After a brief pause in the on-going privatisation process due to landmark decision of the Supreme Court to annul the divestment deal of the Pakistan Steel, the government re-continues with the implementation of its privatisation programme, rather on a fast-track basis.
The broad-based privatisation programme being launched includes the state enterprises operating in the engineering industrial sector, primarily Heavy Mechanical Complex, Pakistan Machine Tool Factory and Heavy Electrical Complex operating under the Ministry of Industries, Production and Special Initiatives. Consequently, the Privatisation Commission (PC) has invited, by November 22, _Expression of Interest (EOIs) from prospective investors, domestic as well as foreign, for acquisition of 90% shares of the company, along with management control.
Heavy Electrical Complex (Pvt) Ltd, commonly known as HEC, established at Hattar Industrial Estate in the NWFP, with the economic and technical assistance of the People's Republic of China, at a cost of Rs 1,158 million. The company's current total assets amount to about Rs 1,518 million and equity of Rs 96 million approx., as on 30th June 2006. Its installed production capacity is to produce 148 Nos. power transformers of capacity ranging from 6.3 MVA to 40 MVA for 132 and 66 kV electricity transmission systems, which is translated into factory's total production capacity of 3,000 MVA.
Spread over an area of over 81 acres, the factory has integrated and largest engineering, production and testing facilities---the only of its kind in the country---procured from China, Germany and Switzerland. The manufacturing facilities include Insulation Shop, including a 2,000-ton hydraulic press, Winding Shop consisting of ten winding machines, a 150-ton hydraulic press and horizontal autoclaves, Core Shop, Mechanical Shop, Assembly Shop and other modern facilities including material handling etc.
The project suffered from its very initial days of conception at the hands of the vested interest of the multinationals and their lobbyists in our own country that never wanted Pakistan to be self-reliant in the electrical capital goods required for power sub-sector. Power transformer, an essential part of today's world economy, forms a vital link in the power transmission and distribution systems, but very few countries in the world have the capability to manufacture this kind of equipment because of high capital cost, complexities of technology transfer and costly value-added inputs.
For this reason, the project, which was planned by the Pakistan Industrial Development Corporation (PIDC) in early 1960s, initially in collaboration with the Western sources, could commence construction in April 1987. It took another ten years to complete, though it was inaugurated earlier by the Prime Minister Benazir Bhutto, on the 16th November 1994.
The Executive Committee of the National Economic Council (ECNEC), while approving this single-product and single-customer mega project on 13th February 1986 had decided that the Water and Power Development Authority (WAPDA) would sign a sale-purchase agreement for power transformers to ensure viability of the project.
Subsequently, the agreement was signed in June 1987 under which WAPDA committed to "procure from HEC at least 85% of their requirements of power transformers or 70% of the HEC designed capacity, whichever is lower", according to an agreed price formula. In spite of the legally binding and valid contract, WAPDA did not place orders on HEC on successful trial-runs of installed machinery in 1994 and onwards, and instead resorted to imports, on the pretext of shortage of local currency funds or on issue of pricing.
Only orders for repair and rehabilitation of damaged power transformers, different makes and sizes, were placed on HEC, which, in fact, the original foreign suppliers were not willing to accept. Thus the Complex carried out successfully the rehabilitation of total 82 Nos. old power transformers of WAPDA and Karachi Electric Supply Corporation Ltd (KESC) until the year ended June 30, 2002.
Having started its commercial operations in 1998, the Complex, however, could secure limited orders, as a result of government intervention, and subsequently undertook manufacturing of 60 Nos. power transformers, in total, of various capacities until June 30,2002. Thus, its production capacity utilisation during that period remained dismally low.
The gross under-utilization of installed capacity, besides other impediments, played havoc with the financial health of the Company that was already cash-starved, as it was not provided with any working capital by the government. Resultantly, the Company had to borrow money from commercial banks to sustain its operations, but it was unable to bear the burden of debt servicing of the loans. Likewise, the Company failed to repay the Chinese and Swiss credits utilised for purchase of plant machinery.
The management was, therefore, unable to pursue its diversification of products that was eventually aimed at executing grid station/sub-station projects on turnkey basis.
The situation today is very salutary and the Company has registered profits, for the first time. During the year 2005-06 the company registered net sales of Rs 588 million, having earned operating profit of Rs 24.26 million and net profit of Rs 5.71 million.
As a result of concerted marketing efforts in recent years, duly supported by the Economic Co-ordination Committee (ECC) of the Cabinet, the Company has now significant orders in hand for manufacturing and supply of power transformers. These purchase contracts placed by the WAPDA/NTDC and the KESC, value Rs 757 million, whereas other major orders are in the pipeline.
