For sale: 'Nightmare' steelmaker losing US$20 million a month

[ISLAMABAD] Of all the shoddily run Pakistani state-run companies that Mohammad Zubair needs to sell in the next year, he says none is worse than Pakistan Steel Mills Corp.

Investors see about two-thirds of the company's 16,000 workers as unnecessary and most others as incompetent, Zubair, who heads Pakistan's privatisation program, said in an interview. Losses are running at roughly US$20 million a month after the firm stopped operating in June because it couldn't pay its gas bill.

"Finding a potential buyer for Pakistan Steel will be a nightmare because the company is a nightmare," said Mr Zubair, 59, a former IBM executive. "I've always sold IBM products which is the easiest - you're always going with the best products or services. Now you're going with one of the worst."

Time is running out for Pakistan to sell stakes in about 40 state-run companies to meet conditions for a US$6.6 billion loan package it received from the International Monetary Fund in 2013. Progress is crucial for Prime Minister Nawaz Sharif to show the world that Pakistan is changing as it seeks to attract foreign capital to its financial markets.

Asked about Mr Zubair's "nightmare" comment, Pakistan Steel spokesman Syed Abdul Hafiz Shah said the losses began piling up after the 2008 financial crisis.

"Production is zero and liabilities can't be paid, so obviously it's difficult to run," Mr Shah said. "It's up to the government what it decides. We will have to follow it." The privatisation program is already behind schedule and facing resistance among unions and opposition political parties. Five transactions yielding US$1.7 billion have been completed so far, and deadlines are being pushed back.

Mr Zubair emphasised that the privatisation push is still on track. He said that legal and political hurdles have delayed the timeline for asset sales by only about three months.

"This is a very critical stage," Mr Zubair said at his office on Dec 4. "This is just the stage where the next momentum will be seen by the people of Pakistan." Strategic sales are more complicated and time consuming than capital market transactions, according to Mohammed Sohail, chief executive Topline Securities Ltd.

"The challenge is not the opposition parties or people opposing privatisation," Mr Sohail said by phone from Karachi. "The situation of these companies is so bad that it will be difficult to find a buyer."

The three companies seen as benchmarks for success are Pakistan Steel, national carrier Pakistan International Airlines Co and Faisalabad Electricity Supply Co, known as Fesco. All have been earmarked for privatisation for more than two decades.

A presidential decree issued last week repealed the 1956 law setting up Pakistan Airlines, removing a hurdle to selling a 26 per cent stake in the national carrier. China's Hainan Airlines Co is among companies that have expressed interest, Mr Zubair said, adding that he'll also seek bids from Emirates, Etihad Airways PJSC and Qatar Airways Ltd. A sale would likely be completed by the end of August, two months behind the original timeline.

Fesco is profitable and will be the easiest of the three to sell despite having 9,000 outstanding legal cases and spotty financial documentation, Mr Zubair said. He plans to unload a 74 per cent stake by May, a sale he hopes will generate momentum for other power producers that are in much worse shape.

Pakistan Steel is more complicated. Established in 1973 to supply a nascent manufacturing sector, the company stopped operating in June after gas supplies were cut off due to mounting debts, according to Shah, the company's spokesman. Its workforce has shrunk to 14,000 as those who hit retirement age aren't replaced, he said.

The cabinet decided to allow the government of Sindh province - where Pakistan Steel is based - to have the first shot at the 74 per cent stake up for sale. If Sindh doesn't express interest by Dec 15, Mr Zubair said he would write to the cabinet and look for other buyers.

"Everything isn't done on a pure professional, commercial basis," Mr Zubair said, adding that he opposed the move to reach out to Sindh. "Politics is involved, and rightly so because these are important stakeholders and you have to take them on board."

After the cabinet signs off on the structure, another six months will be needed to complete the transaction, Mr Zubair said. Other sales in the pipeline include Kot Addu Power Co Ltd, SME Bank Ltd, State Life Insurance Corp and electricity distribution companies in Lahore and Islamabad, he said.

Besides completing the actual sales, Mr Zubair will also need to convince lawmakers and the public that they are getting a fair price. The enterprises are costing taxpayers about 400 billion rupees (S$5.4 billion) a year in losses, he said.

"Of course we want to maximise the price, but that's not the reason we are selling," he said. "We are selling first to stop the bleeding."

BLOOMBERG