The special audit report on KESC’s privatization reveals that the Government of Pakistan has failed to achieve its objectives of reduction in transmission and distribution losses and attracting an investor to enhance the generating capacity of KESC.
The Chapter 4 of the special audit report “Was The Privatization Objective of KESC Achieved?’ points out that the government of Pakistan failed to achieve the objectives of privatization of KESC. “There was no significant improvement in Transmission and Distribution Losses of ECESC. KESC was unable to establish thermal units with a capacity of 1,000 Mega Watt (MW) despite an understanding provided under Clause XI of Implementation Agreement (IA).
There was no significant improvement in the management of KESC. A utility operator was never a part of the winning consortium. Even Siemens Pakistan left the consortium due to conflicts,” the report says.
It adds that financial position of KESC remained weak as it accumulated losses of Rs66,350 million for the year that ended 30 June, 2009. “Karachi, during the year 2007-08 observed worst situation in terms of power shortages and load shedding. Financial Improvement Plan (FIP) could not be carried out although the GOP provided Rs10.1 billion for the purpose,” according to the report.
The report says that there is no comprehensive Privatization Policy document of the Government of Pakistan. “In violation of the PC Ordinance, 2000, Privatization Commission has not prepared any Privatization Policy document for the consideration and approval of the Cabinet. Further PC does not have any guidelines for the preparation of the privatization list which would make a case for an entity to end up on the privatization list,” the report says.
In the Chapter 2 ‘Was The Privatization Process Well Managed?’ of the report, audit officials have pointed out that although the privatization of KESC was done on the basis of internationally accepted procedures, there were instances where transparency and efficiency of the transaction process was compromised.
Sharing details of such instances, the report says that audit could not verify crucial aspects of the privatization process due to scope limitation as the following records were not provided for audit review: A) Due diligence report of Price Waterhouse Coppers (PWC), a thorough examination of the enterprise in all its aspects in terms of financial, legal, technical and human resources. B) Stage III and IV report of PWC which was an agreed milestone which contained the information including financial modeling/information memorandum, valuation analysis/deal structure/marketing/bid process, negotiation & financial closure/proceeds respectively C) Statement of Qualifications (SoQs) of two out of four bidders and the revised Hassan Associates Consortium SoQs were not available. These documents formed the basis for evaluating bidders’ qualification. D) Calculations in support of KESC’s assessed reference price valuation.
According to the report Siemens Pakistan was taken on board as a strategic partner and utility operator even though it had no such prior experience. According to the report the contract assigned to Hassan Associate Consortium had numerous concessions in it to include all or most of the previously approved members. Members of the consortium did not carry out their part of the Financial Improvement Plan and failed to improve the service delivery of KESC or reduce transmission and distribution losses.
In the Chapter 3 “Was The Best Price Achieved?’, the audit officials say that the assets were sold as a going concern and were valued at discounted cash flow adjusted with the price of surplus properties and ability of the firm to raise liabilities. “Net sale proceeds of Rs 83 million were realized from the privatization of KESC, against sale proceeds of Rs 15,859 million for a 73% stake in KESC” the report points out.
In the end, the audit officials have given following recommendation to Privatization Commission: A) Privatisation Commission (PC) may develop a comprehensive policy document for privatization in consultation with all stakeholders which should be widely disseminated. B) PC should have an effective Communication Strategy to keep the public informed about its activities. C) Selection of Financial Advisors should be exclusively done by PC. D) PC should have a policy of securing and storing important documents like Due Diligence Reports etc. if these reports are lost these should be investigated E) Timing and price of sale is important, however these should not be done at the cost of compromising the objectives of the transaction.
For example consortiums should not be selected without a utility operator. F) Confidentiality of sensitive information such as reference price, which is classified as secret, should be ensured so that transparency of privatization process is not compromised.
