Topic: Privatization of Pakistan Steel Mills Subject: Pakistan Economic Policy Submitted By: M. Faizan Sohail (7133) Faculty: Shahid Iqbal Date of Submission: 12th August 2010 Pakistan Steel Mills Introduction: Pakistan Steel Mills is the producer of long rolled steel products in Karachi, Pakistan. The Pakistan Steel Mill is the country’s largest industrial undertaking having a production capacity of 1. 1 million tons of steel. The enormous dimensions of the project can be visualized from the construction inputs which involved the use of 1. 9 million cubic meters of concrete, 5. 70 million cubic meters of earth work (second to Tarbela Dam), 330,000 ton of machinery, steel structures and electrical equipment. It’s unloading and conveyor system at Port Qasim is the third largest in the world and its industrial water reservoir with a capacity of 110 million gallons per day is the largest in Asia. A 2. 5 km long sea water channel connects the sea water circulation system to the plant site with a consumption of 216 million gallons of sea water per day.
Soviet Contribution to Steel Mill In January 1971 Pakistan and the USSR signed an agreement under which the latter agreed to provide techno-financial assistance for the construction of a coastal-based integrated steel mill at Karachi. The huge construction and erection work of an integrated steel mill, never experienced before in the country, was carried out by a consortium of Pakistani construction companies under the overall supervision of Soviet experts. Corporate Business and Net worth
Pakistan Steel not only had to construct the main production units, but also a host of infrastructure facilities involving unprecedented volumes of work and expertise. Component units of the steel mills numbering over twenty, and each a big enough factory in its own right, were commissioned as they were completed between 1981 to 1985, with the Coke Oven and Byproduct Plant coming on stream first and the Galvanizing Unit last. Commissioning of Blast Furnace No. on 14 August, 1981 marked Pakistan’s entry into the elite club of iron and steel producing nations. The project was completed at a capital cost of Rs. 24,700 million. The completion of the steel mill was formally launched by the then-President of Pakistan on 15 January, 1985. Pakistan Steel today is the country’s largest industrial undertaking, having a production capacity of 1. 1 million tons of steel. Founders of Pakistan Still Mills The real founders of Pakistan Steel Mills are Prof.
Dr. Niaz Muhammad, Wahab Siddiqui and Russian scientist Mikhail Koltokof. It was the hard work of Dr. Niaz Muhammad that thousands of scientists and technical staff got trained by him. His inspirations and innovations got him the highest award from President of Pakistan, and also from Government of Russia. The Government of Pakistan has given him Pride of Performance. His nomination for Nobel Prize was biggest respect what Pakistan achieved. Social obligations
Pakistan Steel Mills, besides its core activities, has done a lot in making the environment in and around Pakistan Steel green and beautiful through the addition of three unique projects: the Quaid-I-Azam Park, The Quaid-I-Azam Cricket Park and the Quaid-I-Azam Beach. The Quaid-I-Azam Park, which spreads out over an area of 45acre, consists of a series of six interconnected lakes, lush green lawns and grassy terraces, colorful flower beds, fountains, life- size steel-made models of wild and marine animals, a jogging track, a bird sanctuary and mini-zoo, as well as a children’s play and recreational ground and boating facilities.
The other unique project, known as the Quaid-I-Azam Cricket Park, has been established amidst the pleasing surroundings of Steel Town, featuring sloping grassy terraces all around for spectators and four diagonally-located hillocks with seating arrangements to provide a panoramic view of the game. This is spread over an area of 32000 sq. meters and is equipped with all the necessary facilities, conforming to international standards. The third project, Quaid-I-Azam Beach, is being developed with the aim to provide a seaside recreational spot to the employees of Pakistan Steel, especially those residing at Steel Town and Gulshan-e-Hadeed.
