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Can it hhelp in privatization of a crises-laden utility

SHABBIR H. KAZMI
April 22 - 28, 2002

The pressure on the GoP is growing to contain losses being posted by state owned enterprises (SoEs). Historically the efforts to contain losses and improve their financial conditions have not yielded any satisfactory results. The worst example being the Karachi Electric Supply Corporation (KESC). Therefore, as an alternative, the philosophy of privatization of SoEs is actively pursued by the present economic managers.

The sale of strategic stake and transfer of management control of KESC has been on the cards since 1997. To attract the interest of strategic investors, numerous financial restructurings have been introduced over the years, but all in vain. Yet another attempt is being made, through debt equity swap, to make this crises-laden utility a salable entity. However, sector analysts say, "This may be one of the rare challenges for KESC's Financial Advisors to find a buyer willing to takeover an ailing utility having a paid-up capital to over Rs 88 billion, being increased from current level of about Rs 4.8 billion."

The sector analysts believe, "Despite the various financial restructurings over the years, KESC's condition has gone from bad to worse. Its accumulated losses have continued to grow year after year. Even the induction of Army, to improve financial health of KESC, has not been very successful  though, the Army was able to recover billions of rupees. In the absence of an adequate cashflow, debt and debt servicing has become unsustainable. Therefore, the present debt equity swap is aimed at bringing the debt and debt servicing to a manageable level.

Energy sector experts say, "The KESC did not need any financial restructuring, had the efforts were made to: 1) improve operational efficiency of thermal plants, 2) control T&D losses, 3) curb electricity pilferage and remove management inefficiencies." An electric utility where over one fourth of its product is pilfered cannot remain a economically viable entity. On top of this, because of fast depleting power generation capacity and transmission and distribution network causing interruptions and surges in supply, the number of industrial consumers is on a constant decline."

Some sector analysts even go to extent of saying, "KESC is selling electricity below the cost, at the best it is able to recover fuel cost. This may look a little exaggeration but it is a fact. The evidence is that the amount billed is less than the total sum spent on self generation (including depreciation and financial charges) and electricity purchased. On top of this, the delay in receipt of billed amount and about 25 per cent remaining uncollectable, financial charges have sky rocketed.

The ground was almost ready for sale of KESC. However, nuclear tests conducted in May 1998 and subsequent economic sanctions on Pakistan, did not allow the GoP to even think about privatization of KESC. In the mean time TFCs were floated, part of debt was converted into equity and what not but no sign of improvement. Accumulated losses have not only eroded equity completely but also touched new heights.

With the commencement of efforts to privatize KESC, another financial rescue package is on the cards. As a result, paid-up capital will be increased from Rs 4.8 billion to Rs 88 billion. KESC has called an Extraordinary General Meeting (EGM) of shareholders on May 19 to seek the approval from shareholders of the proposed increase. A question arises, what there any need to go for this ritual?

According to some analysts, "About 98 per cent of total outstanding shares are held by the GoP, directly or indirectly. Once the decision has been made at the highest level, it cannot be turned down by minority shareholders. Even at the EGM any resistance by minority shareholders is not expected."

Going further these analysts say, "Financial restructuring plan is least important. It will be the terms and conditions for the sale of strategic stake and transfer of management which matter the most. We believe, only a small percentage of total equity will be sold at cash and the rest will be recoverable on 'pay as you earn' philosophy. It means, at the best, 10 per cent shares will be old to the strategic buyer in cash and management control will also be transferred. Since bulk of the debt will be converted into equity, the saving in financial cost will be used by the buyer to acquire a total of 51 per cent shares over the next ten years. During this period, depending on the appetite of equities market and dividend paying ability of the utility, the GoP will also divest its holding."

As such the GoP has two options, either to write off the debt and forget about it completely or convert the debt into equity and recover this amount over a longer period. It is a bet where probability of winning is very small. Is the GoP hoping against the hope or KESC' financial advisor can make a miracle happen?