PSM to be leased prior to privatisation

ISLAMABAD: The government has decided to cover the losses suffered by the Pakistan Steel Mills (PSM) by leasing it out to a private firm prior to its privatisation.

Federal Minister for Industries and Production Ghulam Murtaza Khan Jatoi told DawnNews that the government had decided to issue tenders to initiate the process of awarding lease to a private firm till the completion of the process of privatisation of the PSM. He said the winning firm would arrange necessary raw material and also ensure the sale of products.

The government, it may be mentioned, earlier assured the parliament that it would take steps to steer the PSM out of crisis but so far nothing has been done in this regard, and now it appears that privatisation is being treated as the main option.

“When the PSM starts operating with 80 per cent capacity the losses will be overcome,” a senior official at the Ministry of Industries and Production said.

At present the PSM is facing a daily loss of Rs70 million and is running at 12 per cent capacity. Because of its own financial constraints the government is finding it difficult to keep offering bailout packages, hence the option of privatising 26pc of PSM shares.

The process will take more than 15 months. The PPP-led government had given Rs40 billion in bailout packages but that could not help the PSM to overcome its crisis.

PIA’s mounting losses

Continued financial bleeding at the Pakistan International Airlines is likely to make it only that much more difficult for the government to find a suitable, strategic buyer for it.

According to its financial report card for the nine months ended September 30, the national carrier racked up an after-tax loss of around Rs32 billion. This compares with a loss of Rs33 billion that it had reported for the entire calendar year 2012.

The airline’s revenues, in particular, took a 12.6 per cent hit to reach Rs71.7 billion in 9MCY13, from Rs82 billion in the corresponding period last year. Revenue from passengers dropped 13.7 per cent YoY to Rs63.6 billion, while that from cargo dipped by a marginal 2.3 per cent to Rs4.7 billion.

PIA’s management has blamed ‘reduced available capacity’ for its lower revenues. A recent newspaper report had said the airline had only 30 planes, many of which were grounded for repairs.

According to PIA’s latest financial statement, its available seat kilometres (ASK) declined to 13 billion this year, from 14.7 billion last year. ASK is a measure of an airline’s carrying capacity that can be used to generate revenue.

But negligence has also been blamed for the lower revenues. PIA’s employees have accused it of operating high-fuel consuming Boeing 777s — which are designed to be used on long distance flights — on short routes, like those between Karachi, Lahore and Islamabad.

Meanwhile, revenues also took a hit as the Saudi government imposed a quota restriction on Hajj travelers from the country. The airline carries the bulk of pilgrims to and from the country every year during every Hajj season.

Regardless, PIA’s mounting losses come while international jet fuel prices have stabilised; something even the company acknowledged in its third quarter report. Its fuel cost declined by 9.5 per cent to Rs40.8 billion, from Rs45.1 billion during the period under review. Its total cost of services dropped 6.7 per cent to Rs76.7 billion.

Even then, the airline’s gross profit clocked in at a negative Rs4.92 billion in 9MCY13 — a massive 3,500 per cent lower than the negative gross profit of Rs139.4 million in 9MCY12.

And a roughly nine per cent depreciation of the rupee against the dollar during the period compounded the airline’s problems, and led it to post a net exchange rate loss of Rs6.1 billion for the period, up 31 per cent from Rs4.65 billion last year.

The rupee’s depreciation also reflected into higher finance costs for the airline, which rose to Rs9.32 billion, from 8.42 billion. In other words, PIA’s finance costs were almost 1.9 times its gross profit.

Its administrative expenses also rose 9.5 per cent to Rs6.3 billion. ‘Other provisions and adjustments’ registered a big increase of 337 per cent to clock in at Rs1.85 billion by end-September 2013.

And almost one-third of the airline’s non-fuel expenses — or around Rs12.6 billion — was staff-related. These expenses also accounted for roughly 20 per cent of the airline’s total passenger revenue for the period.

Salaries, wages and allowances alone grew by nine per cent YoY to Rs8.33 billion in 9MCY13, while retirement benefits ballooned to Rs1.3 billion, from Rs730 million. The airline spent nearly Rs198 million on printing and stationary.

The current liabilities of the national carrier, up 15 per cent YoY to over Rs192 billion by end-September 2013, are six times its current assets of Rs32 billion, and 1.4 times its total assets of Rs136.7 billion.

Major increases in trade and other payables (46.5 per cent), accrued interest (66 per cent) and short-term borrowings (4.7 per cent) contributed to the higher current liabilities.

