ISLAMABAD:
Local prospective buyers of Pakistan International Airlines (PIA) have demanded protection that is currently available to foreign investors under an Act of parliament and have also sought complete exemption from taxes applicable to air travel, fuel and the lease of aircraft.
Privatisation Commission sources told The Express Tribune that some of the shortlisted parties had placed their demands before the government during the ongoing PIA due diligence process.
They said that the demands along with their refusal to accept performance benchmarks were making it harder to smoothly press ahead with the privatisation transaction.
The demands of bidders are in conflict with an understanding reached with the International Monetary Fund (IMF) that bars Islamabad from giving any special treatment to any segment of investors, according to officials of the finance ministry.
The government has shortlisted Airblue, Arif Habib Corporation, Blue World City, Fly Jinnah, Pak Ethanol (Pvt) Consortium and YB Holdings Consortium for the privatisation of PIA.
It had initially planned to privatise the airline by June-July 2024 but later extended the deadline to October 1.
Sources said that the pre-qualified bidders demanded that they should be notified as investors by the federal government in terms of Section 2 of the Foreign Investment Promotion and Protection Act 2022.
Section 2 states that the investment covered under this Act includes any asset that an investor owns or controls, directly or indirectly, that has the characteristics of an investment, including such characteristics as the commitment of capital or other resources, the expectation of gain or profit, the assumption of risk, and without limiting the generality of the foregoing.
The law gives immunity from the applicability of various taxes and gives a special legal status to the investment.
However, no foreign bidder has shown interest in acquiring PIA and all the six shortlisted parties are local.
Under the IMF’s $7 billion Extended Fund Facility, the government cannot give any special treatment to any investor and cannot offer tax exemptions to attract investment.
Privatisation Commission Secretary Usman Bajwa did not respond to a request for comment on whether the shortlisted parties demanded protection under the Foreign Investment Promotion and Protection Act. He also did not respond to questions related to tax exemptions.
Prime Minister Shehbaz Sharif has given special instructions to the Privatisation Commission to ensure transparency in the privatisation process.
In another demand, the bidders asked the government to make amendments to the tax laws to abolish sales tax on the purchase and lease of aircraft.
The buyer will have to expand the existing fleet to make the airline financially viable, although the bidders have refused to accept any targets about adding a certain number of aircraft.
Sources said that some of the bidders demanded that the government should abolish all taxes, including the federal excise duty (FED) and sales tax applicable to all domestic and international air travel.
International travel is heavily taxed and the government has imposed FED on tickets. At least Rs56 billion worth of additional FED was imposed on air travel from the current fiscal year.
The potential buyers have sought commitments that the government will not impose new taxes on PIA and its related business for a minimum period of 10 years. Moreover, there should be a general tax exemption under the Foreign Investment Protection Act.
Sources said that the shortlisted parties also demanded the removal of sales tax and FED on fuel to make PIA competitive against foreign carriers.
The government has already reduced the burden of potential buyers as it carved out liabilities of Rs623 billion from PIA and parked it in a holding company where those will be serviced by the taxpayers.
Sources said that the bidders also refused to take the responsibility of Rs56 billion worth of pending tax payments to the FBR. They have asked the government to pick these liabilities.
But the bidders are interested in the pending tax claims of Rs62 billion. There were Rs26 billion in overdue payments to the FBR and Rs30 billion in contingent liabilities as of the end of April 2024.
Some of the investors said that the government should bear and settle all tax liabilities, penalties, charges and claims prior to the takeover date. They have also demanded that all taxes and related liabilities should be settled prior to privatisation.
In another demand, some of the bidders said that there should be general immunity from any possible adverse outcome of any tax case or liability related to the federal or provincial taxes prior to privatisation.
