Pakistan Steel Mills: What the future holds?

Pakistan Steel Mills (PSM) has been much in the news for the past decade or so and with cumulative losses soaring to over 100 billion rupees no coverage has understandably been positive. It continues to be referred by its supporters as a national treasure albeit one that requires massive restoration work and by its opponents as a white elephant. So is the picture all white or black?

Prior to responding to this key question it is relevant to note two major factors that have impacted on the performance of the PSM and how it is viewed today. First and foremost, steel industry continues to boom around the world fuelled by sustained rise in demand by the infrastructure industry, automobile industry, construction industry, oil and gas industry and container industry. The world leaders are China (272.5 mtpa), Japan 112.7 mtpa, United States 98.9 mtpa, Russia 65.6 mtpa, Korea 47.5 mtpa, Germany 46.4 mtpa and India 32.6 mtpa. PSM is not an exporter and has instead mainly been seen as reducing reliance on steel imports which have fluctuated based on the Mills output at any given time, which has in recent years plummeted to an appalling 15 to 20 percent capacity at times. In November of last year imports were 155,517 tons up from 137,548 tons a year earlier.

And secondly the two major national parties namely the PPPP and the PML-N (with the right wing Musharraf government in synchronicity with the Nawaz Sharif government with respect to the future of PSM) have taken opposing sides: the former has unhesitatingly extended bailout packages during the past five years and used the mills as a recruitment centre for its party loyalists without implementing governance reforms while the PML-N government has sought its right sizing and improved governance prior to privatisation.

A short history of the mills is in order as it provides some rationale behind the PPPP actions subsequent to 1973 when it was inaugurated by none other than Z A Bhutto. In this context it is relevant to note that the Pakistan government soon after independence realised that without establishing a domestic iron and steel foundry the country would face challenges in its attempt towards industrialisation as it would have to be solely reliant on imports which would require foreign exchange reserves. The idea to set up the mills was backed by a study undertaken by the government-sponsored Pakistan Council of Scientific and Industrial Research (PCSIR). It took another 20 years and military dictator Yahya Khan with little knowledge to approve the recommendations of PCSIR.

The first choice of the country was to seek the US assistance to set up the Mills, an assistance that the US refused. Two countries offered to provide the assistance: (i) as early as in 1956 Krupp of Germany offered to set up the Mills based on Kalabagh iron ore, coal and other inputs with the proviso that the Mills not be located further than 11 miles from the site – an offer which was rejected by Z A Bhutto as the then Energy Ministry. A decade later the German firm Salzgitter AG produced 5000 tonnes of steel from Kalabagh ore and sold it to the car company Volkswagen. The company offered to set up Karachi Steel Mills with a capacity to produce 0.8 million tonnes based on Kalabagh ore and imported coal at a cost of 1.55 billion rupees; European banks at the time offered loans for the project but the offer was rejected; (ii) the Soviet offer of a single enormous steel mill based on 100 percent imported steel and iron ore was accepted by Z A Bhutto. And the Mills was completed in 1985 at a cost of 24.7 billion rupees with a capacity of 1.1 million tonnes of steel. The mills which were coastal-based and reliant on imported raw material. Critics may complain that the government of the day’s decision to abandon indigenous raw materials available at Kalabagh in favour of imported steel was not a good one – an argument that is currently being debated in the corridors of power with respect to using Thar coal or imported coal for power generation with the multilaterals coming out clearly in favour of imported coal premised on environment considerations.

Evidence indicates that what went horribly wrong with the PSM was one economic policy decision taken in Z A Bhutto’s Economic Reforms Order 1972 which gave the power to appoint a Managing Director to the federal government – an appointment that was to be held during the “pleasure” of the federal government subject to orders and directions of the federal government that it may give from time to time in writing. Nawaz Sharif in spite of his pro market policies and his Protection of Reforms Act 1992 did not reverse Bhutto’s Economic Reforms Order 1972 and to this day the federal government appoints managing directors/chairmen of autonomous/state-owned entities amidst allegations of nepotism which are strengthened by the winning candidate’s lack of adequate experience and qualifications for the job.

PSM as a case in point has been abused by those appointed to head it through not only enriching their families and friends but also actively engaged in overstaffing that has reduced the entity to financial ruin where it is unable to even meet the salary costs unless the government of the day releases a bailout package. At this juncture there is debate whether to privatise PSM management to ensure that the Mills are turned around prior to its sale or whether to go straight out and privatize at what ever the market will bring. It needs reminding that the Musharraf-led government approved privatisation of PSM to Arif Habib Consortium for 21.68 billion rupees at 16.8 rupees per share in return for acquiring 75 percent shares 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. In 2006, the Supreme Court declared the sale to the three-party consortium null and void and ordered the government to refer the matter to the Council of Common Interest (CCI), which had last met in 1998. Shaukat Aziz promptly sent a summary to the President to constitute the CCI and it was last reconstituted on 6th July, 2006 with the meeting held on 2nd August, 2006 where privatisation of the PSM was reaffirmed. A day later the 80-page judgement stated that the entire disinvestment process of the PSM was made in ‘indecent’ haste, ignoring profitability aspect and assets of the mills by the financial adviser before its evaluation and the transaction was the outcome of a process reflecting violation of law and gross irregularities.

Two major verdicts given by the Supreme Court of Pakistan are relevant in this context. First, the Anita Turrab case where the following three principles of law were enunciated: (i) Appointments, removals and promotions must be made in accordance with the law and the rules made thereunder; where no such law or rule exists and the matter has been left to discretion, such discretion must be exercised in a structured, transparent and reasonable manner and in the public interest; (ii) When the ordinary tenure for a posting has been specified in the law or rules made thereunder, such tenure must be respected and cannot be varied, except for compelling reasons, which should be recorded in writing and are judicially reviewable; and (iii) Civil servants owe their first and foremost allegiance to the law and the Constitution. They are not bound to obey orders from superiors which are illegal or are not in accordance with accepted practices and rule. The second verdict declared void all 442 decisions pertaining to appointments/transfers/promotions/terminations made by Caretaker Prime Minister Khoso. However neither of these judgements declared Bhutto’s 1972 order null and void.

So what is the solution? The Prime Minister must empower the Board of Directors of PSM as well as of all autonomous as well as SOEs to select or appoint their own chief executives – be they referred to as MDs or chairmen; and at the same time ensure that selection of the members of the board are on the basis of zero conflict of interest. He would also need to rescind Bhutto’s 1972 order and at the same time call the CCI meeting to debate what is to be done about the financially strapped PSM. The majority rests with the Prime Minister and given that the CCI relates to the majority opinion whatever the Prime Minister decides is likely to carry the day. But the decision should be informed based on value of the asset (particularly land) wealth of the mills.