PIA Sale: Key Steps and IMF’s Consent for Successful Privatization

December 11, 2024 Mahi Bukhari

Introduction

The privatization of Pakistan International Airlines (PIA), the national carrier, has faced numerous challenges in recent years. However, significant progress is being made toward overcoming these obstacles. One of the most important developments is the approval by the International Monetary Fund (IMF) to waive the 18% sales tax on aircraft leases and park additional liabilities in a holding company. These two measures are crucial for the success of the PIA privatization process, which has been stalled due to financial hurdles and disagreements with potential investors. This article will explore the details of these developments and their potential impact on PIA’s privatization efforts.

The IMF’s Consent: A Turning Point for PIA’s Privatization

The Sales Tax Waiver

A major hurdle to the privatization of PIA was the 18% sales tax imposed on the lease of aircraft. This tax was seen as a significant deterrent for potential investors who would be required to pay this additional cost when inducting new or leased aircraft into the airline’s fleet. According to sources within the government, the IMF has now agreed to waive this sales tax, making the deal more attractive to foreign investors.

This waiver will level the playing field, as other countries do not impose such a tax on the lease of aircraft. With this decision, the government hopes to remove one of the key barriers that have caused investors to pull out of the bidding process in the past.

Parking Liabilities in a Holding Company

Another critical issue in the privatization of PIA was the significant amount of liabilities on the airline’s balance sheet. These liabilities were a key concern for bidders, as they complicated the process of selling the airline. In response, the government took steps to separate PIA’s liabilities, creating a holding company where much of the negative equity was parked.

However, this step alone was not enough to satisfy potential investors. The government had to negotiate with the IMF to further reduce the liabilities. According to recent reports, the IMF has agreed to allow more liabilities to be parked in the holding company, thus improving PIA’s financial outlook. This decision may open the door for a more favorable privatization process.

Key Developments in the Privatization Process

The Failed Attempt to Privatize PIA

Earlier this year, the government attempted to privatize PIA, but the process failed to meet expectations. A real estate developer offered only Rs10 billion for a 60% stake in the airline, far below the minimum sale price of Rs85.03 billion. Other serious bidders also walked away from the deal, primarily due to the unresolved issues of sales tax and the airline’s negative equity.

Bidders had insisted on a waiver of the sales tax and the writing off of Rs45 billion in liabilities to make the privatization more viable. The government’s decision to divide PIA into two entities—one holding the core assets and another holding the liabilities—was seen as a step in the right direction, but it was not enough to attract investors without resolving these critical financial issues.

Government’s Negotiations with the IMF

In response to the failed attempt, the government renewed its efforts to move forward with the privatization process. The finance ministry, the Privatisation Commission, and other government bodies held extensive discussions with the IMF to seek approval for the sale of the airline. The key points of these negotiations included:

Sales Tax Waiver: The IMF agreed to the waiver of the 18% sales tax, making the lease of aircraft more attractive to potential investors.
Liabilities in Holding Company: The IMF also approved the idea of moving more liabilities into a holding company, thereby improving PIA’s balance sheet.

These decisions have created a more favorable environment for privatization and are expected to resume the process soon.

Financial Impact of PIA’s Liabilities

The Role of Negative Equity

PIA’s balance sheet has long been burdened by negative equity, which has made it an unattractive investment for potential buyers. The airline’s liabilities, including debts to the Federal Board of Revenue, bridge financing from the Civil Aviation Authority, and other financial obligations, have been a significant deterrent.

In total, the government had to park Rs623 billion worth of liabilities in the holding company, but this was not enough to make PIA financially viable for privatization. Bidders had demanded that an additional Rs45 billion in liabilities be written off to ensure the airline’s financial health and make the sale more attractive.

The Privatization Strategy

To address these concerns, the government has been working on a strategy that would allow it to sell off non-core assets, such as the Precision Engineering Complex (PEC), to raise funds for the airline. This will help reduce the overall debt burden and make the privatization process more appealing to investors. The government has also been negotiating with the Pakistan Air Force (PAF) for the sale of PEC, which is expected to bring in Rs6.5 billion.

The successful privatization of PIA will require careful planning and the resolution of outstanding financial issues. With the IMF’s consent on the sales tax waiver and liability reduction, the government is optimistic that the process can now move forward.

Privatization Challenges: A Long Road Ahead

Despite the progress made with the IMF’s approval, the privatization process still faces challenges. The negative perception of PIA, both domestically and internationally, remains a major issue. The airline’s poor financial performance, aging fleet, and lack of effective management have made it difficult to attract buyers.

The Role of Financial Advisors

The government hired Ernst & Young (E&Y) as financial advisors to oversee the privatization process, but their work has been met with criticism. Privatization Minister Abdul Aleem Khan has openly expressed his dissatisfaction with the advisory firm, accusing them of poor performance. It remains to be seen whether the government will retain E&Y or seek new advisors to help navigate the complex privatization process.

Gulf Countries’ Interest in PIA

Despite the financial hurdles, there has been speculation that Gulf countries might be interested in buying PIA. However, concerns over the airline’s negative equity and poor performance have dampened this interest. According to Aleem Khan, even Gulf countries are unlikely to invest in PIA unless the government first cleans up the airline’s balance sheet.

Conclusion

The privatization of PIA remains one of the most significant challenges facing the Pakistani government. However, with the IMF’s recent approval to waive the 18% sales tax and allow additional liabilities to be moved to a holding company, the process has gained momentum. The government will need to continue its efforts to resolve the airline’s financial issues, attract serious bidders, and ensure that the privatization process is carried out smoothly.

The road ahead is still long, but with these key developments, the privatization of PIA is now closer to becoming a reality.

FAQs

1. What is the main obstacle to the privatization of PIA?
The main obstacles were the 18% sales tax on aircraft leases and the significant liabilities on PIA’s balance sheet. Both issues discouraged potential investors from participating in the privatization process.

2. How did the IMF contribute to the privatization of PIA?
The IMF approved the waiver of the 18% sales tax on aircraft leases and agreed to allow additional liabilities to be moved to a holding company, making the privatization process more attractive to investors.

3. What happened to the initial privatization attempt?
The initial attempt to privatize PIA failed because the offered price of Rs10 billion was far below the minimum expected price, and bidders walked away due to unresolved financial issues.

4. Will Gulf countries be interested in purchasing PIA?
While there was speculation about Gulf countries’ interest, concerns over PIA’s poor financial performance and negative equity have made it less likely that they will invest without significant changes to the airline’s balance sheet.

5. What role do financial advisors play in the privatization of PIA?
Financial advisors like Ernst & Young are hired to oversee the privatization process, structure the deal, and ensure the airline’s assets and liabilities are managed appropriately to attract buyers.