In addition, these power transmission companies have placed orders on HEC for the repair and rehabilitation of old power transformers worth Rs 52 million. The management is currently engaged in execution of these orders.
The government has done financial restructuring to a great extent since it has recently picked up major portion of commercial bank loans and foreign currency loans, total amounting to Rs 620 million approximately. Financial position is healthy these days and the Company has recently serviced commercial bank loan of Rs 70 million through its own resources. The government, however, has decided to write back the balance loans too, which amount to over one billion rupees after adjustment of brought forward losses of Rs 377 million.
The overheads are minimal. There are 380 employees at present, but except some fifty engineers, supervisors and other executives on permanent role, all others are recruited on contract or on labour-contract basis. Resultantly, there exists no workers' union.
The PC has decided to share equally with the new buyer the cost of Golden Handshake Scheme (GHS) and Voluntary Separation Scheme (VSS) to be offered to its employees of all categories. There is no housing colony and no major welfare scheme either. The factory is located in a front-line industrial estate, in the NWFP, with all requisite infrastructure facilities.
The present status makes the Complex very attractive and financially viable for inviting overseas investment and domestic capital market mobilisation. But the challenge lies ahead for the private sector investor to maintain market leadership thereby meeting future demand of higher voltage power transformers and cater to increased operational level accordingly.
The future market prospects are promising, as demand is growing fast. WAPDA's Sixth Power Project envisages installation of power transformers of cumulative capacity of over 18,000 MVA during the next five years. This means there would be a demand of about 580 transformer units valuing Rs 14 billion at current market price.
To connect new electricity generation capacity to the transmission grid a number of 500 kV and 220 kV transmission lines are planned to construct either by WAPDA or the new Independent Power Producers (IPPs) as per the Power Policy in vogue. Export markets can also be explored as many electricity transmission projects are coming up in Afghanistan and Central Asian Republics. It is, therefore, imperative for HEC to widen its product range by going for manufacturing of higher capacity (160 MVA, 200 MVA) and higher voltage (500/220 kV, 220/132 kV) power transformers also.
This, nonetheless, will require plant modernisation, technological improvement including acquisition and assimilation of technology, and augmenting the in-house testing facilities. With creation of some additional manufacturing facilities, production programme can also be widened, simultaneously, to cover other grid station equipment, such as circuit breakers, disconnectors, isolators, current transformers, instrument transformers, lightening arrestors and power factor improvement panels.
At this juncture, however, the PC may not lose the sight of fact that an earlier attempt to privatise the Complex did not yield results, and it should, in all earnestness, learn from that experience. Realising the need of adopting a different methodology to divest heavy engineering units, instead of direct sell-off, it was decided some time back to explore possibilities to establish a joint venture with world-renowned companies already active in similar field.
The spadework to identify such companies and to invite them to agree to invest in HEC, both as equity and technology partner, was entrusted to State Engineering Corporation, the holding corporation of HEC. Concerted efforts were made in this direction, and logically, first a proposal was made to the Chinese partners, in the last quarter of 1995, to convert their loan into equity participation and thus taking over the management.
The proposal was discussed at the government level also, and subsequently at the Pak-China Joint Economic Commission meetings held at Beijing and Islamabad. Though the initial response of the Chinese was encouraging, there could be no further headway.
Then, the major global key players in the field were contacted, and, fortunately, three giants namely Siemens, ABB and Skoda showed their willingness to form proposed joint venture with the HEC, in a bid to finally acquire HEC through privatisation.
Respective top-level teams from Europe, including Chairman/Chief Executive of Skoda, visited Pakistan in late 1996/early 1997, to conduct due diligence, and subsequently all the three Groups asked the PC to pre-qualify them to present their proposals. But, when PC invited proposals only Skoda made a financial offer, which was not accepted being single offer.
It transpired later that someone at the PC had put a spanner in the whole process by asking Siemens, ABB and Skoda to submit additional documents, which were required duly translated in English and duly attested by the Pakistan Embassy.
The documents demanded included certificate of company incorporation, financial credibility, bio-data of Board Directors, and alike. Naturally, the two companies namely Siemens and ABB, taking offence to the demand, withdrew themselves from making a financial offer. We thus lost an excellent opportunity to corporatize the HEC years ago.
Efforts can be made by the PC to revive interest of these Groups once again, along with other pre-qualified investors. It is thus important that strong base created for the development of high voltage electrical equipment was not eroded and remains operational. The PC should ensure that prospective/pre-qualified investors have background of manufacturing similar products and a visible commitment to further develop these capabilities indigenously.
(The writer is former Chairman of the Heavy Electrical Complex)