IFC proposes private participation in Discos’ management

ISLAMABAD: International Finance Commission (IFC), World Bank Group (WBG) has presented a plan to the government on private participation in management of power Distribution Companies (Discos), to be implemented initially in two Discos, well informed sources told Business Recorder.

Sharing the details, sources said, Privatization Commission (PC) had requested IFC support in achieving these objectives by developing a competitive landscape for private sector participation in all Discos.

After negotiation on the Financial Services Advisory Agreement (FASA) between IFC and PC, a decision was taken to explore the possibility of transferring Discos to the provinces and IFC engagement was put on hold.

The issue of Discos as identified by the IFC are as follows: (i) high transmission and distribution losses -actual loss of 17.13 percent against targeted loss of 13.41 percent resulting in a loss of Rs 119 billion; (ii) low bill recovery-actual recovery of 90.51 percent against targeted recovery of 100 percent resulting in a loss of Rs 230 billion; (iii) pending applications for electricity connections-a total of 176,829 connections with a total load of 1,215 MW is pending; (iv) overloading of network – 19 percent of 11 kV feeders and 5 percent of distribution transformers are overloaded; and (v) high receivables-total receivables of Discos stood at Rs 1.7 trillion.

The IFC has shared PPP models of Liberia, Brazil, Peru, Kosovo with respect to power utility companies and Turkish model which comprises of transfer or Ownership (ToR) backed by share sale.

Nepra challenges ‘credibility’ of growth projections of World Bank, IMF

According to IFC, broad considerations are setting baseline losses to determine likely efficiencies which can be achieved through sustainable multi-year tariff considering expected losses, investment program, subsidies and other key parameters and the tariffs may need to be notified by NEPRA for a period of 3-5 years, prior to tender, to increase predictability and bank ability.

IFC argued that it would be important to take stock of existing assets and their condition since the right to use these assets may be transferred to the private sector even though the ownership would remain with the government.

IFC maintains that successful implementation of the transactions would require right sizing of employment against international benchmarks. An effective and clear communication strategy would be required around staff retrenchment plan in order to allay the staff fears about job losses and the GoP may be required to ensure no staff retrenchment for some years. A comprehensive review of the regulatory and policy environment and tariff framework would be required. Predictable processes embedded in a clear and transparent framework will be critical for the success of the transactions.

Talking about bankability, IFC stated that creditworthiness of users (including government counterparts), credit enhancement measures, maturity / terms and treatment of existing debt (funded and contingent) on the balance sheets, treatment of receivables, certainty of future cash flows and GoP subsidy arrangement would be essential for developer/operator interest and bankability of the transactions in capital markets. Social issues to be addressed in consideration of IFC’s environmental and social performance standards. Highest level of political support from all GoP stakeholders throughout the process will be key to success and timely completion. Relationship between the Discos and CPPA-G in case the Discos choose to purchase power from other power suppliers. With the increase in uptake of residential solar and net metering applications, careful assessment will be required to ascertain power consumption and associated forecast revenue.

Commenting on lessons from Gepco IFC states commitment from all stakeholders including Ministry of Power, NEPRA, P3A/Privatization Commission and Cabinet Committee on Privatization is essential throughout the process. In 2015, NEPRA was not supportive of a fully cost recovery tariff, IFC consultants were not allowed any site visits by GEPCO officials and Ministry of Power halted the process midway after completion of due diligence.

“In the current political climate, political commitment is absolutely critical to make any meaningful progress in the transaction. GEPCO had liabilities of over $570 million and outstanding receivables (exceeding one year) of $210 million which required settlement prior to project implementation. However, a decision could not be taken in this regard. Similarly, the process of allowing multi-year tariffs with full cost recovery was not implemented by NEPRA,”IFC continued.

After completion of transaction structuring, key prior actions (cleaning up of balance sheet, approval of multi-year tariff) to tendering were put on hold for two years till after 2018 elections. However, after the elections the priority of the new government changed. Employee pensions, inter-company payables/receivables and circular debt related liabilities are the biggest contributors to accumulated negative equity on DISCO balance sheets. A solution in which balance sheets are cleaned up should be found before considering to attract private participation.

The plan suggests that distribution margin needs to be rationalized based on actual losses rather than allowable losses determined by Nepra. The actual losses can then be reduced with reasonable improvements. Measures to improve collection losses (e.g. collective punishment enforced by K-Electric) are subjected to public criticism by politicians. Employee reduction would be done through natural attrition. A clear communication strategy would be required in this regard. Clear separation between the distribution and supply licenses is required. It would be important to minimize the possibility of good customers moving to other suppliers. Discos should be allowed to purchase power from other power suppliers without any mandatory purchase from CPPA-G.

Copyright Business Recorder, 2022