KARACHI — Passengers landing at Jinnah International Airport in Karachi are greeted by a grim sight on arrival: the graveyard of out-of-service planes that once flew the skies for debt-strapped national carrier Pakistan International Airlines (PIA).
“I do my best to avoid taking a PIA flight,” said finance professional Asif Waleed, who regularly takes the two-hour trip between the coastal commercial hub and Pakistan’s capital Islamabad. “I have a high degree of confidence that [their] flights never operate on time.”
The airline, which lost over $3.6 billion in the past 20 years, has been thrust into the spotlight this month as a test case for the government’s ambitious plan to sell off more than 80 of Pakistan’s state-owned enterprises. From power plants and utilities, to a women-focused bank and even a hotel in New York, assets owned by Pakistan are scheduled to be offloaded as the country seeks a multi-billion dollar package from the International Monetary Fund (IMF) to bail out an economy that has crashed into a high-debt, low-growth crisis.
Ahead of an original May 4 deadline, 10 companies submitted bids to buy a majority stake in PIA, including Pakistani tycoon Arif Habib, domestic aviation services firm Gerry’s Group and three of the nation’s private airlines, according to local media reports. That deadline for bids was subsequently extended to May 18.
A successful sale of PIA — two years after the privatization of neighboring India’s national carrier — could be critical to a $6 billion to $8 billion bailout that the country is seeking from the IMF. The Washington-based fund has told Pakistan it must stop subsidizing money losing entities as a condition for loans to help prop up a faltering economy.
“There is no officially minimum acceptable price for PIA, but we expect the bidding to start from $300 million,” an official involved in the privatization bid, who is not authorized to talk to media, told Nikkei Asia.
Pakistan has tried, and failed, to sell the nearly 80-year-old carrier before. In 2016, efforts to privatize PIA saw employees walk off the job, leading to a weeklong flight suspension that forced the government to back down.
This time around, however, the planned sale has the support of the Special Investment Facilitation Council (SIFC), a new body backed by the powerful military, which plays an outsized role in the South Asian country’s affairs.
“What makes things different now is that the military is actively pushing for this reform,” said Michael Kugelman, director of the South Asia Institute at the Wilson Center in Washington.
Still, there is skepticism about how much a spate of privatizations could help an economy already in crisis.
“The privatization [of SOEs] is not the solution to Pakistan’s economic problems,” said Asma Hyder, professor of economics at the Institute of Business Administration in Karachi. “Our problems are far more deep-rooted than just a few poor-performing SOEs in the economy.”
Away from the Karachi airport cemetery for its obsolete jets, PIA may not be an obvious poster child for corporate disasters.
It boasts a large sales office in downtown Karachi, one of about 50 marketing centers at home and abroad. And with an operating fleet of 34 aircraft and more than 8,000 employees, it is also Pakistan’s biggest airline with a 41% share of the domestic market, as well as a 22% slice of international route business, according to the national Civil Aviation Authority.
The logo of Pakistan International Airlines is seen in the capital Islamabad. The airline has dozens of sales offices at home and abroad. © ReutersBut PIA has struggled with overstaffing, crippling debt-servicing costs and a mandate to fly nearly empty planes on dozens of routes across a nation of 241 million people — for political rather than economic reasons.
Adding to its woes, a sharp drop in the rupee has hurt revenue in U.S. dollar terms — the currency in which fuel is priced — while the struggling economy has meant little growth in the domestic market. On international routes, it loses out to successful rivals Qatar Airways and Dubai-based Emirates, a world-leading airline that PIA helped set up decades ago.
Amid a one-two punch of high operational costs and dwindling revenue, PIA last turned a profit in 2004. Yet-to-be announced results for 2023 are expected by industry experts to show a $400 million shortfall.
The airline, which relies on a $40 million annual government subsidy, carries a $3 billion debt load. That eye-watering figure has raised fears about finding a buyer.
“Pakistan hired a global consulting firm, which came up with the solution of bifurcating PIA into two companies, where a new holding company will be created to park the debt,” said the official involved in PIA’s sale.
As a result, the airline is being split into two entities, PIA Corporation (PIAC) and PIA Holding (HoldCo). PIAC will hold core assets required for operations and foreign debt obligations that are a shadow of the more than $2 billion in local debt to be assumed by the holding company, which is not part of the sale.
Pakistan’s market regulators signed off on the arrangement in early May. But critics say the new setup could lead to legal headaches down the road.
“This bifurcation [of PIA] without securitization of assets and liabilities by any reputed financial institution lacks credibility and runs the risk of litigation,” said tax expert Ikram ul Haq.
Still, there’s no sign that Pakistan is willing to back off the sale of PIA, or its wider privatization drive.
Earlier this month, Prime Minister Shehbaz Sharif announced that all SOEs will be privatized, except entities with a defense or strategic purpose.
Syed Muhammad Ali, an Islamabad-based political analyst, said the SIFC could play a key role in cutting through red tape and bureaucratic delays. “Pakistan’s political and military leadership is keen to bring foreign direct investment into the country [via SIFC],” he said.
The sales will likely take years, if they happen at all. But they can’t come soon enough for Sajid Maqbool, a Karachi-based businessman who has dealt with Pakistan’s state-owned companies for years.
“The government should never be involved in running business in the form of SOEs,” he said. “It’s a recipe for disaster since bureaucrats never bother about the profitability of SOEs like executives of private business.”
Key to the drive was last year’s move to establish the army-backed SIFC whose civil and military members are eyeing a boost to foreign direct investment (FDI). The body has said it is aiming to land more than $100 billion in investment, mostly from Gulf nations, as it serves as a “single window” for investment in five sectors: agriculture, information technology, minerals, energy and tourism.
But Pakistan’s investment prospects are not bright, according to the IMF. The latter forecasts just $7 billion in FDI into Pakistan over the next four years, about a quarter of the $27 billion that Bangladesh — also an IMF bailout recipient — is expected to draw over the same period.
Former Pakistani Prime Minister Imran Khan has been jailed on corruption and other charges. On top of a weak economy, Pakistan is in the throes of a political crisis that has seen jailed former Prime Minister Imran Khan and his supporters protest against the military-backed government. Deadly militant and separatist attacks have damaged the country’s investment prospects.
“If investors are concerned about a lack of structural economic reforms and a highly volatile political and social — and security — climate, then SIFC will struggle to kickstart the level of investment it’s hoping to bring in,” said the Wilson Center’s Kugelman.
Any buyer of PIA, meanwhile, could face stiff headwinds on the route profitability. The country’s five carriers are fiercely competing for a market that has flatlined over the past two decades, said Afsar Malik, an expert in airline economics and former director at the aviation authority.
“Growth in the aviation industry is strongly linked to growth in the national economy,” he said. “I see no prospects of any growth in the national economy and, consequently, in the local aviation industry for the foreseeable future.”
source : asia.nikkei