Pakistan Steel is also on its way to establish Quaid-I-Azam National Park over a vast area of 400acre adjacent to Steel Town which shall be a tremendous contribution in the development of the environment. The organization also has a football team Pakistan Steel FC that currently competes in the Pakistan Premier League. History & Privatization of Pakistan Steel Mills After independence in 1947, it did not take long for Pakistan to come to the realization that progressive industrial and economical development would be impossible without the possession of a self reliant iron and steel making plant.
The dependence on imports would cause serious setbacks to the country along with an extortionately high import bill which would be impossible to support. In 1968, the Government of Pakistan decided that the Karachi Steel Project should be sponsored in the public sector, for which a separate Corporation, under the Companies Act, be formed. In pursuance of this decision, Pakistan Steel Mills Corporation Limited was incorporated as a private limited company to establish and run steel mills at Karachi.
Pakistan Steel Mills Corporation concluded an agreement with V/o Tyaz Promexport of the USSR in January, 1969 for the preparation of a feasibility report for the establishment of a coastal-based integrated steel mill at Karachi. Bhutto had signed a contract with the former USSR to help build the project. The project was estimated to cost Rs 10 billion but was completed at a cost of Rs 30 billion and took ten years to finish. The foundation stone of this vital and gigantic project was laid on 30 December, 1973 by the Prime Minister of Pakistan Zulfikar Ali Bhutto.
The completion of the steel mill was formally launched by the then-President of Pakistan on 15 January, 1985. The steel mill project provided 20,000 jobs for workers from all over Pakistan. Unfortunately, from the very beginning plotting were launched by the bureaucracy against the workers in order to destroy their moral and ruin their potential. A propaganda campaign was started in the media to give the impression that the project was “a burden on the national economy” and that it was “a white elephant”.
This campaign gradually became noisier and the idea that there were 8000 surplus workers who were a burden and needed to be gotten rid of was widely propagated. However, the bureaucracy and the press found it impossible to attack the workers due to the political strength and unity of the militant trade unions. With its propaganda having failed and its aims in ruins, the bureaucracy resorted to the traditional and criminal tactics of the ruling class – the tactic of “divide and rule”.
In 1986 Zia-ul-haq dictatorship began a series of brutal political assaults in Pakistan. The ruling class succeeded in generating racial conflicts among workers, which not only divided the workers but also weakened the labor movement. This tactic of “divide and rule” also affected Pakistan Steel. In 1988 the trade unions were divided on racial grounds which resulted in bloody hatred and ended the traditional revolutionary unity of the unions. The labour movement was constantly harassed and its leadership degenerated and became demoralized.
In 1992 Prime Minister Nawaz Sharif appointed a General, Sabeeh Qamar-uz-zaman, as chairman of Pakistan Steel. He was given the task of improving the situation and “normalizing” the working conditions. He imposed an undeclared ban on the trade unions at Pakistan Steel. Terror and the harassment of the unions were enforced in the name of discipline. An internal security intelligence unit, the FIU, was also established and was headed by an army colonel. This notorious intelligence unit “discovered” that 1500 workers were a “security risk”.
These workers were punished and removed from their jobs. In 1995 Benazir Bhutto, in her second term in office, reinstated most of these workers. However not all of them were reinstated. During his second tenure in 1997, Nawaz Sharif introduced many reactionary anti-labour laws. The ex-chief of the FIU, Colonel Afzal, a batch mate of General Musharraf, was appointed as managing director of Pakistan Steel. This gentleman was twice suspended on corruption charges from his previous post as chief of the FIU, yet somehow he still merited the promotion to chairman.
After Musharraf overthrew Nawaz Sharif in 1999, he introduced his “Seven Point Agenda” to the nation. Not surprisingly his top priority was the introduction of the brutal policies of rightsizing and downsizing, which in practice meant maximizing unemployment. These policies were sweetened with another Black Law: the Industrial Relations Ordinance 2000. In June 2000 the chairman of Pakistan Steel announced the immediate dismissal of 436 workers. The workers were informed in their dismissal orders that their services were no longer required.
