Any prospects whereby the world’s largest steel company acquires Pakistan Steel Mills under the government’s privatisation programme should be a source of much joy and elation for the privateers; after all, who can be better qualified to operate a steel mill more profitably? Before getting to the drop scene, and there is always one, two clarification are in order. Firstly, privateers were private ships authorised by their governments during the hey days of European imperialism, to attack foreign vessels in the midst of war. Since this definition has no utility in modern times, why let a good word go to waste especially when words having multiple meanings is not a taboo in the English language. Accordingly, the schools of thought supporting privatisation are referred to as privateers herein under, perhaps rather aptly. Secondly, the objective behind penning contrarian views, as always, is too stimulate a debate on policy issues so that the decision makers can arrive at informed decisions rather than being swayed by populist rhetoric. Coming back, the fly in the ointment, relating to the proposal at the very beginning, is that the world’s largest steel company is ArcelorMittal, so unless Pakistan is comfortable with selling its largest and singular steel mill in the formal sector to Indians, it is back to the drawing board for the privateers. Even the champions of free markets, the Americans and the Europeans are weary of selling their key industries to Chinese entrepreneurs. Fundamentally, if these concerns are legitimate, then key industries should never be handed over to foreigners since there will always be a risk that, through complicated cross holdings, beneficial ownership at some point in time is vested with a persona non grata. However, why limit opposition to selected foreigners — why not all of them? Especially when empirical evidence confirms that foreign and domestic interests can never be aligned; remember the East India Company, which was privatisation too? Perhaps this is the reason why China does not even believe in privatisation. As of today, six of the 10 largest steel companies in the world are Chinese, and there are no rewards for guessing that all of them are state owned. While the world’s largest steel manufacturer, POSCO, was privatised in the late 1990s, it was originally set up in the 1960s in the public sector pursuant to the South Korean government’s vision that integrated steelworks were essential to economic development. The importance of steel can be gauged from the simple fact that China, Japan and South Korea are the leading economies of the world and, amongst them, almost in entirety, control the global steel trade. Additionally, all three are leading ship builders of the world for which steel is the primary raw material. Accordingly, the conclusion that steel played a major role in industrialisation and eventual migration to developed nation status of these countries might not be extremely farfetched. If all of these nations, at one time or the other, categorized the steel industry as critical and essential for their economic growth, the same paradigm should apply to Pakistan as well. Steel is a key industry or to make the assertion crystal clear, steel mills is a strategic asset. The conclusions derived in the immediately preceding paragraph raise a dilemma: if steel is a building block for any developing nation and an essential initiative for economic development, why is Pakistan Steel Mill (PSM) in a financial mess? According to the honourable Supreme Court’s order of 2006, PSM had a run of profitable operations leading upto 2005 when it made a profit of Rs six billion, on June 30, 2005 PSM had positive equity, all accumulated losses had been wiped out. The reason for this profitability and the causes behind the dismal state of affairs leading upto 2013, therefore, require more than a cursory overview. Unfortunately, information available in the public domain on PSM is rather sketchy, and a Google search does not even lead to the current financial statements of PSM. Accordingly, the comments here-in-after are based on what little is available on the net and a common sense analysis. The Supreme Court (SC), in 2006, declared the privatisation of PSM void and of no legal effect noting that the loss, including the cost of golden handshake scheme, to the government from the sale amounted to Rs 33 billion. This loss did not include the value of land, which some analysts estimated as high as Rs 45 billion. Dr Farrukh Saleem, analysing this loss, also pointed out that PSM was established at a cost of $ 2.5 billion. Seven years later, the cost of the golden handshake might have doubled as should have the value of land, which suggests that the government will still be out of pocket if it sells PSM today, not even considering the impact of rupee devaluation on the indicative benchmark price of $ 2.5 billion. If the government can still find a buyer at that price, it would be a brilliant strategy to sell and set up a new steel mill with the proceeds, again in the public sector. In any case, it is highly unlikely that the SC will revisit its earlier findings on loss to the exchequer. On the operational side, currently, it is estimated that Pakistan’s requirement for steel is around four million tones. Hence, there is a ready market for PSM’s output. Operationally, the inability of PSM to retain its market share can be attributable to marketing mismanagement or underutilisation of capacity, resulting perhaps from an obsolete plant or a combination of both. In case of the former, due to a global recession since 2008, invariably steel mills around the globe are struggling. Admittedly, there might be other issues with PSM’s inability to maintain its market share but, all in all, a bit of focused efforts can allay the situation in a largely captive market. As regards the latter, refurbishment is a business decision, which even the private sector will fund through local debt if it is feasible. Selling the mill lock stock and barrel as a solution to either predicament is a rather extreme solution. As aptly pointed out by Paul Cohen, “Growing lists of private sector counterexamples, from Enron to AIG and General Motors to Citibank, make it clear that state-owned enterprises have no monopoly on titanic mismanagement.” Finally, every privateer’s favourite reason to privatise state owned enterprises, including PSM, surplus staff largely due to political appointments. It has always been befuddling why analysts, sitting in their drawing rooms, typing on their laptops have an issue with the government employing the poor. If handouts are an issue, why do they not oppose the Income Support Fund? In the absence of complete information it is not possible to comment on the impact of over staffing but an accountant’s solution for that will be to segregate these costs and disclose them as a separate item in the profit and loss account. This will in effect clearly identify the mills own profitability and the net position after these social costs. The fiscal burden of loss making enterprises might appear unsustainable but why is repatriation of profits and fees by foreigners in precious foreign currency a better alternative? And what if, in the case of deemed unprofitable operations, the private owners shut down the mill, which was what ArcelorMittal threatened in a particular case in Europe? To wrap up, those who believe in minimal government interference in markets should focus on western economies where the private sector was left on its own for decades; high unemployment and abnormal erosion of individual wealth is the outcome. Pakistan can hardly afford such a calamity. The question, ‘to privatise or not to privatise’ is definitely a brain buster and the answer is not so simple. One has always maintained that partly the answer lies in an in-depth economic analysis of previously privatised entities to establish the eventual outcome in the domestic environment. At the end of the day, as a wise man rightly says, the decision should be in the best interest of the country. Reading from books, taking tips and watching videos will not make a Tiger Woods, for that one has to personally visit the golf course, regularly. The writer is a chartered accountant based in Islamabad. He can be reached at syed.bakhtiyarkazmi@gmail.com and on twitter @leaccountant