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Last Updated: Thursday, 1 June 2006, 23:42 GMT 00:42 UK
Pakistan steels itself for sell-offs
By Malcolm Borthwick
Asia Business Report editor, BBC World, Port Mohammad Bin Qasim

Pakistan's only steel company, created more than 20 years ago with Soviet technical expertise and financial help, has come full circle after being sold last month to a Russian-led consortium.

Pakistan Steel mill at Port Mohammad Bin Qasim
Pakistan Steel has had its ups and downs over the years

Pakistan Steel is the latest state company to be fattened up for privatisation and sold off to a foreign bidder.

Spread over 29 sq miles, the sprawling steel complex is based near Port Mohammad Bin Qasim, in the south of Pakistan, where two 4km-long conveyor belts transport the raw materials used for steel production - iron ore and coal - to the factory.

The sale was resisted by unions and sparked lengthy debates in parliament, which members of the opposition walked out of in disgust.

They argued that at $362m, the government's 75% stake in the company was sold off too cheaply - and it should have kept hold of such a strategic asset.

Chequered history

The consortium that bought Pakistan Steel is backed by a Saudi Arabian steel mill and a Pakistani brokerage company based in Karachi. They are taking over a firm that was seen until recently as a white elephant.

"Pakistan Steel's performance followed a chequered pattern during the 19 years after its final commissioning in 1985," explained Pakistan Steel's Finance Director Khursheed Anwar.

Pakistan Steel complex
Pakistan's sole steel firm is profitable at last

But last year, after years of underperforming, it achieved record production levels, sales and profits.

Soaring steel prices created more demand and led to higher prices. This enabled the company to invest more and reduce debt, lowering interest payments to the banks.

The firm also upgraded equipment to make it less labour-intensive and has cut its workforce by about 35% over the last five years.

The current Chairman, Lt Gen Abdul Qayyum, who has been with Pakistan Steel for two-and-a-half years, is credited with helping to transform its fortunes.

That was no mean feat for a business which is reported to have gone through about two dozen different chairmen since production started in 1981. But Gen Qayyum said he had taken the company as far as he could.

"We are proud to have made it profitable and we are selling it to private owners, who are actually the steel people. They will invest more money, make it more efficient and more profitable."

Investment

At the moment, the plant, which is running at virtually full capacity, accounts for about a quarter of the country's demand for steel.

The retired lieutenant general, dressed in the company's regulation boiler suit, showed us around the rolling mills, where the molten steel is cooled, flattened and rolled into coils.

Blast furnace at Pakistan Steel complex
The outlook is hotting up for Pakistan Steel

This is the engine room of Pakistan's rapidly-growing economy, and the steel will be used to make everything from railway wagons to oil drums.

The manufacturing and construction sectors in Pakistan, two of the main drivers for steel demand, grew by 12% and 6% respectively between 2004 and 2005.

Gen Qayyum said privatisation would bring in more investment, helping Pakistan Steel to increase its domestic market share and export steel to its neighbours.

But the plant will need a big increase in investment if it is to compete with more efficient steel plants in South Korea and Japan.

Another concern among some workers is that the new Russian-led consortium will use the plant to sell steel to Russia, bypassing the domestic market.

Union officials at the plant were "on message" about how the company welcomed privatisation. But the leader of one of the firm's biggest unions, interviewed outside the factory, was more circumspect.

"A large number of employees, who are breadwinners for their families, will lose their jobs," warned Zaffar Khan, general secretary of Pakistan Steel Labour Union.

Nothing is sacred, we are packaging up our companies
Pakistan's Prime Minister Shaukat Aziz

And finding new jobs is a big concern, according to Karachi-based journalist Babar Ayaz. "New jobs are not coming up that fast because of automation. This is one of the major social concerns and is related to inequality which is increasing in society."

But Mr Ayaz is confident that privatisations will generate lots of money for Pakistan, estimating they will bring in about $10bn over the next couple of years.

Dash for reform

Pakistan's privatisation process was launched in 1991 by the then Prime Minister Nawaz Sharif.

Most of the proceeds so far have come from the telecom and banking sectors - 80% of Pakistan's banking sector is now in private hands.

The pace of privatisation has picked up from a jog to a sprint under the current Prime Minister, Shaukat Aziz.

Pakistan's Prime Minister Shaukat Aziz
Shaukat Aziz is seeking record privatisation receipts

"Nothing is sacred, we are packaging up our companies," he told the BBC. "They have been well-run for the past few years and now we are offering them to investors from all over the world."

The prime minister is the chief architect of privatisation and is widely respected among foreign investors.

"Pakistan has had the most broad-based structural reform of any country in Asia. Last year, we were the second fastest growing economy in the world after China. We grew at 8.4%," says Mr Aziz, interviewed at his home in Karachi.

He estimates that privatisation will help bring in more than $3bn in foreign investment this year, the highest in the country's history.

Unrest

However, foreign investors are still nervous about the country's stability. Pakistan's President, Gen Pervez Musharraf, has survived three assassination attempts over the last four years and the Prime Minister himself survived a suicide attack when his driver and eight others were killed.

Recent bomb blasts in the country's financial capital, Karachi, have also killed US and French nationals.

But Mr Aziz, who is also the country's finance minister, dismisses these as isolated incidents.

Part of Pakistan Steel complex
Pakistan needs to restructure as well as privatise

"Pakistan is more secure than ever before," he says. "You have an incident in one suburb, but that does not mean the whole city stops functioning.

"These are a reflection of certain elements which are not happy with how Pakistan is progressing, but we are dealing with them."

The big advantage of privatisation is that it brings in much needed foreign currency and saves Pakistan's government pouring money into companies which in the past have been a drain on their resources.

About 70% of the money from privatisation goes directly to the government.

However, if the example of Europe is anything to go by, privatisation will also involve restructuring, automation and job losses.

Just 2% of the funds raised from privatisation in Pakistan are going to "restructuring expenses", which includes golden handshakes and rehabilitation.

The big challenge will be to re-train these workers to take up opportunities in other sectors of the economy such as IT, banking and education, which are suffering from skills shortages. That's another side-effect of Pakistan's rapid growth and economic success.




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