This was just the beginning however, and a new policy was enforced where workers were requested to enjoy the “benefits” of the VRP (Volunteer Retirement Policy). All of these laws and policies were exercised in the worst manner in Pakistan Steel; it became a model and an example to whole country, and to all workers and trade unions. 8500 jobs were ruthlessly cut by these barbaric policies. These sackings affected the workers deeply, and led to a change in consciousness. On December 31, 2001 the workers of Pakistan Steel organized a general strike against the anti-labor policies of the chairman and the government.
The workers blocked all roads and access to the mill. On February 7, 2003 the workers again organized a strike. The authorities attempted to stop the strike by using the tactics of delay. But this only served to provoke the workers, and on March 8, 2003 the workers again blocked the roads. This time they also occupied the mill. This action paralyzed the authorities but unfortunately the struggle was lost because the workers were betrayed at the negotiating table by the trade union leadership.
It was apparent that this struggle could have galvanized the working class nationally and that it could have found a mass basis. However, in the end it was drowned in petty compromises and conciliations. On December 30, 2003 Chairman Afzal was suddenly dismissed and again a General, Abdul Qayum was appointed as the new chairman. He immediate gave the impression to the workers that the situation would be totally reversed and that the workers would not have to fear any more suspensions or dismissals. He also announced an extension plan for Pakistan Steel that would create more jobs.
However, just before initiating the extension plan, it was announced that Pakistan Steel would be privatised rather than proceed with the extension. This was a clear declaration of a severe attack on the rights of the workers. This was a clear attack on their jobs and their working conditions. This declaration provoked 12,500 workers who are drawing the conclusion that they need to fight back. The government was not as lucky in the case of Pakistan Steel Mills as it had been with regard to certain other privatization deals.
No doubt, the endgames of the PTCL and KESC deals were also embarrassing for the government, as was the pullout by the highest bidder in the Pak-American Fertilizer case. Thanks to the proactive workers of the steel mills, however, this hurriedly reached deal was reversed by the court decision. Pakistan Steel Mills was to be handed over to the Tuwairqi Steel Mills, the Magni Togorsk Iron & Steel and Arif Habib Securities on May 29 2006 for Rs 21. 68 billion at Rs 16. 8 per share.
These groups were supposed to acquire 75 per cent shares of the Steel Mills with management control, 4,457 acres of land with developed infrastructure including 110-kilometre metalled roads, a 70-kilometre railway track, a 165-megawatt power plant, a water treatment plant and a jetty. However, the Supreme Court while halting the transfer of possession to the bidders, stayed the process of privatisation, first on May 24, 2006 till June 15, 2006 and then on June 14, 2006 pending a final decision on the case.
The Chairman, Watan Party, barrister Zafarullah Khan was the main petitioner in the case challenging the deal, for which the chief justice had constituted the larger bench. The nine-member Supreme Court, after back-to-back hearings, finally declared the sale of Pakistan Steel Mills to the three-party consortium null and void. Instead, it ordered the government to refer the matter to the CCI (Council of Common Interests) within six weeks.
It was indeed a shock to the government, which had already claimed credit for its successful privatization policy during the Parliament’s budget session. The reversal of the $362 million deal left the Russian-Saudi-Pakistani investors, as well as the government, in a state of absolute shock. “The March 31 Letter of Acceptance (LOA) and April 24 Share Purchase Agreement (SPA) with the bidders are declared to be void and of no legal effect,” the chief justice announced in a packed courtroom, marking the conclusion of four weeks of consecutive hearing.
The Privatisation Commission Ordinance 2000 was, however, not held as being against the Constitution, but the apex court’s short order said the process of PSM’s privatization stood vitiated by acts of omission and commission on the part of certain state functionaries, reflecting a violation of mandatory provisions of law and the rules. These adversely affected decisions like pre-qualifying a member of the successful consortium (Arif Habib), valuation of the project and the final terms offered to the successful bidders, which were not in accord with the initial public offering given through advertisement, the short order said.
