Credible constraints: Government to divest shares in energy companies

Move will give independent boards more power to hire and fire CEOs.

ISLAMABAD/ KARACHI:

The Pakistan Muslim League - Nawaz (PML-N) is contemplating reducing the government’s share in state-owned energy companies to around 51%, in a bid to raise the cash necessary to clear the circular debt in the system, as well as restrict the ability of future politicians to engage in populist moves in the energy sector.

The move to retain a majority-government ownership in energy companies appears to be a retreat from what the PML-N said in its manifesto, where it appeared to favour complete privatisation. Now it appears that the incoming ruling party wants to test the waters initially with initial public offerings of unlisted state-owned companies and follow-on offerings of listed ones.

Sources familiar with the matter say that the PML-N leadership believe that bringing in more private sector investors into state-owned companies will help improve the governance of these companies. Under the current arrangement, the CEOs of these companies are appointed by the prime minister. This level of direct government control has exposed these companies to political interference, which has reduced their efficiency.



The PML-N wants to give the power to appoint chief executives to the board of directors, and have more private sector investors represented on the boards to limit government influence. This proposal is likely to find no major opposition, as one of the main opposition parties, the Pakistan Tehrik-e-Insaf, is also in favour of such a move.

Companies most likely to see their government shareholding reduced include the nine state-owned electricity distribution companies, two of the state-owned gas distribution companies (Sui Southern Gas Company and Sui Northern Gas Company) as well as primary energy production companies like the Oil and Gas Development Company and possibly others.

Were the government to go ahead with this move, it will certainly raise a lot of cash. There are currently eight energy companies listed on the Karachi Stock Exchange with a substantial government shareholding. At Friday’s closing prices, the total market capitalisation of those companies comes to nearly Rs1.5 trillion.

The government’s weighted average stake in these companies is around 81.5%, according to the latest available financial statements. Reducing that share to 51% would raise approximately Rs455 billion for the government, at Friday’s prices, a number very close to the Rs500 billion that the PML-N is looking to raise to pay down the circular debt in the system in one go.

And this does not even take into account the amount that the government will earn if it listed the eight state-owned power distribution companies on the stock exchange. As The Express Tribune has previously reported, the Nishat Group and the Crescent Group, two of the largest diversified financial and industrial conglomerates in the country have expressed an interest in buying the Lahore Electric Supply Company and the Faisalabad Electric Supply Company.

Energy sector stocks have had a tremendous run-up since the elections three weeks ago. Stocks like Pakistan State Oil are up almost 50% in anticipation of the government’s moves to resolve the energy crisis. And foreign investors have begun showing a significant interest in energy stocks. It is entirely likely that the government will not have a problem selling its stakes, and given the current boom in the stock market, is likely to get good prices for them.

Some energy experts, however, believe that the government will also have to revise the regulatory regime to attract investors willing to pay a premium for investing the sector.

The PML-N’s market-oriented proposals to resolve the energy crisis stand in contrast to the outgoing left-leaning Pakistan Peoples Party administration’s plans, which typically tried to retain heavy government involvement. It tried to outsource the operations and maintenance of state-owned power plants, but faced enormous protests from the unionised workers at those plants. It tried to break up the two giant gas distribution companies into 20 smaller companies, but saw that plan run into legal complications.

Published in The Express Tribune, June 1^st, 2013.

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