Privatising PIA – Agha Waqar Javed

The government has frequently highlighted the excessive financial haemorrhaging of the exchequer at the hands of various public-sector enterprises (PSEs) to the tune of about Rs500 billion per annum. Of this PIA alone is responsible for the bleeding of a colossal Rs360 billion. Consequently efforts are underway to privatise these PSEs – and rightly so.
The government has come up with a list of 32 entities of which 12 are to be put under the hammer by the end of 2014. Some of these are necessitated by covenants of the IMF bailout package. Prominent among these is PIA for which a strategic sale by way of divestment of 26 percent stakes along with transfer of management control is envisaged because the government cannot afford to subsidize it by Rs30 billion a month. Noble intentions indeed. However, the transaction structure of a 26 percent divestment with transfer of management is quite on the contrary.
By divesting 26 percent the government will still be subsidising 74 percent of the Rs30bn per month ie Rs22.2bn which comes to Rs266.4bn per annum. This subsidy will be given to a company that is run by the private sector till the time it starts making profits. As part of the pre-privatisation restructuring the government will spend a few hundred billion in golden handshake/voluntary separation schemes and cleaning up the balance sheet to make it attractive for potential investors.
It does not take an financial wizard to realise that as it is PIA could not be turned around without injecting further capital for modernisation, up gradation and expansion of its existing fleet and on streamlining its operations, engineering and management services. This would require capital call by the new owners, 74 percent of which will have to be coughed out by the government without getting diluted in its shareholding. In case of dilution the government will lose out on the management control premium on each share by which it gets diluted. This again would run into billions which would actually be a subsidy to the investor who would have a windfall in terms of saved costs.
We know by past experience that 26-percent privatisation models attract costs like management fees running in millions of dollars (case in point PTCL) which reduces pro-rata distribution of profit hence a lower share for the government. The 26-percent model involves reclassification of ordinary shares into two categories – those that carry two or more voting rights so as to provide the necessary majority on the board of directors for transfer of management control and the other with one voting rights – ordinary share. This could create legal hitches and complications.
The 26-percent model is better suited for those entities that are already in profit, or just a notch below, where change of ownership from government to private sector would result in realisation of profit potential owing to reduced political interference and professional management practices.
The transaction structure details like percentage of stake divestment are normally finalised after financial advisors (FA) have completed their due diligence and market appetite assessment through soft marketing. Deciding this upfront even before FA is engaged becomes counterproductive and, under the 2000 privatisation ordinance, can attract legal challenges as well.
It would, therefore, be prudent to observe rules in letter and spirit especially when the privatisation process is being reinitiated after having remained stalled for a considerable period. The Supreme Court judgement in the Pakistan Steel Mills case should be kept handy.
As for PIA, it would be best to attempt to divest maximum possible stakes – 51-74 percent (75 percent and above constitutes super majority which has its disadvantage) depending upon market appetite assessment by the FA so as to reduce financial haemorrhage of the exchequer.
Turning around a critically sick entity like PIA would be risky and expensive, quite a task even for the best private/international players in the industry. Therefore without massive concessions and generous capital injections as part of the pre-privatisation restructuring, it would be not surprising if investor response is not encouraging.
Alternatively, outright liquidation should be considered. Liquidation averts problems arising from pension/GHS/VSS schemes, discounts and other benefits for owners and staff and a lot of legal and HR issues. Simultaneously, the government may consider setting up a new airline as a green-field PPP project. Public contribution may come from what might be salvaged from the PIA fleet and asset sale of Roosevelt Hotel New York and Scribe Hotel Paris. The government’s stakes in the new airline can then be privatised at a later stage.
It is appearing exceedingly likely that the government has not thought the PIA privatisation plan through and is once again preparing to shoot itself in the foot. Prudence, due process and diligence should be the guiding principles rather than expediency and recklessness. But is anybody listening?