ISLAMABAD: The government’s ministerial committee has recommended that power Distribution Companies (Discos) will be sold to the private sector as transferring them to provinces would merely shift the problem from one government to another, and the federal government, in all likelihood, would continue to bear the financial burden, even if there is marginal improvement in enforcement, sources close to Petroleum Minister told Business Recorder.
The Committee, headed by the former Deputy Chairman Planning, Muhammad Jehanzeb and comprising Minister for Petroleum Musadik Malik, Secretary Power Rashid Mahmood Langrial (now Chairman FBR), Secretary Privatization Division and Rana Ihsan Afzal, Coordinator to the Prime Minister discussed all the pros and cons of Discos’ privatization and long-term concession and provincialisation.
The following aspects were discussed by the Committee:
(i) Caretaker Cabinet’s decision was high-level. More technical, legal and commercial due diligence is necessary to work out appropriate solutions for each Disco.
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The regulatory, electricity market structure and revenue streams should be compatible with private sector participation in Discos.
Analytical work on the tariff regime and its impact on consumers is also a prerequisite to successful private sector participation;
(ii) two key issues faced by the power sector are theft of electricity and losses, including technical losses;
(iii) all provinces have divergent views on the provincialisation of Discos.
The proposals from the provinces lack clarity and ownership of liabilities on their part;
(iv) the experience gained in privatisation of Karachi Electric Supply Corporation (KESC), (now K-Electric) is of mixed nature.
Various studies undertaken on KE model were considered by the Committee. KE still relies on the federal government for subsidies and other matters, it was noted;
(v) there is requirement of detailed working/ benchmarks for determination or preference as to whether a specific Disco may be considered for any one of the two options.
The aim should be to determine the best option from amongst multiple options; i.e., provincialisation, privatisation and long-term concessions;
(vi) international best practice and experience should be adopted for each Disco;
(vii) long-term concessions entail private investment in the Discos as per agreement.
The benefits from additional recoveries be shared between the Disco and private party(ies);
(viii) investment by the private party may; however, raise additional revenue requirement which would have an impact on consumer tariff;
(ix) regulatory approvals would be required for investments, as per agreement, to be made by the private party. Power sector has a sound mechanism to check expenditure to be incurred by the private party. Implications of the investments upon the consumer tariff through multi-year tariff, distribution margin (DM), and heavily regulated regime are important considerations;
(x) losses are not uniform in all Discos.
The tariff is uniform; however. More losses may require further investments;
(xi) maintenance of uniform tariff across country will require a standard tariff regime.
This would be a challenge, given that some Discos are reliant on cross subsidy being loss making;
(xii) all the better performing Discos are in Punjab. Major fuels/resources for generating electricity are in the other provinces. Extensive political consultations are required to forge consensus across provinces to modify the current arrangement;
(xiii) concession is being proposed for 20 years.
A shorter concession, say 5-years, can also be explored to keep the option of privatization open;
(xiv) privatization of Discos remained stalled in the past.
Alternate modes have; hence, been discussed at multiple forums, more recently at SIFC. Long-term concession for two Discos has been approved by the Federal Cabinet on February 07, 2024; (xv) long-term concession, it appears, is being opted on the premise that privatisation is not possible. All the Discos are in negative equity.
Private investors may thus not be interested to purchase Discos with assets. The process of privatisation involves comparatively longer time frame than long-term concession; (xvi) only distribution business be given to private sector through concessions. Assets will remain ownership of the government.
Distribution margin allowed to Discos by the Regulator is much lesser than the losses in Discos; (xvii) Discos are in loss with low level efficiency. Private sector participation through long-term concession in these Discos can upscale administrative, commercial, financial and operational efficiencies; (xviii) the actual technical loss in Discos are 4% to 5% lower than allowed by the regulator.
Consumers; hence, bear additional burden of Rs. 400 to 500 billion. Technical loss is one of the contributory factors in determination of tariff. Cushion also exists due to technical allowance by Regulator being more than actual.
Increase in tariff by even Rs1; therefore, should not impact the consumer/ tariff regime thus; (xix) there is no surety that poor performing Discos could be taken over by private investors through long-term concessions. Better performing Discos must, nevertheless, be considered for privatisation; (xx) poor performing Discos are candidates for long-term concession.
Good performing Discos are fit for outright sale; (xxi) improvement in technical losses will require heavy investment from the private party; (xxii) there are barriers in immediate privatisation as considerable quantum of loans have been taken from private banks on Discos’ assets.
