PECO - Nationalization, Privatization and, Arif Habib - A tragedy in three acts
The tragedy continues in Act 4
I didn't know about PECO till last week, when I was sent an article on it by someone after they read my last post on Arif Habib and Javedan Cement. I was only interested in the role of Arif Habib but my googling turned up other interesting details. This is the summary of my googling. It is completely based on copying from news reports (all reports linked at the end). I just reorganized it a bit.
Act 3: Arif Habib: 2002 onward
The MO of Arif Habib for taking ownership of PECO shares isn't exactly like Javedan, but I can't help feel that there is a method to all his approaches.
The MO for Javedan
Javedan Cement was purchased in privatization by Haji Ghani and Shunaid Qureshi for Rs.4.3 billion, without the Privatization Commission (PC) assessing the value of the land assets.
Purchasers immediately stopped the production of cement.
Purchasers transferred the shares to Arif Habib and AKD sidestepping the requirements of Listed Companies Takeover Ordinance 2002.
SECP looked the other way at this gross violation.
Reading between the lines, Arif Habib admits that Haji Ghani and Shunaid Qureshi were frontmen when as CEO of JCL he says, "We had beaten the other bidders in a fair competition so it was our right to procure the company."
Arif Habib said there was no illegality in ceasing cement business after the privatization of the company as it was the right of the buyer to change the nature of business
The mining land which is contaminated land was converted into residential land during the PPP government.
Commissioner Karachi says that such conversion is not allowed legally, and his office has no record of such conversion.
Naya Nazimabad on the cement factory land was launched in 2011. Till 2016, the company didn't bother to amend its Memorandum/Articles of Association, which continued to state cement and mining as the principal business activity of the company.
The MO for PECO
The main interest of private investors is in PECO’s land in Badami Bagh and Kot Lakhpat, both prime locations of Lahore. In Badami Bagh, there is about 247 kanals of land owned by PECO, while it has about 1,349 kanals in Kot Lakhpat as per the revenue record of the Punjab government.
In 2002, the government held 54% shares of PECO, whereby it was a public-sector entity.
As part of the attempt to privatize the company in 2003, the government had decided to restructure the company’s balance sheet: it authorized PECO to sell some of its prime urban lands in Lahore to pay back debts that had been guaranteed by the government.
On August 9, 2003, the PECO board of directors was informed that they had obtained the final approvals needed – a no-objection certificate from the Punjab government – to sell the land and clear the way for privatization.
The meeting was attended by, among others, Asif Jameel, who was a director serving as NIT’s representative on PECO’s board.
In the next four days, NIT sold nearly all of its shares in PECO, all 1.2 million of them. The trading patterns in PECO’s shares went completely berserk... More PECO shares were traded in the three weeks after that board meeting than in the previous full year.
NIT offloaded its shares at a nominal value of Rs80,27,145 at an average share price of Rs6.81.
About 30% of these shares were offloaded through M/s Arif Habib at a nominal value of Rs4 per share.
In an investigative report compiled by Javed Hasnain Rashid & Company, a chartered accounting firm retained by PECO management in 2018, it is alleged that the ultimate buyers of the shares from NIT were veteran investment banker Arif Habib, through Rotocast Engineering (Pvt) Ltd, and Masood Ahmad Khan Soodi, through Maha Securities.
The central allegation in the report is that NIT acted on behalf of Arif Habib and his associates and improperly sold its shares, an action that, if true, would constitute not just insider trading, but several other counts of securities fraud.
The sales of shares under suspicious circumstances changed the shareholding of the government from 50%+ to 33%.
For his part, Arif Habib claims that he did not act inappropriately and in fact, was not the buyer when NIT was selling in that frenzied month in August and September of 2003. “I had purchased shares of the company a year after NIT had sold in the market,” said Arif Habib, in a statement e-mailed to Profit.
Apparently, the owners had plans for re-commencing production of pumps and motors, but nothing has been done practically since take-over. In fact, the management has failed to take measures that could have ensured the revival of the strategic industrial unit through modernization and restructuring, and adopting a solid business plan with a focus on technology transfer.
On the other hand, its operating assets like installed machinery, equipment, tools, cranes, auxiliaries etc as well as its stock, spares and inventories worth billions of rupees have been disposed of, phase-wise, in a non-transparent manner, since virtual take-over by the private sector. The practice however continues without any checks.
As many as 97 valuable machinery items were sold in 2014-15 to two private companies and an individual, on negotiation basis, at a throw-away price of Rs5.43 million. These included lathes, shapers, milling machines, drilling machines, grinding machines, boring machines, gear hobbing machines, hydraulic press, mechanical press, electric furnace, induction furnace and spot welding machine.
The total value of the land in 2011 stood at Rs14 billion.
Act 2 : Privatization : 1991 - 2002
Read and weep. A company that continued to be profitable even after nationalization was further ruined by taking it through the privatization process.
Prepared in 1991, the first-ever list of the State-owned enterprises to be divested included PECO prominently. Subsequently, the Privatisation Commission (PC) notified publicly the intent to sell-out, in the first phase, PECO Badami Bagh works.