The decision read: “We hold that the establishment and working of CCI was a cornerstone of the federal structure, which provided for protection of the rights of the federating units. Mindful that this important institution (CCI) is not functioning presently and taking note of the statement of Advocate Abdul Hafeez Pirzada, who is representing the federal government, that the process for making it functional was underway, we direct the federal government to do the needful expeditiously as far as possible, but not later than six weeks. “However, the approval for the privatisation of PSM by the CCI on May 29, 1997 continues to hold the field. ” “In view of the developments having taken place during the intervening period and the divergent stand taken by the counsel for the federal government that this approval was never recalled and the stand taken by the steel mills’ counsel that the matter of its privatization was dropped subsequently, it would be in order if the matter is referred to CCI for consideration. On illegalities, the court noted that pre-qualified parties – the Arif Habib Group of Companies and Al-Tuwairqi Group of Companies – had entered into a consortium before the bidding process, but the third party, Magnitogorsk Iron and Steel Works Russia, joined hands with the consortium on the day of the bidding. It also questioned the ORE-qualification of Arif Habib, a member of the successful consortium, who had been accused of being the largest beneficiary of the stock exchange crash in March, and has three damage lawsuits, three investigations and a first information report (FIR) in a criminal case pending against it.
The Privatisation Commission Board had recommended the sale of PSM at Rs 17. 43 per share, but the Cabinet Committee on Privatisation had determined the reference price at Rs 16. 18 per share. The court questioned the low reference price set by the cabinet. It also said that the 4,457 acres of land, which was part of the Steel Mills, had not been included in its evaluation.
Since the bid offered by this consortium was found to be higher than the bid of other competitors, it was accepted and the LOA was issued on the same day, March 31, 2006, followed by the agreement on April 24. The order noted that the privatisation commission had extended benefits to the purchasers like handing over the stock in trade in the units worth Rs10 billion and cash worth Rs8. 559 billion lying in its account out of which post-dated cheques for about Rs7. 67 billion had already been issued to clear the liability of loans, which were due for the years 013 to 2019. Likewise, the tax of Rs3 billion has already been paid, out of which Rs1 billion will be refunded to the purchaser on taking over the unit. Thus the total loss incurred by the government in this manner works out to Rs18 billion. Above all, the government has accepted the liability to pay compensation of Rs15 billion to workers under the golden handshake scheme, the order said. The short order also holds that it is not the function of the court, ordinarily, to interfere in the policy-making domain of the executive. However, the process of privatisation of the PSMC stands vitiated by acts of omissions and commissions on the part of certain State functionaries reflecting violation of mandatory provisions of the law and rules framed under these, which adversely affected the decisions, pre-qualification of a member of the successful consortium (Arif Habib), valuation of the project and the final terms offered to the successful consortium, which were not in accordance with the initial public offer given through advertisement,” the court held.
Barrister Zafarullah Khan of the Watan Party – who had challenged the sale of 75 percent stake and handing over of management control of the PSM to the consortium comprising Russian Magnitogorsk, Saudi Al-Tuwairqi and Arif Habib Securities for $362 million (Rs 21. 68 billion) at a rate of Rs16. 8 per share – told reporters after the unanimous verdict: “The decision will prove to be a source of strength for the people of Pakistan, help build the image of the judiciary and further strengthen its independence. Many analysts, as well as government officials,fear the Supreme Court verdict against one privatisation decision would be read as a reversal of the entire privatisation process, thus opening a Pandora’s box of petitions challenging every single sale made since the early 1990s. Since 1991, 160 transactions have taken place, netting a total of Rs 395 billion. There have been repeated delays, too. It was only in 2002 that privatisation picked up again and since then 33 deals amounting to Rs 302 billion have been completed.
Most agree that the decision may also augur well with the investment climate as the Supreme Court has conditioned each new privatisation with the approval of the CCI. However, there are strong voices within the bureaucracy as well as the treasury benches that have privately asked for revision or scrutiny of other deals such as those involving PTCL and KESC. The government had gone many extra miles to please Etisalat, the highest bidder for PTCL, which has been using delaying tactics in fulfilling its financial commitments towards the privatisation of the telecommunication corporation.