Meanwhile, PIA’s non-current liabilities clocked in at Rs75.6 billion by end-September 2013, up around six per cent from the end of last year. Long-term financing rose 71.4 per cent YoY to Rs24 billion.

PIA said in its financial statements that the Economic Coordination Committee (ECC) of the Cabinet has approved, among others, new loans/guarantees for its repayment of previous loans amounting to Rs11.1 billion that are due this year, and the rollover/extension of the government’s guarantees to the tune of Rs51.16 billion.

The government has also set aside Rs16 billion ‘as equity for the corporation,’ and of this, the ECC has approved disbursement of Rs7 billion for making overdue payments to vendors and Rs5.7 billion as partial payment of Exim Bank loan installments, said the airline.

Meanwhile, the government has announced that it intends to split the airline into two companies — PIA1 and PIA2 — and then saddle state-owned PIA2 with all the unviable components of the national carrier (including its ageing equipment and non-flight operations) by the end of this year.

The government would service guaranteed past loans of PIA2; put in force a voluntary ‘handshake’ plan for the excess workforce, and hopefully liquidate it by end-June 2014.

PIA-1 would retain the airline business and would continue contracting aircraft leases and rationalise its routes in order to increase its efficiency. It would keep some liabilities and streamline its workforce. The government hopes to sell off a 26 per cent stake in PIA-1 to strategic investors by June 2014.

Return on savings up by 50bps

KARACHI: The minimum return on savings has become seven per cent as the SBP discount rate hit double digits on Wednesday.

Announcing its monetary policy the State Bank raised its policy rate by 50 basis points (bps) to 10 per cent from 9.5pc. The hike attracted both positive and negative reactions from stakeholders, with most analysts saying that the increase was in line with the market expectations.

“With the increase in discount rate by 50bps, return on these saving accounts will rise to 7pc on average monthly balance,” said a Topline Research report issued on Wednesday.

The State Bank circular issued in September 2013 said that with effect from October 1, 2013, the Minimum Profit Rate to be paid on all Pak Rupee Saving Deposits will be 50 basis points below the prevailing SBP Repo Rate.

Change in the Minimum Profit Rate, following any change in the SBP Repo Rate, will be applicable with effect from 1st day of the subsequent month.

This is second increase in the discount rate in two months. Last time, the rate was raised by 50bps to 9.5pc from 9pc. This reversal occurred after rates fell by 500bps in almost two years from as high as 14pc in June 2011.

The SBP mentioned fragile external flows coupled with rising inflation as primary reasons for the rise in discount rate.

However, analysts believe that the local currency would remain under pressure despite IMF support.

The report said that the pressure on the rupee would continue as foreign exchange reserves are declining fast.

The SBP said its reserves declined by $1.3 billion during the first quarter of this fiscal year to $4.2bn as on Nov 1.

“Keeping in view the central bank concerns to maintain positive real return and ease pressure on exchange rate, monetary tightening will continue in the upcoming announcements,” said Shajar Research in its report.

Industry slams policy rate hike

KARACHI: Trade and industry opposed the upward revision of 50 basis points (bps) in discount rate by the State Bank on Wednesday.

Industry leaders said that the business community had been asking the successive governments for long to keep the policy rate within single digit, but the latest increase was disappointing and against the interest of trade and industry.

All Pakistan Textile Mills Association (Aptma) chairman Yasin Siddik said that SBP’s move to bring the mark-up rate into double digit would be detrimental for the grappling economy and further erode the competitive advantage of country’s industry.

He said the hike would create difficulty for the industry which was already braving losses on high cost of energy and other crises.

The SBP revised the key policy rate upward by 50bps from 9.50 per cent to 10pc. Industry leaders believe that these policy rate increases were adding to the cost of production and making the country’s exports uncompetitive in the world market.

Pakistan Apparel Forum (PAF) chairman M Jawed Bilwani said that by raising the discount rate alone the inflation could not be controlled particularly when the government itself was a major borrower.

He said that official figures disclosed that private sector borrowing remained much below the required level and this was resulting in job losses as no fresh investment was coming in and existing industries were running much below the capacity.

Mr Bilwani said that high discount rate means costlier borrowing from banks and this directly had adverse impact on investment, industry and general masses.

He apprehended that with double-digit discount rate one should not expect that new investment would be coming and it was badly needed to create new jobs for the youth.

