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Asim2013 PDF
Asim2013 PDF
Abstract
The steel industry is one of the most progressive and innovative industries in today’s dynamic and
competitive world that caters to the need of every individual and every aspect of life from a micro level
to the macro level and fulfils the demand of almost all industrial sectors and therefore is a key element
responsible for driving the economy of a nation. Pakistan Steel Mills Corporation (PSMC)—once a
highly profitable organization and considered one of the largest and sole steel producers in Pakistan—is
on the verge of collapse and passing through critical stages of its survival. Despite its monopoly and vast
potential to expand and grow, PSMC has not only lagged far behind in comparison to its neighbouring
nation, but has also been unable to meet the demand of its own nation. This study attempts to explore
and analyze the pros and cons of its current deteriorating condition by considering the various factors
and challenges faced by PSMC for the last few years and in particular the consequences of the unsuc-
cessful post-privatization attempt made by the government. Numerous apparent and inherent factors
are attributed to this failure, namely, the high bureaucratic influence, financial irregularities, managerial
incapabilities, inefficient management techniques, etc. In addition, the role and impact of other steel
sources such as ship-breaking, steel melting, imports, etc., are also taken into account, that, if carefully
managed and controlled, can help PSMC come out of its dilemma.
Keywords
Privatization, PSMC, TSM, state-owned enterprises (SOEs), financial crunch, mismanagement, ship-
breaking
Introduction
Steel is considered to be one of the key drivers of an economy and touches almost every aspect of life. It is
an essential component of various industries such as construction, automotive, transport, power, machine
guards, etc. According to the World Steel Association, the construction industry alone consumes around
The case has been developed solely as the basis for class discussion, for educational and management development
programmes and is not intended to illustrate either effective or ineffective handling of an administrative situation
or to present successful or unsuccessful managerial decision-making or endorse the views of management in
decision-making. The authors may have disguised/camouflaged some of the names, events, financial and other
recognizable information to protect the identity of individuals and the confidentiality behind decision-making.
This study uses secondary data, and information (news reports, published papers, reports, books available on the
company websites) and the sources have been cited, wherever such data and information have been used.
Downloaded from bmc.sagepub.com at University of Manitoba Libraries on April 24, 2015
40 Muhammad Asim and Abdul Rahman Zaki
51 per cent of the global steel produced.1 From the steel rails of trains to the body of aircrafts and cars, steel
hulls of ships, steel frames of cranes, and from harbour and ports to factories, from factories to warehouses
and from warehouses to ultimate destinations, all intermediary paths make use of steel products in some way.
Steel is not only used in industry but it is one of the vital elements needed for infrastructure growth and
development of societies. Steel is a fundamental and inevitable need of the industrial sector. Steel serves as
one of the major components in the production of numerous products like tyres, furniture, railways, con-
sumer goods and the energy sector, thus making it an essential commodity for an efficient economy.
Pakistan, soon after its independence in 1947, realized the extreme need of a steel-making plant for
its survival, economic development and self-reliance because total dependency on import would result
in a serious setback to the country which already inherited a weak industrial base. Initially a steel plant
was set up in Karachi in 1968, which later was upgraded with the assistance of the United Socialist
Soviet Republic (USSR), and the foundation stone of the country’s largest industrial complex was laid
down in 1973 as the only integrated crude steel producer with an operating capacity of 1.1 million mt/
annum. Pakistan Steel Mills Corporation (PSMC) is now a state-owned entity, and is operational, having
its facilities spread over an area of 19,088 acres. It holds the rank of being the sole processor of iron ore
and long rolled steel and heavy iron products in Pakistan. Almost 20 per cent of Pakistan’s finished steel
capacity is constituted by PSMC (State Bank of Pakistan, 2012). The enormous dimensions of the proj-
ect can be judged from its construction inputs which involved the use of 1.29 million cubic metres of
concrete, 5.70 million cubic metres of earth-work (second to the Tarbela Dam), 330,000 tonnes of
machinery, steel structures and electrical equipment. Its unloading and conveyor system at Port Qasim is
the third largest in the world and its industrial water reservoir with a capacity of 110 million gallons per
day is the largest in Asia; the 2.5-km long sea water channel connects the sea water circulation system to
the plant site with a consumption of 216 million gallons of sea water per day (Pakistan Steel, 2012).
