ISLAMABAD: As Pakistan Steel Mills (PSM) continues to pile up liabilities, the government is considering leasing the country’s largest industrial complex to a private concern for 45 years under a revenue sharing arrangement, and laying off almost 5,000 employees.

On Monday, a transaction committee discussed various options in this regard, based on which the Privatisation Commission’s board will meet on Tuesday (today) to decide the duration of the lease. Sources privy to the development said a meeting of the cabinet committee on privatisation has been called over the weekend to approve the transaction structure.

“The present state of PSM is due to unchecked corruption, inefficiency, over-employment and the government’s lukewarm attitude towards its revival,” summarised a report to the Economic Coordination Committee by the secretary of the industries ministry.

Read: Pakistan Steel Mills financial woes continue

A previous attempt to sell the PSM by then prime minister Shaukat Aziz to a Saudi-led consortium for Rs21.6 billion ($362 million) was struck down by a landmark Supreme Court ruling in June 2006, which practically led to a halt of the privatisation programme for almost eight years.

The PSM’s accumulated losses and liabilities, which stood at Rs26bn at the end of 2008, have increased to around Rs415bn, including Rs166bn payable liabilities.

The government has injected over Rs85bn out of the federal budget for various bailout packages since than.

A previous attempt to sell PSM to a Saudi-led consortium for $32m was struck down by a landmark SC ruling in 2006

It was clear from the deliberations on Monday that the government would take care of liabilities worth Rs166 billion and offer voluntary separation scheme (VSS) to at least 4,835 employees and outsource the services of some of the remaining workforce to the new operator.

The PSM’s total liabilities and losses have more than doubled since the PML-N government came to power in May 2013. At least $5 billion has been spent on ‘replacement imports’ ever since the PSM was put on ‘hot-mode-zero production’ since June 2015.

An official who attended the meeting of the transaction committee led by Zafar Sobhani, a private sector expert, told Dawn that selling the company at this stage would be difficult to pull off. The options finalised by the transaction committee included a concession agreement or lease agreement with the private concern.

He said three lease or concession terms had been proposed with a maximum of 45 years. A Chinese group, an Iranian firm and a local steel group are reported to have shown interest.

Bidding will be held on the basis of revenue sharing with the government during the lease tenure. The government will convert its Rs33 billion financing/loans and guarantees into equity and issue interest-bearing coupons to the Sui Southern Gas Company for Rs35bn dues and Rs50 billion to banks for interest/loans repayment and bear about Rs17 billion of the employees’ severance cost.

The lease agreement will require the new firm to revive 25 per cent of the plant’s capacity utilisation in the first year, raise it to 50 per cent in the second year and to 85 per cent after that. The government will retain the right to encash the investor’s bank guarantee if the private concern fails to achieve 50pc capacity utilisation at the end of two years or 85pc capacity utilisation between three and five years.

The PSM’s land will remain with the government while the plant and machinery will be handed over to the new company for a maximum of 45 years.

The investor will form a new company registered in Pakistan and operate the plant on its existing premises. All non-core assets will remain the property of the PSM while “all liabilities on PSM books would be settled or restructured by the government before signing the lease or concession agreement with the new investor”.

The government will also ensure resumption of all utilities, particularly natural gas, while the assets or capital expenditures (Capex) will be transferred to the PSM at the end of the lease term for a notional value.

The investor will not be allowed to mortgage existing assets to raise finances but will be free to bring in equipment or invest to revive operations.

The investor will also have to commit to bring in its own working capital and share a revival and expansion plan. “The lessee will pay a lease amount to the PSM as a percentage of revenue.”

The sources said that PSM’s employees will be retained on the PSM payroll and be outsourced to the lessee. The core regular staff strength is currently estimated at 19,700, of which the government expects 4,835 to be laid off through VSS.

A few weeks ago, the Ministry of Industries and Production warned the government that a humanitarian crisis was brewing in the mills because of non-payment of wages and medical expenses. Salaries have been paid from the federal budget for over two years and are considered outstanding since October 2016. Since the mill is no longer considered an “ongoing concern” for auditors, the PSM’s three-year accounts could not be audited.

The PSM had previously leased out about 157 acres of prime land to the Port Qasim Authority for Rs1.467bn on a 30-year extendable lease to ensure emergency payments on account of unpaid utility bills.

Published in Dawn January 17th, 2017