The management is also working on a plan to expand production capacity, currently at one million tons. Though Privatisation Minister Senator Waqar has given a slogan of adding another six million tons, the ministry officials termed this ‘impractical’. Enhancing capacity to six million tons requires an investment of at least $5 billion and no party is willing to make such a huge investment at this point in time, said the official.

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