Figure 1 reveals the product chain process in the Pakistan steel industry.
Unfortunately, PSMC demonstrated a constant stagnancy in its production over a last couple of years,
despite the potential for expansion and growth. As a result, PSMC has exited out of the world market list.
The facility at present is small and cannot gain efficient economies of scale (State Bank of Pakistan,
2012). There are a number of causes attributed to this anomaly the analysis of which is the main subject
of this case which are covered subsequently.
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and at the time of privatization of PSMC, it was about to be finished. A number of environmental hazards
are associated with the ship-breaking that requires the attention of the concerned authorities. However, the
reduced production of steel by PSMC has once again provided an opportunity to the ship-breaking indus-
try. At present, it is serving as a major source for bridging the steel demand and supply gap in Pakistan.
Imports
The challenging issues of a monetary and non-monetary nature faced by the main provider of finished
steel in Pakistan, that is Pakistan Steel Mills, have led the country to meet its steel requirements with the
help of finished steel imports. According to the State Bank of Pakistan, in FY11, 3.2 million mt of iron
and steel have been imported to Pakistan, that in monetary terms amounts close to US$2 billion. If
Pakistan Steel Mills operates at its full capacity, the import of finished steel can decline to only 0.1
million mt a year. This consequently brings about a net saving that could exceed US$1.0 billion per year
(State Bank of Pakistan, 2012). However, despite heavy import duties, the domestic steel prices are high
when compared with the import figures. The factors contributing to this situation include small-scale
production and lack of integration resulting in lower economies of scale for Pakistan Steel Mills.
Issue of Privatization
The process of privatization in Pakistan started with the privatization of the financial institutions in the
early 1990s. ‘Privatization’ means the sale of state-owned enterprises (SOEs) to private owners or at
least shifting their operations to private sector management. Interest in this option is attributed to various
causes and varies from country to country depending upon its micro- and macro-economic environment,
namely, the mounting foreign-debt servicing burden, deteriorating balance of payments, rising fiscal
deficits, less than expected performance, political disposition and pressure from international agencies
such as the International Monetary Fund (IMF) and World Bank. The justification cited for privatization
of PSMC was to reduce the financial burden of the government and encourage foreign investments.
The privatization theme regained momentum in the year 2002 in Pakistan, when 33 organizations
were privatized with a budget of PKR2 302 billion (Ahmad, 2007). Till now, Pakistan has sold a total of
166 SOEs for PKR 476.5 billion since 1990 (Daily Dawn, 2012). Since steel plays an important role in
the industrial and economic development of a country, the basis for the establishment of PSMC was to
enable the nation meet its local demand. When PSMC failed to live up to the performance expectation,
the issue of privatizing PSMC came into being. In the year 2006, PSMC was sold at an open auction held
in Islamabad for $362 million for a 75 per cent stake in PSMC. An amount of PKR 21.6 billion or $362
billion was paid by Al Tuwairqi, Russian Magnitogorsk and local brokerage firm, Arif Habib Securities,
to take control of Pakistan Steel Mills. This amounted to PKR 16.8 per share (Hashmey, 2012).
The government failed to comprehensively analyze the post-privatization consequence of such a mas-
sive initiative concerning the only steel industry of Pakistan, an important strategic asset of the nation.
Later, it resulted in its withdrawal, proving it to be an unsuccessful attempt made by the government.
There are a number of arguments and criticisms against the privatization issue of PSMC. One view holds
that that privatization was a hasty decision, and it was sold at far less price than its actual estimated value.
