Pakistan Steel, the premier Industrial Enterprise of Pakistan has witnessed the most dramatic turnaround in the corporate history of Pakistan making it a very interesting case study for the analyst. In order to attain self-reliance in steel products by creating a base for the production of high quality steel, Pakistan Steel was incorporated as a private limited company in July, 1968, wholly owned by the Federal Government.
The Mills were established with the techno economic assistance by the former USSR, which came into operations in stages during 1981-85. It is an integrated mill with an annual capacity of 1.1 million tons of raw steel production with a built in potential for expansion upto 3 million tons. The project originally estimated to be set up at a cost of Rs:13 billion was completed at a cost of about Rs:25 billion, out of which Rs:13.7 billion was equity of the Federal Government. Due to resource constraints, Government financing was not sufficient to meet its requirement.
The non-plant assets worth Rs:11.27 billion and losses upto 30th June, 1995 amounting to Rs:4.57 billion should have been fully financed through equity, instead the Government provided only Rs:11.8 billion towards equity after deduction of Rs:1.91 billion for debt servicing during the construction period. Further, the Government did not finance any portion of the initial working capital which normally comes from equity or interest free loan. Denied this facility, Pakistan Steel was forced to use expensive short term credit, which further worsened the deteriorating financial position. The financial health showed no improvement despite the fact that the Steel Mills was financially restructured twice upto 1991.Pakistan Steel's performance followed a chequered pattern during 19 years after its final commissioning in 1985.
During this period, there had been many ups and downs leading near to closing down of the mills at times due to low capacity utilization, low sales and continuous losses. The total long term liabilities of commercial banks increased to Rs:19.117 billion upto June, 1999, whereas the accumulated losses of the Corporation gaped alarmingly at Rs:9.326 billion as on 30th June, 2000.In order to make the Steel Mills economically viable and to facilitate it to repay its outstanding loans, the ECC assigned the task of financial restructuring of Pakistan Steel in July, 1999 to a Restructuring Committee under the convenership of the then Secretary, Corporate Finance. On the recommendations of Restructuring Committee and Governor, SBP, the financial restructuring was approved by the Government in May, 2000.
The total long term liabilities of Rs:19.117 billion were bifurcated into two Finance Facilities. Finance Facility No.1 covering the principal amount of Rs:11.35 billion was to be paid in 12 equal annual instalments at a mark-up rate linked with T. Bills rate. Finance Facility No.2 covering accrued mark-up of Rs:7.767 billion would be payable in seven equal annual instalments starting from 2013, at a mark-up rate equivalent to 12 months' average T. Bills rate. The financial restructuring approved by the Government was tied up with the achievement of some targets by Pakistan Steel, which interalia included, reduction in regular manpower from 20,533 to 15,000 through introduction of Voluntary Retirement Scheme (VRS), attending the capital repairs of various production facilities on priority and spin off the non-core activities.
Pakistan Steel has implemented all the recommendations of the Restructuring Committee. The manpower of the mills has been reduced from 20,533 to 13,080 by paying Rs:4.80 billion to the retiring employees through self-generated funds. Capital repairs of various production units i.e. Blast Furnace No.2, Oxygen Plant and Waste Boiler of Steel Making Plan have been completed. Non-core activities such as Transport, Security, Cleaning Work, Education etc; have been placed under Hadeed Welfare Trust (HWT), established recently as a separate legal entity. 70% manpower deployed in these activities has been laid off. As a result of above restructuring, the financial position of the Corporation has improved considerably since 2000-01.
In view of the corrective measures taken by the management, Pakistan Steel broke all the previous records in terms of production, sales, profitability, liquidity etc; during the year 2003-04. During the year 2003-04, Pakistan Steel operated at 93% capacity, attainment of sales and other revenue of Rs:26.1 billion and net profit after tax of Rs:4.85 billion. The operational performance of the Corporation during the year 2004-05 is expected to improve further, as (during the first 07 months July-January, 2005) the sales and net profit after tax increased to Rs:19.1 billion and Rs:3.6 billion against Rs:14.1 billion and Rs:2 billion respectively in the corresponding period of last year. The accumulated losses have been completely wiped off and the Corporation is in net profit of Rs:802 million upto January, 2005.
The liquidity position has been remarkably improved and currently Pakistan Steel is carrying cash and bank balances of about Rs:12 billion. It is evident from the above stated facts that Pakistan Steel is operating successfully in an environment of fairly tough competition against imported steel products despite the fact that its existing capacity of 1.1 million tons is an uneconomic size and therefore, its production unit cost remains higher than what it would in an economic size Steel Mill. A tremendous upsurge in the consumption of iron & steel products witnessed during the last couple of years, has added an element of urgency to Pakistan Steel's expansion programme.
In order to reap the benefit by the present favourable situation, Pakistan Steel's management has conceived a short term strategy for BM&RE of the mills' capacity upto 1.5 mtpy at a cost of Rs:12 billion, which will be financed in-house. The Government has authorized the Board of Directors to carry out improvement, replacements wherever required for achieving the above target.
The present management has already embarked on the path to institutional strengthening by signing a Memorandum of Understanding with M/s. Transparency International (Pakistan). The objective is to make all procurements, marketing and financial procedures absolutely transparent. Finance, Audit and Human Resource Committee of the Board have been constituted in furtherance of this objective. Comprehensive measures have been implemented to achieve environmental upgradation, general cleanliness at the residential areas and improved educational, canteen and security facilities. The Organization will shortly be accredited with ISO 14001.
Pakistan Steel has also recently earned international accreditation in the form of "Social Accountability Certificate SA 8000" for discharge of social obligations towards employees. (The writer is an Ex-Director of Finance)