DISCOs buyers eye dollar returns
Prospective buyers of Pakistan's three power distribution companies have set out demands for a return on their investments in foreign currency, sought sovereign guarantees that their deals would not be reopened in future, and they will not be required to buy expensive electricity.
Some of the demands, which the local and foreign investors have made, stemmed from the government's questionable respect for commercial deals in the past, a weak judicial system and a weaker power sector regulator.
According to officials privy to these discussions, demands like paying profits in US currency or giving exemption from buying electricity from Independent Power Producers (IPPs) are unlikely to be accepted due to their implications for consumers and the economy.
However, the government is willing to address some of the genuine concerns of investors, particularly about the post-privatisation market regime.
The sources said the investors' feedback has already been shared with Prime Minister Shehbaz Sharif, who has instructed the Privatisation Commission to work out a transparent and rule-based post-privatisation regime.
The investors' feedback was obtained during domestic and foreign visits held recently. The government has begun the process of privatising three power distribution companies in the first phase – Faisalabad, Gujranwala and Islamabad. About 12 investors have shown interest, including four foreign investors.
Public sector enterprises' debt and liabilities jumped 8.7% during the last fiscal year to Rs3.11 trillion – an increase of Rs249 billion in a year, according to the central bank.
The officials said investors have demanded protection against contract reopening and renegotiation outside the control period.
The demands stem from the government's earlier decision to force IPPs to renegotiate their contracts, which authorities said were one-sided. However, no action has been taken against responsible bureaucrats and cabinet members who finalised these deals.
The investors have emphasised the need for improved regulatory capacity, effective implementation of service level agreements and timely tariff adjustments by the National Electric Power Regulatory Authority(NEPRA).
The officials said investors expressed strong concern that there is a risk any agreed tariff could be reduced by future governments or courts.
To address concerns, the financial advisor has recommended the government obtain political risk guarantees from multilaterals and include contractual protections against reopening in transaction documents.
Another major issue is that investors want freedom and flexibility in power purchase and competitive supply. They are reluctant to buy electricity from expensive IPPs, which the government is contractually obligated to purchase.
The officials said it would be difficult to exempt distribution companies from these purchases. If the government does not buy and sell the electricity, it must pay idle capacity payments to generation plant owners.
Some prospective bidders also own power plants. The bidders want a license for both buying and selling electricity.
Investors have termed the five-year tariff period too short for making long-term, major investments, proposing a 7 to 10-year control period.
One major demand is to replace the uniform tariff with performance and efficiency-based tariffs. Under the current system, the power price is the same for profitable Fesco consumers and for loss-making Sukkur and Peshawar consumers.
Investors also want returns on capital investment, investment plan approval and tariff determination before bidding to ensure NEPRA does not create post-privatisation problems. They have demanded timely provision of subsidies for subsidised consumers.
Bidders also asked for inflation-adjusted guaranteed returns on investment in foreign currency. The government may give inflation-adjusted profits but seems reluctant to link payments with foreign currency.
Privatisation Commission officials said strong interest exists from foreign and local investors but they seek certainty over the regulatory regime and guaranteed returns, with some indicating they would buy 100% of Faisalabad and Gujranwala distribution companies.
Investors also showed high preference for unrestricted commercial use of land and sought separation of pension and legacy liabilities. The finance ministry is not in favour of separating pension liabilities as the cost is built into the tariff.
Bidders have demanded a free hand in hiring and firing, saying current staffing levels exceed requirements, particularly after the rollout of Advanced Metering Infrastructure. They are not in favour of any freeze period on retrenchment.
However, the government may impose a minimum one-year ban on retrenchment.
Investors also want to monetise assets and commercially use land for activities like installing optical fibre, telecom towers and electric vehicle charging facilities.