Another view holds that the sale price was justified in comparison to the liabilities of PSMC.
The fact that non-government organizations proved helpful in meeting the demand and thus
complementing the steel industry also provides a basis for the justification of privatization. The opposing
activists stress that PSMC is a strategic asset of the nation and steel is needed for sensitive purposes such
as meeting the defence, military and other nuclear needs, and thus, PSMC must not be disposed off for
reasons of national security, sovereignty and social necessity, and it should be under governmental con-
trol. The proponents of privatization hold the opinion that steel mills are crucial for the production and
supply of steel and political influences on such a production facility can have multiple negative effects
in maintaining the consistency of operations and efficiency.
It is also a common knowledge that most of the SOEs globally have a high turnover of top manage-
ment personnel, who are often chosen for their political connections rather than their professional com-
petency. When the parties in power change, executive posts become stools in a political game of musical
chairs. The managers exit, taking with them their experience and institutional knowledge. This situation
indeed has intense implications and has severely impaired the management capabilities, strategic coher-
ence and competitive abilities. It is also observed that the management executives joining the vacant
slots usually walk in divergence from directions followed by their predecessors, thus leading the organi-
zation towards an erratic behaviour.
Table 1. Full and Actual Capacity of Finished Steel Produced by Various Sectors
In Pakistan, TSM will serve as the largest private sector steel integrated manufacturing unit. The plant
covers an area of 220 acres at Port Qasim, Karachi, incorporating the most complex DRI technology of
the MIDREX process. The production process at TSM is shown in Figure 2. POSCO, a South-Korean
based and the world’s third largest steel maker in terms of market value, has made an investment of
US$15 million in the project of TSM (Khan, 2012).
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Financial Crisis
Pakistan Steel Mill is considered to be a ‘sternly sick organization’ because it is facing a severe financial
crisis due to mismanagement and a sharp decline in sales. Highlights of the financial losses of PSMC are
shown in Table 2.
Financial crunch has resulted in the shortage of raw material which is one of the primary and funda-
mental problems for PSMC. Shortage of raw material has led to a massive decline in production, now
by 23.8 per cent (State Bank of Pakistan, 2012). Currently, raw material including fine ore and coal is
almost extinct (coal in Pakistan is of lower quality and cannot be used for this purpose). The corporation
also had a negative equity of PKR 11,298 million, which provides an indication of the existence of mate-
rial uncertainty (Maken, 2012). When PSMC used to produce at full capacity, it generated its own elec-
tricity but now it is not able to operate at its full capacity which has resulted in purchasing electricity
from KESC, thereby further increasing the financial burden of PSMC. Added to these problems, the
corporation has been working without a permanent and full-fledged chief executive officer for the last
several months, while the losses are also simultaneously increasing day by day further deteriorating the
already collapsing organization. PSMC has requested the Ministry of Industries and Production and the
Ministry of Finance to arrange a bailout package of PKR 25 billion to help the mill run efficiently and
overcome its financial problems (Hashmey, 2012)
The non-payment of timely salaries to employees is further creating frustration and resulting in demo-
tivation among the employees. PSMC is facing a loss of billions of rupees, in the form of huge bank
loans and government taxes.
According to the Associated Press of Pakistan (APP)—a government-operated national news
agency of Pakistan—the counsel for Pakistan Steel Mills has said that according to final reports from
27 July 2011, a total of PKR 26.5 billion in losses was detected during 2008–2009. Out of the total,
PKR 4.68 billion is shown as a business loss, PKR 9.99 billion due to corrupt practices and
PKR 11.48 billion due to mismanagement (APP, 2012).
There was an increase of 200 per cent administrative costs in the year 2008–2009 while production
was very low (Razzaq, 2012). PSMC has to spend PKR 1 billion every month under different heads,
whether it is making any profit or running into losses. Crude steel production has dropped from 80 per
cent of installed capacity in FY2008 to 23.8 per cent in July–November FY2012 (State Bank of Pakistan,
2012). Apart from the low production, PSMC also faces liabilities of damaged claims of PKR 10 billion
filed in different courts by contractors, dealers and suppliers (Cheema, 2011).
without offering them any sort of job-training. In the fiscal year 2009–2010, there were 17 on-the-job
reported casualties (Shakil, 2011).