Constitutionally speaking, an unsettled matter in the CCI is required to go to a joint session of parliament which would then debate the fate of an under consideration deal. Keeping in mind the high gear approach of the government, the long constitutional route to privatisation, especially of entities like Pakistan Steel, amounts to a ‘mere waste of time. ’ The backers of the privatisation process fear nasty consequences to a timely policy just because of one shadowy deal. The bloc believes that the Supreme Court decision may scare off future bidders who will now think that no final deal in Pakistan is really final.
For them, the privatisation process may fall prey to disgruntled losing bidders and ’status quo’ friendly labour unions. Certain circles analyse the reversal of the PSM privatisation in the context of national security on the basis of published reports that an Indian-born steel baron is keen on acquiring the Russian component of the consortium that purchased the steel mills. The opposition, ranging from the PPP to PML(N) and the MMA, has not only welcomed the reversal of the privatisation deal but also applauds the creation of the CCI, which General Musharraf always remained indifferent to.
The delayed but inevitable debacle may infuse a wave of confidence amongst the frustrated labourers and political activists who have been waiting for such an opportunity to vent their anger. The Pakistani group involved in the shot-down deal has high-powered connections in Islamabad’s power corridors. It is not a coincidence that the president and prime minister have stopped referring to the country’s investment climate in the light of the changed outlook in the stock exchange. The shadowy PSM privatisation scam has had an adverse impact on domestic financial markets and may ring a warning bell for prospective investors in the future.
Recently some leading economists on July 7th 2010 s lammed the ruling PPP leaders for announcing that the loss-making Pakistan Steel Mills Pakistan Steel Mill will not be privatised. Dr. Salman Shah, a former advisor to prime minister on finance, said that if the ruling party did not want Pakistan Steel’s privatisation, its leaders should provide from their own pockets the staggering Rs25 billion needed to keep this loss-making entity on float. “The top eight loss-making public enterprises including PSM, Pakistan International Airlines and Pakistan Railways are eating up about Rs300 billion every year,” he said. The PPP should pay this amount from its own accounts instead of spending taxpayers money. ” On July 6th 2010, Federal Minister for Industries Mir Hazar Khan Bijarani and some other party stalwarts, while addressing a seminar, announced that the Pakistan Steel will not be privatised. The announcement came as a shock for leading analysts and businessmen, who saw this as a departure from the country’s stated policy of privatisation, economic liberalisation and de-regulation. Shah said that Pakistan Steel failed to achieve its objective of developing the engineering sector.
He said that Finance Minister Dr. Abdul Hafeez Shaikh, who master-minded the failed bid of Pakistan Steel’s privatisation in 2006, must quit if he fails to advance the country’s privatisation program. Analysts say that it was not the government job to run industries and commercial institutions, but to create an enabling environment where businesses, investment and trade can prosper. Conclusion & Recommendation State-run institutions, including Pakistan Steel, suffered huge losses because of massive irregularities, corruption and over-staffing.
Most of the successive governments have been accused of political interference and nepotism, especially in the process of recruitment. Management control of Pakistan Steel should be handed over to efficient professionals in the private sector. Directors on the board should have stake in the mills so that they are willing to run it professionally. Unless the control of PSM is given to the people, who belong to this profession and have a stake in the mills, it will not be run efficiently.
The government might also sell some percentage of shares of Pakistan Steel Mill with management rights and continue to hold majority shares as it did in the case of Pakistan Telecommunication Company Limited, he said. By doing so the Mills would continue to remain with the government. Bibliography: http://www. thenews. com. pk/daily_detail. asp? id=249453 http://www. spiritus-temporis. com/pakistan-steel-mills/history-of-pakistan-steel-mills. html www. InformPress. com http://www. defence. pk/forums/economy-development/12981-privatisation-labour-management-relations. html