Can it hhelp in privatization of a
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
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
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
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?