This means that the government was encouraging people not to invest their funds in trade and industry but put them in banks and get high mark-up, he said, adding that this would have disastrous results as job market would shrink further and joblessness would increase.

Inter-corp financing

The financing of subsidiaries by cash-rich holding and big companies is likely to catch up fast.

Anecdotal evidence suggests that even companies enjoying immaculate reputations, and whom the banks are always pleased to extend credit to, are loathe to turn to them due to the persistent volatility in the money market. Instead, even such companies prefer inter-corporate financing.

A former regulator at the Securities and Exchange Commission of Pakistan (SECP) observed, “now that the days of low interest rates are coming to an end, major conglomerates are endeavouring to cut down finance costs on the balance sheets of their textile and cement subsidiaries to assist them to return to profitability, after years of churning out losses”.

But the minority shareholders continue to eye inter-corporate financing with suspicion. Ill-intentioned financing of subsidiaries or associated companies is almost always difficult to trace. Apart from the siphoning of hard cash from a public limited company into its subsidiaries — which are generally wholly owned by the sponsors and directors — there are other ways to rip off small shareholders of their share in listed companies.

Some examples include unauthorised donations to associated companies; renting out company-owned premises to associated companies without recovering full and timely rentals, and misstatements in published annual accounts.

Yet, corporate executives argue that inter-corporate financing is not altogether an unethical business. “What is required is to create a balance between the rights of shareholders and the need to facilitate access to finance-associated undertakings,” says Muhammad Ali Tabba, chairman of Lucky Cement, the largest cement producer in the country.

He asserted that so long as the financing to subsidiaries and associated undertakings is at an ‘arms length,’ and the funds are provided at market or bank rate, there should be no grievance. He added that in undertaking such transactions, all the relevant provisions of the code of corporate governance should also be strictly followed.

Holding companies, sitting on mountains of cash, and in almost all sectors, disburse funds to associated companies as a means to advance their long-term projects or to meet working capital needs. And these investments generally fetch them good dividends no financial charges are involved. Here are some of the recent examples selected at random from various sectors.

Textile sector: Nishat Power and Nishat Power Chunian disclosed that the group had submitted an Expression of Interest (EoI) to the government to build a 590MW hydropower plant on Jhelum River. It was also indicated that Nishat group companies may invest in the long-term project of an estimated cost of $1.4 billion through a debt-to-equity ratio of 75:25.

Cement sector: Lucky noted in its quarterly accounts for end-September 30 its “[intention to] invest in an associated company in a 50MW wind farm. The project is likely to be completed by end-December 2015. The total cost of the project is estimated at $143 million, to be financed through debt/equity ratio of 75:25”.

Fertiliser sector: Engro Corporation disclosed in its Annual Report 2012 that it moved a resolution during its shareholders’ meeting for approval of lending to Engro Polymer & Chemicals Limited, a subsidiary company, a subordinated long-term loan of up to Rs1 billion.

The company had obtained approval at the previous shareholders’ meeting for extending a long-term loan of up to Rs1 billion and a running finance facility of up to Rs2 billion to Engro Polymer. During the year, only the running finance facility was utilised.

“The long-term loan approval was obtained to provide support, if required, for repayment of banking loans of Rs950 million by Engro Polymer,” stated the company’s annual report.

Banking sector: Askari Bank Limited disclosed in its Annual Report 2012 that it had authorised its president to take all steps to make investments of up to Rs330 million as seed/core capital in open-ended mutual funds schemes to be launched by Askari Investment Management Limited, a wholly owned subsidiary of the bank.

Oil and gas sector: Attock Petroleum Limited recalled in its Annual Report 2012 that at an annual general meeting (AGM) held on September 7, 2007, shareholders had approved investment in the following associated companies: National Refinery, Attock Refinery Limited (ARL), Pakistan Oilfields and Attock Cement.

However, except for ARL, no investment was made in any other associated companies, as it was not found feasible.

Meanwhile, the regulators have continued to advocate that the Companies (Investment in Associated Companies or Associated Undertakings) Regulations, 2011, provide guidelines for streamlining investments made by listed companies in associated firms and its proper disclosure.

At present, Section 208 of the SECP Ordinance provides that a company should obtain approval of shareholders through a ‘special resolution’ for financing subsidiaries and associated concerns.

The SECP’s acting chairman, Tahir Mahmood, told this scribe that inter-corporate financing is closely monitored, and that companies found guilty of misuse of company funds are taken to task.

