Privatising PSM

Old stories are worth narrating again, otherwise, they can be forgotten. More importantly, old stories never come back in their original form, there are always some new twists in their plots.

A previously played-out story is unfolding again these days. (Un)fortunately, the opening of the story is exactly the same: the Pakistan Steel Mills coming up for sale. Unless one has a peculiar interest in steel or privatisation, which fortunately, most normal souls don't, there isn't any newsworthiness in a privatisation or a steel mill story. But this mill has an interesting history: it came up for sale once before; created a big controversy and allegedly soured very cordial relations between the then military dictator and the chief justice.

So how did the story unfold last time? The story started in March 2005 in a similar fashion as it has started now. A year before the transaction date, there were a few news stories, appearing infrequently in the national newspapers, describing the government's position that the steel mill, a 'white elephant', would be sold to a 'strategic investor' who would acquire a 51-75 per cent stake and would manage and expand it to cater to the steel needs of a growing economy.

After going through an all too complex a process of selection of transaction advisers, sell-side consultants, due diligence, finalisation of reserve price, pre-qualification of bidders etc, none of which was of much interest to the common Pakistanis, 75pc stake in the ownership of PSM was finally sold in March 2006 to a consortium led by a Russian firm at a price of $362 million.

A previously played-out story is unfolding again. That is when the story plot thickened. Opposition leaders started criticising that the steel mill was sold at too low a price, and this piqued the interest of news organisations. The news stories started describing the sold industrial entity as the 'family silver' and a 'national asset' that had been sold at a 'throwaway' price. In a matter of days, an object made of steel and brick, cold and lifeless, transformed into something warm and living: national pride.

When it comes to selling your pride, no price is a good price. But then, how 'throwaway' was the sale price? $362m felt like a meagre sum to many but the then privatisation minister concretised this feeling. Defending the sale price, he made a public statement that the steel mill had a total of 19,000 acres of land, out of which around 14,500 acres, worth $800m, were kept out of the transaction. This $800m should therefore be added to the sale price to get a complete picture of the transaction.

This genius move made the accounting simple for everyone and quantified the humiliation caused to the nation. If 14,500 acres is worth $800m, the 4,500 acres of land sold with the mill is worth $250m. In other words, excluding the land price, the mill had been sold for a mere $112m, an amount which was ironically equal to its last annual profit.

If a priceless thing had been sold at such a throwaway price, it was not hard for the story audience to imagine the motivation behind it. Most likely corruption, or perhaps incompetence. The media frenzy started to build up, especially after the issue was taken up by the Supreme Court. Against the power of a popular discourse which was now backed by a simple calculation logic, the government played the 'technical' card by claiming that the unit had been sold as a 'going concern' using multiple sophisticated valuation methodologies, including a 12pc DCF rate, 'public multiple analysis' and 'precedents transaction analysis'.

If this technical jargon did anything, it was to dispel any doubts in the audience's mind that incompetence was not the cause of the low valuation. Put yourself in the shoes of the judges hearing the case for a moment. Here is your national pride being sold for a 'paltry' price, in a hasty manner, using technical jargon and the prestige of global financial and strategic advisory firms. Who would you side with? Unless you are one of those naïve idealists who think that judges are emotionless creatures who dispense justice with a cold legal logic, the verdict is quite clear.

As the story goes, on the day of decision, the chief justice, in his chamber, started with the junior most judge on the bench to give his decision and then went around the table to find out that all brother judges had decided to nullify the transaction. The chief justice, who was reportedly called by Gen Musharraf a day before and had 'assured' the general of his support for the government's economic policy now had very little choice.