Pakistan Steel Mills: A Cortege to Collapse

The Economic Coordination Committee (ECC) of the Cabinet approved the retrenchment plan of Pakistan Steel Mills (PSM) to reduce the government’s financial burden. Since 2008-09, Pakistan’s government has been paying PKR 58 billion to PSM to cover worker salaries through bailout packages. The expectation was for PSM to be a key driver of development, but it failed to achieve its expected economic contribution. In retrospect, PSM has been a wasted opportunity that could have bolstered Pakistan’s economy. It could have proven to be a pivotal determinant in establishing Pakistan as a leading savant in the steel industry.

Today, the mill’s production is zero. Outdated machinery does not meet the standards set by other leading mills in the steel industry. The technology is far from self-reliant due to administrative and financial constraints. Production at the mills shut down in June 2015, when Sui Southern Gas Company (SSGC) stopped supplying gas due to overdue payment. Additionally, PSM has not paid salaries to its employees since 2016. PSM incurred a loss of PKR 16.9 billion by end of FY 2008. Within 5 years this had ballooned to PKR 118.7 billion. These losses continued to bulge and reached PKR 200 billion in 2018. At present, the total losses and liabilities are approximately PKR 400 billion.

Political interference

One of the primary reasons behind PSM’s failure is the interference in the mills’ affairs by successive political governments. These governments always compromised merit while appointing the CEO’s of the organization during all the previous governments, besides inducting incompetent people at various key positions, having political affiliations. Consequently, the organization has been managed very poorly throughout all these years.

Import dependency

Another integral factor that has triggered PSM’s downfall is the dependency on imported steel for local purposes. Despite its potential to expand and grow, PSM has failed to meet the nation’s demand and lagged in competition with other countries. Domestic iron and steel products struggle to compete with cheap imports from countries like China, where advanced technology and skilled labor involvement produces high-quality steel. China-Pakistan Economic Corridor (CPEC) is also expected to accelerate the imports of steel. State Bank of Pakistan (SBP) believes cheap imports from China and Ukraine had damaged the local production of iron and steel, which fell 8.6% during the first half of FY16 compared to a growth of 31% during the same period of FY15.

Unskilled labor force

While comparing PSM with the steel industries in other countries such as Japan, we can infer that a skilled workforce’s employment is crucial in developing a steel industry. Unfortunately, PSM lacked a skilled workforce. The labor in developed countries is qualified and adept in their respective departments.Selecting workers based solely on their expertise instead of partiality or prejudice ensures this. Industries in developed countries hire the required amount of workforce that can produce enough product. In case of PSM however, the workforce hired was more than the mills required. The PPP appointed thousands of new employees. While about 9,000 employees could have met PSMs workforce requirement, 17,000 ended up being hired. This superfluous employment put an additional burden on PSM.

The dilemma of privatization

The privatization of PSM is another equally impactful dilemma. The government under priced the PSM structure and decided to sell the stake at a low price. However, a group of PSM workers standing up against the mills’ privatization caused a reversal of this decision. Subsequently, the Supreme Court declared the decision when it intervened. This decision resulted in massive corruption as the government-appointed new public servants at the mills. To secure their position and obtain undue benefits, they practiced corruption and drained PSM from its revenue. This had adverse effects on the economy of Pakistan.

Figure 1: Number of Employed Workers

Political Economy of PSM privatization

The present government wants to privatize many state-owned enterprises (SOE), including PSM. This has led the government to set up the privatization commission (PC) board. For privatizing PSM, the PC board considered two options–whether to set up a wholly owned subsidiary of PSM and then sell the majority stake of the subsidiary or give the PSM on lease for 30 years. The board chose to set up a wholly-owned subsidiary of PSM to sell majority shares in the subsidiary to the private investor. They could offer the investor 51 to 75% shares in the new subsidiary.

However, the Cabinet Committee on Privatization (CCOP) will be the deciding voice. According to the approved proposal, Security and Exchange Commission of Pakistan (SECP) will ratify a reconstruction scheme to transfer the core operating assets to a wholly owned subsidiary. They will reconstruct the core operating assets. 7% of the total land will be leased out to the subsidiary for PSM to use. The remaining land value, which is worth Rs310 billion, will remain with the PSM Corporation. PSM will sign a land lease agreement with a new subsidiary for the primary purpose of steel manufacturing according to the decisions. Subsequently, the CCOP will approve this decision.

Concluding Thoughts

Looking at the performance of various SOEs, like PSM, we can infer something about the state’s role. It is not to own, run or operate commercial entities. Instead it is to create and ensure a healthy environment for their efficient running.