This; however, is not a barrier in case of long-term concession; (xxiii) long-term concession is also one of the most feasible options for Pakistan as per its success factors at international level; (xxiv) due to management inefficiencies in Discos, huge losses are being posted on yearly basis.
The liabilities in some Discos are more than the value of assets; (xxv) huge losses, amounting to billions of rupees, are being added every year to the circular debt due to low recoveries, theft and management inefficiency; (xxvi) even one percent increase or decrease in loss or recovery in LESCO translates into much more financial quantum than any poor performing Disco; (xxvii) empowered Boards are imperative for well-functioning Discos. Conflict of interests may exist in Boards.
This can be resolved through nomination of professionals on Boards; (xxviii) Discos’ ability to tap financing from private banks is limited due to reputation issues. Private investor; however, access borrowing to improve the viability of the company; (xxix) financial position of the Discos would improve in long-term concession. Private investment will bring efficiency in performance of Discos in the initial years. The investment would be recouped in the next l0 to 15 years.
After improvement, government could resort to outright sale of Discos. Investors are not likely to show interest, especially in poor performing Discos. With this approach, the better performing Discos, like GEPCO, IESCO and FESCO with comparatively lower losses, can be considered for privatization; (xxx) GEPCO would not be a fit candidate for long-term concession, if improvement must precede privatisation.
Federal Cabinet’s decision, to the extent of GEPCO, would have to be reviewed; (xxxi) the balance sheet of the Discos would have to be cleared liabilities to make them fit for privatisation. The financial feasibility of shifting these liabilities to GoP is yet to be determined; (xxxii) Safeguards should be placed so that government could act in case the private party does not perform. There have been consistent instances of non-performance in case of KE.
Future transactions must learn from the experience; (xxxiii) long-term concession agreement can contain clauses for early closure under specific circumstances. If the private party performs well, and the position of the Disco gets better, the case for privatization would be strong. Enabling clauses can be added in the agreement to proceed with privatisation in such eventuality.
The agreement should provide for remedial action; in case the private party fails to perform; (xxxiv) private party is required to make huge investment in privatisation. Long-term concession requires lesser investment, comparatively.
It is more doable, hence; (xxxv) private sector participation through sale of shares is also possible.
Private party can be given right of management, through special share rights, even when the shareholding is less than 50%; (xxxvi) available data suggests that IESCO, GEPCO and FESCO could be considered for privatisation. After further due diligence, both MEPCO and LESCO, would be fit for privatization.
The other Discos are more suitable for long-term concession or any other option; (xxxvii) TESCO and QESCO confront serious administrative challenges and are being run with huge financial support of the government.
These Discos should, thus, continue in public sector for the time being. Efforts should be made to improve their functioning. After major improvement, they can be considered for long-term concession or privatization; (xxxviii) all Discos are on privatization list. Criteria for either long-term concession or privatisation must be devised. Those considered fit for concession would have to be delisted from the privatisation list; (xxxix) there are certain empirical and other benchmarks/ enabling factors based on which these Discos can be bifurcated for privatisation or Concession Model. Besides losses and recovery, the following benchmarks were discussed at length: (a) cost recovery ratio exceeds 70%, and system losses are below 15%; (b) electrification rates exceed 80% and revenue collection ratio exceeds 90% and is enforced through disconnections and anti-theft initiatives; (c) tangible quality of data collection, monitoring and reporting; (d) independent best procedures, regulating tariff adjustments within regulatory methodology and removal of major bottlenecks in transmission, grid or supply of fuel for generation; (e) balance sheets of the Discos may also be considered as any privatisation will require a clean-up of balance sheets.
The Committee was of the view that consistent engagement with the Regulator would be required for appropriate action on all prior actions and policy/ regulatory framework, if the long-term concession and privatisation route is followed, adding that dividing the Discos into smaller entities, under the circumstances, is not an immediately doable option. It would only delay the urgently required action.
The Committee stated that completion of prior actions, including those of technical nature, is required well before the appointment of the Transaction Advisor. If not completed in time, unnecessary expenses on Transaction Advisor would be borne by government.
The Committee further contended that the SIFC, Apex Committee, and subsequently federal cabinet, have already approved long-term concession for HESCO and GEPCO. The decision would have to be reviewed to the extent of GEPCO.
Power Division, in collaboration with stakeholders, should be tasked to immediately commence work on the legal, regulatory, electricity market structure and revenue streams requirements for private sector participation in Discos. Analytical work on the tariff regime and its impact on consumers is also a prerequisite for sustained and reliable provision of electricity to the consumers.
Copyright Business Recorder, 2025