He said it is only in the sub-continent that the law requires approval of shareholders for such transactions (under Section 208 of the Ordinance), while in most developed markets, ‘disclosure’ is thought to be enough, without having to seek recourse to shareholders for their approval.

The regulators contend that efforts are being made to block inter-corporate financing, where it is proposed to be made without observing the relevant legal provisions.

Also, in order to ensure disclosures and strictly monitor directors from making investments in their own companies, the name, amount of loans, their purpose and the expected benefits to the investing company has to be clearly spelt out in company reports.The board of directors has to inform shareholders about the purpose, benefits and period of investment in subsidiaries and their annual reports. Besides, the maximum amount of investment to be made is to be approved by the majority of shareholders present in a general body meeting.

The Public Sector (Corporate Governance) Rules 2013, published in a Gazette notification on March 8 this year, provides, “one of the key information to be placed before the board of directors is the inter-corporate investments in and loans to or from associated concerns and the failure to recover material amounts of loans, advances and deposits made”. —Dilawar Hussain

Unresolved underlying circular debt issues

The circular debt has swelled to Rs211 billion in the first four months of the current fiscal year, as the underlying problems remain unresolved. Only in July, the government had cleared an outstanding amount of Rs503 billion.

However, Finance Minister Ishaq Dar says the goverment will adhere to this year’s circular debt ceiling of Rs250 billion.

While clearing the liabilities, the government had claimed to make a serious effort to bridge the difference between the cost of electricity generation and distribution, and the tariff. Moreover, bill collection was to be improved and energy theft was to be controlled to avoid future increase in the circular debt. All of this doesn’t seem to be happening.

The PML-N government’s apparent focus was on eliminating the circular debt altogether, which, it believed, would reduce load-shedding in the country. But an earlier World Bank report had presented a different view on the power crisis.

“It must be stressed that the circular debt is a symptom of an inefficient and unsustainable energy system that can only be addressed once the underlying causes have been resolved; otherwise it would just re-emerge,” said the WB report.

The World Bank report came almost one month ahead of the PML-N government’s energy policy, but the underlying causes have not been addressed so far.

The Bank had recommended that the ministry of water and power and the ministry of petroleum be merged into a single ministry of energy. The merger of Nepra and Ogra to form a single energy sector regulator was also proposed.

Currently, a small group of experts are actually running the power ministry, who are not responsible to Federal Minister for Water and Power Khawaja Asif, but to Punjab Chief Minister Mian Shahbaz Sharif. Adviser to prime minister on water and energy Dr Mussadaq Malik and former finance minister Shaukat Tareen were tasked to suggest policy measures. The prime minister’s nephew Abid Sher Ali, a state minister, is also involved in decision making.

Another failure of the present government is the non-recovery of electricity bills, with public sector dues — at Rs190 billion — causing a deep cash flow deficit. The government has yet to work out an effective strategy for recovering the outstanding amount from government departments.

The theft in the distribution system — reckoned at about Rs100 billion — is not a real-time reliable figure, because no meters are installed at the entry and exit points of distribution companies.

A power expert says it is difficult to segregate the real excess distribution technical losses and theft. In the absence of a metering tree, he said, another way of ascertaining power theft is to carry out a technical audit of all distribution networks. However, this is resisted by ‘vested interests’.

The PML-N government has yet to take a decision on audit of all distribution networks to ascertain the actual power theft and losses to the national exchequer.

Similarly, the government should get independent financial audits carried out of all distribution companies to verify their billing processes and to detect any over billing or parking of units.

Like the previous government, the present one is also hiking electricity tariffs to raise additional revenue, instead of recovering overdues and minimising theft and improving governance.

Pakistani stocks end lower; rupee weakens

KARACHI: Pakistan’s main stock exchange closed lower on Tuesday, with the benchmark 100-share index of the Karachi Stock Exchange falling 0.34 per cent, or 78.62 points, to 23,302.46.

After the announcement of the date for the release of the monetary policy, the market lost its initial gains, with investors expecting an increase in the policy rate tomorrow. Due to this, renewed buying interest was seen in the banking sector, which will benefit from rising interest rates, dealers said.

National Bank of Pakistan rose 1.12 per cent to 54.11 rupees while Bank of Punjab was up 4.96 per cent at 11.42 rupees.

The rupee ended weaker at 107.47/107.55 against the dollar, compared with Tuesday’s close of 107.38/107.43.

Overnight rates in the money market fall to 9.00 per cent from Monday’s close of 9.40 per cent.