Prior to next week’s elections, Pakistan’s caretaker administration is making binding plans for a new government to sell loss-making Pakistan International Airlines (PIAa.PSX), according to the minister in charge of the process and other officials.
Historically, elected governments have avoided undertaking unpopular reforms, such as selling the flag carrier. However, Pakistan, which is in a deep economic crisis, agreed in June to overhaul loss-making state-owned enterprises as part of a $3 billion bailout deal with the International Monetary Fund.
The government decided to privatize PIA just weeks after signing the IMF agreement.
The outgoing parliament empowered the caretaker administration, which took office in August to oversee the February 8 election, to take any steps necessary to meet the IMF-agreed budgetary targets.
“Our job is 98% done,” Privatisation Minister Fawad Hasan Fawad told Reuters when asked about the airline’s sale plans. “The remaining 2% is just to bring it on an excel sheet after the cabinet approves it.”
Fawad stated that the plan, developed by transaction adviser Ernst & Young, will be presented to the cabinet for approval before the administration’s term ends after the election. The cabinet will also decide whether to sell the stake through a public tender or a government-to-government transaction, according to Fawad.
“What we have done in just four months is what past governments have been trying to do for over a decade,” he stated. “There is no looking back.”
Details about the privatization process have not previously been reported.
As of June last year, PIA had 785 billion Pakistani rupees ($2.81 billion) in liabilities and 713 billion rupees in accumulated losses. Its CEO has stated that losses in 2023 are likely to be 112 billion rupees.
Progress on privatization will be critical if the incoming government returns to the IMF after the current bailout program expires in March. Last year, Caretaker Finance Minister Shamshad Akhtar told reporters that Pakistan would have to continue participating in IMF programmes after they expired.
According to the 1,100-page Ernst & Young report, buyers will be offered a 51% stake with full management control after the airline’s debts are parked in a separate entity.
Reuters could not independently confirm the report’s contents. Fawad did not specify the size of the stake to be sold, but confirmed that the plan included spinning off the carrier’s debts into a separate entity.
Ernst and Young did not respond to requests for comment.
According to PIA spokesman Abdullah Hafeez Khan, the airline is assisting with the privatization process and has extended “full cooperation” to the transaction adviser.
Aside from operational and technical measures for PIA’s divestment, the caretaker government has also amended a 2016 law that prohibited selling off its majority shares, according to a draft posted on the Pakistan parliament’s website.
Analysts predict that the Pakistan Muslim League-Nawaz, led by former Prime Minister Nawaz Sharif, will win the election with the support of the powerful military. Its main political rival has been decimated by Imran Khan’s arrest and a crackdown on his supporters.
Sharif’s close aide Ishaq Dar, who has previously served as finance minister and has been named by the party to retain the position if it forms the next government, told Reuters that the sale of PIA will be expedited.
“It will, God willing, move ahead with fast speed,” he went on to say.
In a report issued in mid-January, the IMF expressed satisfaction with the caretaker government’s efforts to accelerate reforms of state-owned enterprises, citing the amendment to the PIA privatization law.
According to Fawad and two sources involved in the process, the government-guaranteed legacy debt and payables, which are currently held by a consortium of seven domestic banks, will be parked in a holding company under Ernst & Young’s privatization plan submitted to the government on December 27.
Fawad stated that the government and the consortium had reached an agreement to settle the legacy debt, which included negative equity of 825 billion rupees in loans, creditors’ money, and losses. He gave no further information.
According to sources, the banks wanted a five-year bond issued against the debt with a coupon of 16.5%, whereas the finance ministry offered only 10%.
The banks have not commented on the transaction.
Aside from its losses and debt, PIA’s governance and safety standards have been questioned by global aviation authorities for several years.
In early 2020, Czech and Hungarian air force jets were dispatched to intercept a PIA flight carrying 300 people after it went astray due to a “avoidable human error” by its pilot, according to a previously unreported confidential report by a PIA inquiry board reviewed by Reuters.
In May of that year, a PIA plane crashed in Karachi, killing nearly 100 people, and a fake pilot license scandal broke out later in 2020.
Following the scandal, the European Union Aviation Safety Agency (EASA) prohibited the airline from flying to its most profitable routes in Europe and the United Kingdom.
According to government records presented in parliament, the 2020 ban remains in place, costing the airline nearly 40 billion rupees in revenue each year.
According to Reuters-reviewed correspondence, the airline has been pleading with EASA to lift the ban, even temporarily.
Pakistan’s financial crisis has also resulted in creditors seizing PIA aircraft in recent months, according to the airline. According to the PIA, one aircraft was seized at Kuala Lumpur International Airport for failure to pay lease fees, and another was seized in Toronto for failure to pay ground handling fees.
While the airline awaits the government’s decision on a sale, it continues to require financial assistance: According to three government and PIA sources, 23.7 billion rupees will be required to keep it afloat for another five to six months before control is transferred to a new buyer.
Not everyone agrees that the sale should proceed as quickly as possible.
Three senior airline officials who spoke to Reuters on the condition of anonymity said a quick sale could reduce the airline’s value and would not be a transparent transaction without due diligence.
“We are not against its privatization, and all we want is that you don’t just throw it away,” said one of the officials.
However, Singapore-based aviation analyst Brendan Sobie stated that PIA is in dire straits and that the plan submitted to the government was “essentially the only option to save the airline”.
“The privatization will be challenging and a sale is likely not possible unless it first undergoes a deep restructuring and the debts are cleared,” the minister said.
PIA’s assets include key slots at the world’s busiest airports, as well as air routes to popular European, Middle Eastern, and North American destinations.
Despite the EU ban, PIA has air service agreements with over 150 countries and generates approximately 280 billion rupees in revenue each year, according to airline records.
It has ten Heathrow slots, which, according to two PIA officials, are currently worth 70 billion rupees annually. It has an additional nine slots in Manchester and four in Birmingham.
Turkish and Kuwaiti airlines have been operating 70% of the slots under a business agreement with PIA that also allows the airline to keep them, according to PIA officials.
Separately, PIA’s physical assets, which include aircraft, hotels in Paris and New York, and other properties, are valued at 105.6 billion rupees ($375 million) by book value, according to the airline’s 2023 annual report.
However, PIA officials stated that the assets’ market value could exceed $1 billion. In any case, the hotels and other properties would not be available for purchase, they stated.