Privatising power companies: Nishat and Crescent interested in buying FESCO

Faisalabad’s electricity supplier is one of the most efficient state-owned power companies.

FAISALABAD: Even though it has not formally been put up for sale yet, two of Pakistan’s largest financial-industrial conglomerates have shown interest in buying out the state-owned Faisalabad Electric Supply Company, one of the most efficient power distribution firms in the country, according to officials at Fesco.

Nishat Group and the Crescent Group have reportedly expressed an interest in buying out the company after the government announced that it would fast-track the privatisation process for Fesco, along with the Islamabad Electric Supply Company (Iesco).

A Nishat Group official, who wished to remain anonymous, confirmed to The Express Tribune that they are interested in buying Fesco. Crescent Group officials acknowledged that their conglomerate had in the past shown interest in acquiring Fesco, but were unable to confirm whether that interest remained.

A rare prize in the power sector

Fesco is one of the very few power companies owned by the government that actually turns a profit. In 2010, the latest year for which figures are available, the company made Rs61.8 billion in revenues and Rs1.9 billion in profits, far above the catastrophic losses that are common among its state-owned counterparts in other parts of the country.

The company primarily serves the third largest city in the country, in addition to many of the adjoining districts in central Punjab. It does not produce its own power, but rather buys it from state-owned as well as privately owned power generation companies and sells it to residential, commercial and industrial consumers. All told, the company sold about 8.4 billion kilowatt-hours in 2010.

It comes, therefore, as no surprise that two of the leading conglomerates in the country are bidding for a profitable power supplier in an energy-starved nation.

“We have the second lowest line losses and the best bill recovery rate in the country,” claimed one Fesco official who wished to remain anonymous.

Losses of electricity during transmission – known colloquially as “line losses” – can be caused both by faulty equipment as well as theft. Yet Faisalabad’s average of around 10.9%, while significantly higher than the US average of around 6.6%, is nevertheless less than half of the national average of around 22%.

The management of the company also seems to be better than most of its counterparts. Fesco officials boast that they had been given a target by the Pakistan Electric Power Company (Pepco) – the company created by the government to manage the finances of the state-owned power sector – had given them a target to reduce their line losses to 11.1%, but they were able to reduce it to 10.9%.

Fesco is also able to recover bills at a better rate than any other power company in the country. About 97% of the amounts owed to the company by its customers are paid on or close to the due date. The next best competitor is the Multan Electric Supply Company (Mesco) at 95%.

Pitfalls remain

Any bidder that eventually succeeds in buying Fesco, however, will likely face several challenges, the most pressing of which is the shortage of gas in the country, a problem that is most acute in the northern parts of the country, particularly in the winter, when many residential consumers use gas-fired heaters.

The shortage of gas leads many power generation companies that supply Fesco to shut down production completely since many of them cannot switch over to furnace oil. Fesco has no power generation capacity of its own nor does it have access to sufficient back-up supplies from other sources to make up for the shortfall, resulting in prolonged power outages every day.

Protests against those power outages in Faisalabad have a tendency to get violent, with Fesco’s property often being vandalised by aggravated citizens.

An additional problem is that while Fesco is very good at collecting its bills, most of its customers that do not pay are the federal and Punjab government departments. These include the Punjab Irrigation and Power department, the Punjab Livestock and Dairy Department, the Faisalabad Water and Sanitation Agency, the Punjab Police, as well as several local governments.

The bidders

The Nishat Group has as its major shareholder Mian Muhammad Mansha, originally from Chiniot in central Punjab and the richest man in Pakistan, who was quoted in Euromoney magazine in 2007 as having estimated his own net worth at close to $5 billion.

The group owns MCB Bank (the largest bank in Pakistan by market capitalisation) as well as Nishat Mills (the largest textile manufacturer) as well as DG Khan Cement (the second largest cement manufacturer in the country). All three of those firms are listed on the Karachi Stock Exchange.

The group has several other holdings including Nishat Power and Nishat Chunian Power, two independent power generation companies that were originally meant to supply power to the group’s textile mills. In December 2009, the group also bought out the Pakistani holdings of AES Power, a US-based power company.

The Crescent Group is also a conglomerate started by another Chinioti family and has diversified interests in textiles, financial services as well as the power sector. Indeed, the captive power plant at Crescent Textile Mills in Faisalabad is one of the biggest suppliers of electricity to Fesco. The group is intensely private with relatively few publicly listed companies and hardly any reliable information on its major shareholders.