How to privatise DISCOs - I

The privatisation of electricity distribution companies (DISCOs) involves some basic questions. The answers to these questions will lead to an alternative proposal that will be quite innovative, will expedite the process of privatisation and start bringing in proceeds immediately.
Some basic questions are:
a) Why does the government want to privatise DISCOs in the first place?
b) Why should a foreign or local "strategic investor" be sought, and that too for not more than 26%? Some related questions are:
i) What will be the buyer's interest and objective?
ii) What will be the likely consequences of the take-over by him?
iii) What will be its impact on the electricity users?)
Let us take up the questions one by one and try to find their answers.
The objectives of privatisation
There are two main reasons why the government wants to privatise DISCOs. One objective is to make the DISCOs efficient companies so that they can not only meet the electricity needs of the country but also make the required investment on their own. Autonomy to the managers of DISCOs under the present system cannot solve the problems because a bureaucratic set-up cannot be turned into an efficient organisation simply by giving it autonomy. Habits and culture of bureaucrats may not change even after they are told that they are now "autonomous" in their working, just as an elephant in the zoo will not walk away as a free animal even after its shackles are removed.
The second objective of the government is to get substantial funds through privatisation. The government expects to get tens of billions of rupees with the sale of the shares of DISCOs. Since such a huge amount may not be possible to get from our own businessmen or even through the domestic stock exchanges, the government believes that it can do it only if some foreign investors offer to buy the DISCOs (even if only a portion).
The consequences of hand-over to a foreigner buyer
What will be the consequences if 26 percent shares are sold to foreign strategic buyers and, at the same time, management is handed over to them? Obviously, the strategic investors will be primarily interested in making as much money as they can and in as short a period as possible. It is as simple as that. The interests of the customers will not be their primary concern. As a case in point, the privatisation of Karachi Electric Supply Company (KESC) was a disaster that caused great hardship to customers and highlighted the harm that foreign investors may cause.
Savings not to be passed on to users
Foreign buyers will make strenuous efforts to improve operational efficiency. They will not hesitate even in downsizing the present personnel as much as they can to get maximum output per employee. They will also reduce expenses to the barest minimum level.
The improvements, however, will be entirely in their own interest. They will be extremely reluctant to pass on the benefits of efficiency and savings to consumers. The government will be hardly able to force them to reduce rates and charges in the interest of consumers.
Higher rates for electricity
Foreign buyers will do their best to charge as much as possible in order to maximise profit. If a buyer is from a country, which is a big world power, he will not hesitate in using his government's influence (what the international investors in independent power projects have been doing indicates what may well happen.) Our government will not be able to resist the pressures. The increases in electricity rates in recent years provide a good example of the shape of things to come.
No new assets
Foreign buyers will not be interested in making any investment that is not recovered with maximum profit. (The present management of KESC failed to honour its commitments regarding investment.) It takes years to expand infrastructure, such as construction of new transmission lines and replacement of present ones. It will not be in a foreign buyer's interest to make long-term investments if returns are not to come soon. If he finds that he can no longer make as much money as he did in the beginning, he will look for more profitable opportunities elsewhere in the world. All that he will have to do will be to sell his shares to some interested party or unload them at the domestic stock exchanges. In other words, he will take his money and leave the country.
Little interest
The reasons are not hard to find why foreign strategic investors may not be coming forth soon.
a) A proper and comprehensive evaluation of the assets and liabilities of DISCOs is not available.
b) There are huge liabilities in the form of outstanding dues that DISCOs have been unable to recover from influential defaulters.
c) There are far too many employees to run the operations efficiently and economically.
d) The prospects of profitability are not rosy at present due to high cost of electricity.
The needs of the people
The consumers want basic improvements immediately:
a) They expect better efficiency and service after the DISCOS are in private hands. And they want the savings in costs (most, if not all) to be passed on to them in the form of lower rates and charges.
b) They want increase in electric supply to meet fully present and future needs.
c) They want improvement and expansion in the network so that connections are available also in all villages, even if service in some areas has to be subsidised.
A foreign buyer will be hardly inclined to "waste" his money on doing any of these things, if he does not himself get the major benefit. Nor will he feel any compulsion to do so.
Local buyers as an alternative
Local strategic buyers, if available, may have the same thinking as foreigners and try to make as much money as they can. However, they live in this country and cannot afford to annoy the people and the government beyond a certain limit. They may also be expected to have some consideration of national interest. Therefore, they would be preferable to foreigners. However, the purchase of even the specified minimum ratio (26%) of shares of a DISCO, not to speak of all, will require a sum that a local investor may not have.
The local investors can, however, do it collectively or jointly if they agree to join hands in taking over DISCOs, hire professional management, and do not allow any one of them to dominate, if not oust, the others. This will be a tall order.
The third alternative
When selling to foreign buyers is not in the national interest and local counterparts are not available, what should be the way out? Go to the people, as wise men say.
At present, the DISCOs have over 20 million customers in total. Why not offer the shares to all of them? Collectively, they may have enough purchasing power to buy all shares, in quarterly instalments, if necessary. Of course, not all will get the same number of shares. Some of them may be able to buy just one share each, while others may be able to get big lots.
How to do it?
The chief executive of every DISCO will issue a share to every connection holder in his area (for Rs 10 or 100) and include the amount in the next month's electricity bill. There will be no need for a share certificate. The DISCO records will show that every consumer is a shareholder and a customer will have the electricity bill as proof.
To sell more shares, a DISCO will send a letter to all of its customers, offering its shares to them. The letter, in Urdu, may explain the benefits of buying DISCO shares and the procedure for purchase. It will bear the customer's name, address and other identifying information as it appears on the monthly bill and will be attached with the bill. Thus, the offer letter will be delivered to every customer along with the bill.
At the bottom of the offer letter will be a form in which the subscriber will fill in the number of shares (in figures as well as words) that he wants to buy and enter the amount that he will pay. Then he will fold the self-addressed, postage paid letter and mail it. The DISCO will enter the payment in the next month's bill. It may also confirm the sale of shares through a letter to the customer.
The DISCO will deposit the total amount collected through the sale of shares in the Government account with the State Bank towards the retirement of public debts because that is the primary objective of the privatisation.
Offer to be repeated
The DISCOs will repeat the offer of shares to customers once every quarter or once every six months. This will facilitate purchases by small customers, who can buy shares from their savings only at intervals. A DISCO will also offer its shares to every new customer on approval of his new connection. As a result, the paid-up capital of every DISCO will continue to grow while simultaneously it will get additional interest-free funds to finance expansion and modernisation.
(To be continued tomorrow)