More power plants to be privatised

Govt includes three more plants in sell-off list, plans to maintain uniform tariff

ISLAMABAD:

The government has decided to include three more power plants, including two liquefied natural gas (LNG)-fired units, in its privatisation programme and it also plans to continue the uniform electricity price even after the privatisation of three profitable distribution companies.

The government would again include the Jamshoro Power Plant and two LNG-fired plants in the list of entities to be privatised, said Muhammad Ali, Adviser to the Prime Minister on Privatisation, on Tuesday. Earlier, the three entities had been struck off the list due to multiple challenges in the way of outright sale.

Ali was speaking during a consultative session on the privatisation of 10 power distribution companies. The power sector is annually receiving Rs1.2 trillion in subsidies for price differential, debt payment and offsetting losses caused by inefficiency, low recoveries and electricity theft. "If the privatisation of power distribution companies is not done, the country will be in a big trouble," said Muhammad Ali.

It emerged from discussions that the privatisation of distribution companies may improve service delivery but the policies causing resource drain may continue, including the uniform tariff and subsidies. Uniform tariff was a very important social and economic phenomenon and the government had a bunch of good reasons to keep the uniform tariff due to country-wide considerations, said the financial adviser.

Under the uniform tariff policy, the consumers of a company having the highest line losses and lowest recoveries, for instance Hyderabad, will pay the same tariff applicable to the most efficient company, for instance Faisalabad or Islamabad. This means the consumers of Punjab will keep subsidising the consumers of Balochistan and Sindh.

The government has engaged the services of Alvarez & Marsal as the financial adviser for the sale of three power entities – lesco, Fesco and Gepco. So far, the government has done initial market assessment and the transaction structure is in the process of finalisation.

The restructuring plan for the three distribution companies would be finalised in one week and the first Expression of Interest for prospective investors would be issued in several weeks, said the financial adviser.

Former Nepra chairman Tauseef Farooqi said that during consultation with stakeholders, there was all-out support from the management of the distribution companies. He hoped that the employees would not create any challenges.

Power Planning and Monitoring Company Managing Director Abid Latif said that under a presidential ordinance, union activities were banned in the power sector. "I do not see any challenge to the privatisation of three power distribution companies, but there might be challenges in the case of other DISCOs," he said.

The financial adviser said that the reserve price should be determined under the discounted cash flow method, which was the best approach in the case of power sector. The government may also go for outright sale by handing over management control to the private sector. Tauseef Farooqi said that giving distribution companies on lease to the private sector was not the preferred choice as there was no private-sector investor in Pakistan that had the experience of running a distribution company.

One of the eligibility criteria is managing the distribution company, said the former Nepra chairman, who was advising the financial adviser on handling the transaction. However, a major condition to transfer the shares of distribution companies in the name of the president before outright sale remains unmet. The World Bank has proposed the transfer of ownership of 10 power distribution companies to the president of Pakistan before their auction, in addition to setting other conditions.

All conditions had been met except for the transfer of shares in the name of the president of Pakistan, said Abid Latif. In February this year, the cabinet had approved the transfer of shares of power distribution companies in the name of the president to prepare these entities for privatisation.

The World Bank has recommended at least nine prior actions, one of which is that the shares of distribution companies should be transferred in the name of the president. In August last year, the cabinet approved the privatisation of three distribution companies in the first phase. The outright sale of Islamabad Electric Supply Company (Iesco), Faisalabad Electric Supply Company (Fesco) and Gujranwala Electric Power Company (Gepco) has been cleared by the cabinet.

The World Bank has also recommended that the government should clarify subsidies for Nepra's consideration and in notifying tariffs. It will also have to notify guidelines on how distribution companies can request and recover subsidies. Another condition is that the government will complete the issuance of shares in distribution companies and develop the future process for the issuance of shares. A new electricity policy is also needed before privatisation, wherein roles and responsibilities will be specifically and clearly defined to facilitate the companies in reducing their technical and commercial losses.

The government has not yet been able to privatise any major entity through a competitive bidding process. Last month, it sold a small bank, the First Women Bank Limited, under negotiated sale to a UAE-based firm for Rs4 billion.