Initially, its assets and business both were offered on an "as is where is" basis, but PC failed to attract the proper response of the investors.
Later, the PC auctioned separate lots of machinery and land, but without positive decision on the bids received.
The Economic Co-ordination Committee of the Cabinet (ECC) therefore decided, in March 1993, to dismantle and shift all the plant machinery and steel structure from Badami Bagh to Kot Lakhpat, and to hand over the vacated land to the PC for disposal.
Consequently, this 260-kanal freehold land was handed over by the management to the PC, along with its title documents. Once again the PC auctioned the land this time dividing to land into smaller plots - but for reasons best known to the PC, none of the bids received was considered acceptable.
Another attempt was made by the PC to sell the company assets in April 1999 that included 247-acres of Kot Lakhpat works in operation, along with the vacant land of Badami Bagh. Financial advisors were appointed to assist the PC, and they were wide publicity given, domestically and abroad, with road shows to attract investors. This time too, the transactions could not finalise.
The last effort to dispose of the 260-kanal land of Badami Bagh was made in January 2001, again without results. Once again the company's works in operation and the vacant land were scheduled for divestment in August 2001, but the plan ran into snags.
On November 7, 2001, the government approved the strategy for the sale of only its land of Badami Bagh, but the PC took no further action. One fails to comprehend as to why the PC has not been able to dispose off the prime land, with a fair price of over Rs 900 million estimated ten years ago.
The negative effects of this 10-year saga of failed privatization of PECO.
I want to bold, underline and highlight each line in the below section. How a profitable company was ruined for the sake of privatization, which didn’t happen.
Whatever the reason for the lack of decision on the part of the PC, the long and unsuccessful privatisation process had a multiplier negative effect on the operations of the company.
PECO, which was a vibrant and profitable organisation till 1990, suffered losses for the first time in its history during that year. Understandably, the customers were reluctant to place orders. Due to reduced inflow of orders the company operated far below its production capacity, and as fixed overheads could not be absorbed, it sustained heavy losses.
The company thus remained under heavy debt burden. The uncertainty due to privatisation created insecurity for the employees that were retained by the company, resulting in inefficiency and mismanagement. Designing capabilities of the company deteriorated over time, lowering the company's competitive edge. PECO's dealer network weakened, adversely affecting the promotion of its products.
Furthermore, all the resources of the management were diverted towards facilitating the PC, resolving various issues related to privatisation, and the shifting and re-installing of the machinery and steel structure to new premises.
Thus, whatever orders were in hand could not be delivered according to agreed schedules, impairing the company's credibility further. Resultantly, the company was even unable to pay the salaries of employees on a regular basis. As on 30th June 2004, the company had accumulated losses of Rs 1, 741 million.
Obviously, the situation had a direct impact on the production operations. Manufacturing of machine tools and power looms was discontinued way back in the early nineties, and most of the workers and staff, over 600 in number, were then laid off under the Voluntary Separation Scheme.
Machinery, equipment and the steel structure shifted from Badami Bagh and installed at Kot Lakhpat could not be put into operation. Huge investment in terms of time, money and effort went down the drain. In the latest move, on January 2002, the Cabinet Committee on Privatisation decided the closure of the remaining production units of the company, that is the bicycle plant, the furnace and rolling mill, pumps and motor sections and the general engineering workshop.
The PC accordingly terminated the services of all the regular and contract employees, totalling about 1,500 in number, under the Compulsory Separation Scheme.
Thanks to the ill-conceived and short-sighted privatisation policies of the government, the operations of the company, which once was the industrial empire and played a key role in the industrialisation of the country, are now at a standstill, with the exception of the fabrication of the steel towers.
This caused serious liquidity problems, but the banks and financial institutions were not willing to extend credit limits to a state enterprise under privatisation.
Act 1: Establishment to Nationalization : 1948 - 1972
PECO, the pioneering engineering industrial complex, was established in 1948 in the private sector.
Its large variety of light engineering products remained popular for quality and performance for almost four decades. The product range of pumps included various sizes and different types of deep-well turbine pumps, up to 200-litre/second capacity, submersible pumps, mobile pumping units, and centrifugal pumps, single-stage, multi-stage and non-clogging types.
The annual installed capacity was to produce 3, 400 sets of pumps that competed well with the reputed foreign makes. Machine tools, such as general-purpose lathe, precision bench lathe, heavy-duty centre lathe, shaper, drilling machine and hacksaw were manufactured in accordance with international standards.
Automatic power looms were produced, in technical collaboration with IWAMA of Japan, to meet the demands of the domestic textile industry. The wide range of electric motors, 3-phase, 400 V, 50 c/s, squirrel cage type, offered models up to 150 HP, including the advanced totally-enclosed fan cooled (TEFC) type, having an annual capacity of producing 16, 500 motors.
