Rs911b assets transferred in DISCO restructuring

The government has approved restructuring of three power distribution companies to transfer Rs911 billion in assets against Rs648 billion in liabilities to new buyers, but the scheme appears to violate an International Monetary Fund (IMF) condition that bars netting off arrears unless independently audited.

Advisor to the Prime Minister on Privatisation Muhammad Ali said on Monday that the assets have been valued on the basis of their "market value" and the government would retain ownership of all land of the three companies.

The Cabinet Committee on Privatisation (CCoP), headed by Deputy Prime Minister Ishaq Dar, approved the restructuring plan in its third attempt for Faisalabad Electric Supply Company (FESCO), Gujranwala Electric Power Company (GEPCO) and Islamabad Electric Supply Company (IESCO), according to the Privatisation Commission. Under the approved plan, selected assets, including all land parcels, and selected liabilities – including post-retirement benefits of already retired employees – will be carved out to a government-owned Special Purpose Vehicle (SPV). The retirement benefits of current employees will remain with DISCOs.

"The inter-governmental receivables and payables will also be net-off to settle government of Pakistan receivables," Ali said the plan was fiscally neutral, prepared with the objective to enhance value for the government to ensure the transaction was viable.

However, the IMF has barred settling liabilities against receivables until these are independently audited, according to IMF documents.

One participant of the CCoP said the IMF condition would be met by ensuring audit of receivables and payables by external auditors. Pakistan will "refrain from netting out cross-arrears (unless they are independently audited); using non-cash settlements; and issuing government guarantees except where there is a need to substitute an existing government guarantee on maturity," reads the IMF report.

Under the restructuring plan, the government would transfer Rs911 billion worth of assets to new buyers against Rs648 billion in liabilities, giving buyers net positive equity of Rs263 billion. The federal government would retain Rs257 billion worth of assets, mainly land, and Rs11 billion in liabilities.

For FESCO, the government approved transferring Rs290.5 billion of assets against Rs226.5 billion in liabilities, giving buyers Rs64 billion equity. The government will retain Rs73 billion worth of FESCO land. FESCO's distribution losses were 8% or Rs1 billion in the last fiscal year.

The CCoP approved increasing authorised share capital of FESCO to Rs100 billion and directed the power division to set up a new company with a total authorised capital limit of Rs250 billion.

Ali said the government would lease land to new buyers at existing rates so tariffs are not increased to recover additional lease costs.

For GEPCO, the government approved transferring Rs252 billion in assets and Rs169 billion in liabilities, giving buyers Rs87 billion equity. The government would retain Rs69 billion worth of land. GEPCO's distribution losses were 10% or Rs6 billion in the last fiscal year.

IESCO's buyers would get Rs368 billion of assets against Rs256 billion in liabilities, giving Rs112 billion in equity. IESCO's distribution losses were 7.9% or Rs2 billion. Its Rs70 billion worth of land would be retained by the government.

The finance ministry assured the CCoP it would clear all outstanding liabilities of IESCO on account of pending dues of Azad Jammu and Kashmir.

The government recognises that consumers, employees, industry and local communities have a direct stake in these reforms, said Ali. Service continuity will remain paramount throughout the process , he added.

The CCoP also decided to register a new company for transferring pension liabilities of retired employees, to be funded by consumers through tariffs.

Ali said employee interests would be addressed in accordance with applicable law, while consumers would remain protected under NEPRA's regulatory framework.

FESCO, GEPCO and IESCO collectively serve more than 14 million consumers in major industrial, commercial and urban centres.