Power distribution companies: World Bank proposes ‘Pakistan Model’ for private participation

ISLAMABAD: The World Bank has proposed ‘Pakistan Model’ to hand over Distribution Companies (Discos) to the private sector for 20 years with equity injection of Rs 728 billion without any cash impact layoffs and transfer of government assets, sources close to SAPM on Power Tabish Gauhar told Business Recorder.

The 18-month roadmap is supposed to be achieved using the examples of Turkey and some countries in Latin America as well as Pakistan’s indigenous experience with private participation.

According to the roadmap, transfer of government assets to private parties and the prospect of staff layoffs draw strong negative reactions in Pakistan. Therefore, under the ‘Pakistan Model’ for private participation, the Disco assets will remain in the ownership of the government and there will be a moratorium on staff layoffs for a prescribed number of years after the private operator takes over.

The core of the ‘Pakistan Model’ is the tendering of concessions in the Discos. Each tender will allow the government to select a private partner who will purchase shares in a Disco against the right to run the Disco’s business for 20 years (to match the 20-year licences of Discos) without any transfer of ownership of the assets to the private partner.

Discos are highly regulated and the proposed model will bring additional clarity about the expected improvements in the Disco through the Multi-Year Tariff (MYT) regime. The MYT regime, which is already in vogue in Pakistan, will ensure that the operational targets, investment obligations, and tariffs of the Disco’s private operator are pre-defined to a great extent.

The government will continue to own the Disco assets operated by the private partner as well as any new assets created by the private partner.

Before the end of the 20-year concession, the government shall tender the next concession. The shares owned by the concessionaire will be returned to the Disco at the end of the ongoing concession.

The objective of a concession is that a private party acquires the rights and obligations related to the technical and financial operation of the company for a pre-defined period. This includes the investment obligations and compliance with all the conditions of the license of the Disco, all compensated through the tariff.

To achieve this, the concessionaire must have control of the Board of Directors of the Disco. This can be granted through appropriate corporate measures such as selling the majority of the shares of the Disco or granting shares with special rights to give control of the company to the private partner.

Eight of Pakistan’s ten Discos are proposed to be offered to qualified private partners under the concession model. The other two, Qesco and Tesco, are considered to have significant risks to the possibility of securing revenues through the tariff. Therefore, the concession model is not considered suitable for them at this stage and a well-crafted 5-year performance-based management contract is proposed for these two Discos after which they can be tendered for concessions. The management contract is considered more suitable for Qesco and Tesco since it is tendered for a fee paid to the private partner in exchange for improving specific performance areas. The management contractor is not mandated to make (major) investments and is not affected by tariffs or subsidies since its profit arises from the fee and is subject to achieving the performance targets in the management contract.

A performance-based management contract is different from outsourcing of one or more of the Disco’s activities to a third party (which has already been attempted in Pakistan).

Pakistan’s Discos have been performing two key businesses under one licence: (i) the business of distribution (delivering electricity to consumers and providing access to generators), and (ii) the business of supply (the sale of electricity to consumers). The Nepra Act amendments of 2018 stipulate that these businesses require separate licences and also that each service territory can have more than one supplier. This implies that technical losses become the responsibility of a distribution licencee while collection losses become the responsibility of a supply licencee. Currently, each distribution company has a single licence for both services but these licenses will expire shortly for 8 of the 10 Discos. The World Bank has proposed that the Discos to be concessioned are offered to private parties after each Disco has been granted a distribution licence and a supplier of last resort licence for their service territory.

In terms of sequencing, the World Bank has recommended that each Disco be offered individually allowing for a single private party to be awarded more than one Disco with pre-established conditions about how many Discos may be awarded to a single party. Offering all Discos simultaneously would become a major challenge, therefore, World Bank has recommended that the process be divided into batches of Discos. This approach of batches can also be implemented within a short period of time, ie, a year or so. In the interest of efficiency and consistency across individual transactions, the Privatisation Commission must consider appointing a single Transaction Advisor for the entire program. The batches need to be designed by the Transaction Advisor.

The ongoing implementation of the Competitive Trading Bilateral Contracts Market (CTBCM) in Pakistan’s power sector is fully consistent with the participation of power sector entities whether they are in public hands or private hands. No adaptation is required in the proposed model for private participation.

On the licencing front, the plan says that the Government needs to prescribe eligibility criteria for licensees interested in distribution and supply. The bidders’ qualifications in the tendering process must be aligned with these criteria. Nepra is already engaged in the development of licencing regulations and templates for distribution and supply licences. Nepra will need to define the eligibility criteria for customers who have the right to choose their supplier. The current licences of eight of the Discos end between November 2021 and April 2022 which can facilitate a transition.

For a predictable tariff regime under private participation, the Government will need to formalize in guidelines the uniform tariff regime, the allocation and administration of subsidies, and the request and recovery of subsidies by Discos. Nepra must modify the current tariff guidelines for Discos to approve separate guidelines for distribution licencees and supply licencees. The multi-year tariffs for the initial 5- year period of the concession should be notified prior to the tender. The start of the multi-year tariff periods is possible for seven Discos which are currently operating under annual tariffs. For the three Discos with ongoing MYTs (Lesco), Fesco and Iesco), it may be considered to replace the current MYT period with a new one. After the first five-year period, the private operator shall petition for multi-year tariffs until the end of the concession.

To create a strong financial foundation for the Discos under private participation, three key actions, ie, reallocation of equity injections of 2013, PHPL loans settlement and Rs 448 billion adjustment against longstanding receivables of Discos from the government as well as private consumers aged more than two years have been recommended that can bring equity injections of up to Rs. 728 billion to the Discos without any cash impact on the Government. Such clean-up of the Discos’ stretched balance sheets will provide a strong foundation for the private operator to build on. It will also provide a useful benchmark for monitoring future progress. In turn, this will reduce the Discos payables to CPPA-G.

Some actions for ensuring that the Discos’ balance sheets do not get unnecessarily burdened again have also been recommended.

The roadmap suggests that achieving success in this program requires the creation of a win-win solution for Disco staff, the private operator as well as the Government. To address staff perceptions of job insecurity and lack of trust regarding prospective private operators, it has been recommended that the Government move fast to announce a moratorium on layoffs of Disco staff for a prescribed number of years after the private partner takes over the concession. Government should take a clear view of the costs associated with this decision and commit to a way to cover them. Options based on international experience may be considered. Communication by the Government is the key first step, far ahead of any transaction work. It is critical to provide a transparent playing field and a predictable process. Coordinated and timely action by the relevant Government entities can bring success to Pakistan.

Copyright Business Recorder, 2021