Its products mix also included high-speed diesel engines, concrete mixers of various sizes, electric overhead travelling cranes ranging from 1/2 to 30 tonnes lifting capacity, mini hydel turbines, bank safe and strong room doors, vessels and storage tanks, steel towers, parts and components for the industrial sector.
PECO rolled steel products covered mild steel angles, flats, tees, shafting, channels, joists, girders, deformed bars, plain bars and ribbed TOR steel bars, and special steel ingots, billets and shafting, according to international specifications.
Annual installed capacity related to rolled material and ingots was of the level of 80, 000 tons and 40,000 tonnes, respectively. A dedicated unit, installed in 1960, produced PECO bicycles, with an installed capacity of 120, 000 Nos. a year, which were marketed nation-wide.The government nationalised the company, along with another 30 key industries, in 1972, having its works located at Badami Bagh and Kot Lakhpat Lahore.
Act 4: The tragedy continues
Bureaucracy and shareholder tussle
In March 2016, the government appointed a civil servant – Mairaj Anees Ariff – as the CEO of PECO. And almost from the very beginning, the private sector shareholders were deeply unhappy with the situation, which has resulted in the company descending into chaos, accusations of embezzlement and corruption being traded between the CEO and the private sector shareholders, and the dredging up of the old issue of how the private shareholders managed to even get control over the company in the first place.
In short, the situation is this: Mairaj Ariff wants to assert control as the CEO of PECO, and believes that the private shareholders, led by Arif Habib, are instigating a revolt under him, particularly through their influence with some of the senior finance and operations staff, including the CFO. The private shareholders, meanwhile, believe that the CEO is unqualified for the job and is not only running the company into the ground but also embezzling company funds while doing so
Still on the privatization block for its land
[In its June 23, 2021 meeting,] the CCOP spent significant time on the matter of selling a high-value plot of PECO instead of privatising the whole company, an official of the Privatisation Commission told The Express Tribune after the meeting.
Many parties, including some from Karachi, want to acquire the Badami Bagh property of PECO, said the official.
PC Board continues to waste time and incur costs
The PC Board , in its meeting held on June 3, 2021, was informed that along with the complexity and seriousness of the issues, the following new issues have also surfaced during meetings with MoI&P and PECO: (i) a case in Islamabad High Court (IHC); (ii) default on repayment of an NBP loan; (iii) defaulter' status on Pakistan Stock Exchange; (iv) mutation of land in the name of PECO; (v) non-availability of audited/approved financial statements from June 201 8 onwards; (vi) verification of valuation of assets (including Badami Bagh and Kot Lakhpat Land); (vii) unauthorised JV between MD and a private firm; and (viii) inquiry initiated by SECP for non-compliances on March 26, 2021. On June 23, 2021, Privatization Division briefed the Cabinet Committee on Privatisation about PECO’s case and submitted the following proposals for consideration and approval as recommended by the PC Board: (i) PECO may be removed from the Active Privatization List; (ii) PECO's land may be sold by Privatization Commission in light of Cabinet decisions dated 30-5-1994 and 31-12-2004 and subsequent PECO's Board decision for implementation on 12-3-2005 to settle GoP liabilities; and (iii) Privatization may be considered when the entity is free from inherent issues and encumbrances.
In the following section, I am impressed with the value addition brought to the table by Finance Minister, Adviser to PM on Institutional Reform and Austerity, and Minister of Industries and Production. After their invaluable input, a detailed discussion was held, which resulted in another committee being made by CCoP.
The Finance Minister observed that reconstitution of the Board and removal of MD PECO is the first step to proceed further, otherwise it will be kept pending.
Adviser to the Prime Minister on Institutional Reforms& Austerity, Dr Ishrat Hussain, stated that there could be legal implications therefore the advice of the Ministry of Law and Justice must be sought first.
The Minister for Industries and Production supported the opinion of Adviser to the Prime Minister on Institutional Reforms& Austerity.
After a detailed discussion, the CCoP constituted a Committee under the convenorship of Secretary Privatization Division and comprising Secretary Industries & Production, Secretary Establishment, Secretary Law & Justice, Chairman SECP and Sr. JS (CF) Finance Division to put up recommendations for removal of major bottlenecks to proceed further including removal of current MD PECO and reconstitution of PECO Board. The opinion of the Law Division must be explicitly reflected in it. The recommendations shall be submitted before the CCoP for a decision.
I don’t have the details but the heirs of CM Latif, who established BECO (renamed PECO after nationalization) have a case continuing in the courts for returning the entity to them.
At the time of nationalization, CM Latif owned 24.86% of the shares of PECO, and the rest of the shares were owned by the general public. Under the 1972 order, the shares held by CM Latif were taken over (or stolen, depending on one’s perspective) by the State Engineering Corporation (SEC), a wholly owned subsidiary of the Ministry of Industries. The government-operated mutual fund National Investment Trust (NIT) also purchased 21.24% of shares of PECO through the stock exchange effectively changing the shareholding pattern to this: 33.25% of the shares were held directly or indirectly by the federal government; 21.24% shares were held by the federally controlled NIT, and 45.51% shares were held by the general public.