The burden of PIA’s debt was shifted to taxpayers

Islamabad:

The government and commercial banks have agreed on a Rs268 billion debt restructuring plan for Pakistan International Airlines (PIA). This move, while shifting the burden of PIA’s inefficiencies onto taxpayers, removes an irritant to its privatization. The Ministry of Finance, abandoning its previous stance of not including PIA’s debt in the public debt, is now committed to making principal and interest payments from the budget.

Under the agreement, the government will use proceeds from the sale of PIA for capital payments, resorting to the budget if insufficient funds are available. The banks, in return, accept a 10-year debt rollover at 12% annual interest, amounting to Rs 32.2 billion in annual interest payments.

This deal means banks will receive Rs 322 billion in interest payments over a decade, surpassing the balance of Rs 268 billion. The total payment to banks at 12% interest will be Rs 572 billion over 10 years, the sources said.

The finance ministry will seek the approval of the International Monetary Fund due to the budgetary implications of the arrangement, and the banks will go to the respective board for approval, sources said. The response of the representative of the Ministry of Finance, about the circumstances that led to a change of opinion in the ministry, was awaited until the filing of this news.

In March 2023, the finance ministry had stopped paying interest on PIA’s debt, forcing the government and PIA’s management to explore the option of privatizing it. However, there are concerns that individual debt restructuring of commercial banks may delay its privatization. The agreed restructuring and ownership of PIA’s debt by the finance ministry ends the airline’s biggest worry, which also removes the largest monthly charge from its balance sheet.

Privatization Minister Fawad Hasan Fawad persisted in his demand to make PIA’s debt part of the public debt, Finance Minister Imdad Ullah Bosal and Finance Minister Dr Shamshad Akhtar finally agreed to the proposal with some caveats. Sources said that according to the agreement of the finance ministry, the privatization ministry and representatives of nine commercial banks, the debt of 268 billion rupees, including the initial capital of 250 billion rupees, is being restructured over 10 years.

The government will pay an interest rate equal to the one-year Karachi Interbank Rate (KIBOR), but capped at 12%. Interest payments will be made annually.

Reading A plan for the sale of PIA has been submitted

Capital payments will be made from proceeds from privatization and the sale of other fixed assets. If, however, no revenue is available, the Ministry of Finance will arrange the payments from the budget. Sources said the privatization minister has also informed the finance ministry that the plan to sell Hotel Roosevelt and Hotel Scribe has been withdrawn at this stage. Instead, the Roosevelt Hotel will be demolished and a new structure built in the coming years.

Despite the agreement on the most contentious issue affecting its privatisation, PIA is nowhere close to privatisation. The airline’s total outstanding debt is Rs825 billion and the privatization ministry and PIA have to seek no-objection certificates from the Civil Aviation Authority and the Federal Board of Revenue to file a draft agreement with the Securities and Exchange Commission of Pakistan (SECP). . A Scheme of Arrangement, separating PIA into core and non-core entities, could not be filed with the SECP in the absence of mandatory audited accounts of PIA by September 2023 and no-objection certificates from creditors.

The finance minister said two weeks ago that PIA’s 825 billion rupees debt would be transferred to a holding company. “I don’t know what to do with this debt,” remarked the finance minister, speaking at a seminar on the country’s economic issues.

The banks agreed to give an NOC to the SECP to transfer their Rs 268 billion debt to the holding company and cancel their claim on PIA’s assets. The Privatization Commission board had approved the transaction structure to sell at least 51% after liquidating its balance sheet by transferring nearly three-quarters of the Rs825 billion to a new company. The board also approved the creation of a new holding company to hold the debt.

The privatization minister was optimistic that he would be able to sell PIA before the end of the caretaker government’s tenure, which looks unlikely to happen.

The federal government rejected some of the banks’ other requests. Banks had requested that the PIA debt be considered eligible for the Capital Requirements Regulations (CRR), but the finance ministry rejected this proposal. Likewise, the banks’ request to defer tax payments on the profits they would have earned was also rejected. Sources said the banks have also sought a firm commitment that PIA’s privatization will not stop after its balance sheet is liquidated.

Published in The Express Tribune, February 2^n.d2024.

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