According to the Occupational Safety and Health Administration (OSHA), the associated dangers
with ship-breaking can be categorized into three types, (a) Hazardous Work Activities; (b) Hazardous
Work Conditions; and (c) Hazardous Exposures (OSHA, 2001). According to the estimates of European
Commission, approximately 1.3 million tonnes of toxic materials are disposed-off from these derelict
ships, which are exported from Europe alone, to South Asia (European Commission, 2008).
it. Privatization neither proved to be a panacea nor an ultimate solution. The search and positioning of a
capable and diligent leader is the need of the hour in uplifting an organization showing a declining trend.
There are a number of examples around the globe witnessing the action of its executives who turned a
sinking organization into a highly profitable one. PSMC is in a state of flux and confronting critical chal-
lenges amidst competition. The undertaking needs strategies and initiatives for revival. A number of
concerns require redressal. Several issues are to resolved. Some of these include the following:
1. Should privatization of PSMC be reiterated and will it be successful? Can the national interests,
as highlighted, be served without PSMC under state control?
2. A private ownership firm is often referred to be highly efficient, more focused to reach perfor-
mance, possess result-orientation that lead to a high profitability. Can a public sector unit also rise
to these heights? How? If not, why not?
3. When do you think that a state-owned unit is more desired than a private-owned firm? Does
PSMC fall in that category?
4. Will restructuring lead to revival of PSMC? What steps are needed for revival?
Notes
1. http://www.worldsteel.org/media-centre/speeches-and-presentations/basson-raw-materials.html (accessed on 13
June 2012).
2. PKR stands for Pakistani rupee.
References
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http://www.pakistantalk.com/forums/economy/6493-gravely-sick-pakistan-steel-being-set-up-grab.html
Ahmad, N. (2007, 27 March). Unconstitutional, illegal privatization of Pakistan Steel Mills. Retrieved on 29 April
2012, from http://www.politicaldeception.com/politicaldeception/privatisationofpakistansteelmills.htm
Associated Press of Pakistan (APP) ( 2012, 14 March). Corruption case: SC apprised of Pakistan Steel Mills losses.
The Express Tribune.
Cheema, U. (2011, 29 October). Pakistan Steel losses cross Rs 104 billion. The News. Retrieved from http://www.
thenews.com.pk/Todays-News-13-9942-Pakistan-Steel-losses-cross-Rs104-billion.
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haroonhaider.com/2012/01/16/pakistan-steel-mills-corporation/
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Quarterly Report for FY12.
Muhammad Asim is currently serving as an Assistant Professor at Karachi University Business School,
University of Karachi, Karachi, Pakistan. He earned his PhD in Comparative Management from University
of Karachi. He holds an Engineering Degree from NED University of Engineering and Technology,
Karachi, and an MBA from University of Karachi. His research interest focuses on management practices
in Organizations, Leadership, Corporate Social Responsibility, Quality Management, Organizational
Development and Change, and Organizational Creativity. Dr Asim has contributed a number of research
papers in various national and international journals. [E-mail: masimku@hotmail.com]
Abdul Rahman Zaki is currently the chairman of Karachi University Business School, and co-
coordinator evening program at University of Karachi, Pakistan. Prof. Zaki supervises a number of
scholars pursuing doctoral programmes. With more than 25 years of teaching experience, his research
interest focuses on Export Marketing, International Trade, Financial Management, etc. He is a member
of the editorial board of a number of journals and has conducted and participated in a number of confer-
ences at national and international levels. Prof. Zaki has published a number of papers in various
journals of repute. [E-mail: abdulrahman.zaki@hotmail.com]