Govt finalises advisers for selling off IESCO, LESCO, FESCO

The federal government has finalised appointments of financial advisers to divest three major distribution companies IESCO, LESCO and FESCO, Pakistan Today has learnt.

The government has appointed a United Kingdom-based Renoir Consulting offers to turn around three electricity supply companies in return for a 20 per cent share in profit, the board of Privatisation Commission (PC) has approved appointment of a consortium as financial advisers to privatise Lahore and Islamabad power distribution companies.

A source in the Privatisation Commission said the government had decided to finalise the privatization of Islamabad Electric Supply Company (IESCO), Lahore Electric Supply Company (LESCO) and Faisalabad Electric Supply Company (FESCO) in the next fiscal year 2015-16.

Unfortunately, high losses and low recoveries of the entire system has inched up the circular debt figure to Rs 270 billion despite RFO prices remaining low (falling 30 per cent FYTD). This leaves a large sum of borrowing that needs to be financed.

According to sources, around Rs 360 billion of power sector public debt parked in power holdings and Rs 6 billion need to be paid quarterly to banks, which is effective annual rate of 6.7 per cent.

The country is mainly surviving on hydel plants and IPPS and the output of power plants operating in the public sector is even less than 25 per cent, either the plants need major overhaul or don’t have the funds to pay the cost of fuel.

Since assuming power, the PML-N government has paid nearly Rs 750 billion to clear the circular debt and also raised tariff to improve cash flow of distribution companies. But, factually the size of circular debt still hovers above Rs 250 billion and outages range from 8 to 16 hours per day.

Industry experts say while the government has been dishing out money to the favourite IPPs, it has completely failed in containing theft and recovering overdue amounts. With regular intervals, the PML-N government keeps on announcing new projects and new deadlines for ending load shedding. However, experts are of the consensus that if the government continues to pay money without removing the root causes of the crisis the problem will never be resolved even if double the amounts are paid.

The PML-N government has announced yet another plan, which at the best can be termed fleecing the consumers who still bother to pay their bills. Recent developments in the power sector, such as tariff rationalisation with the imposition (post legal challenge) of equalization surcharges, raising the weighted average consumer tariff by 15 per cent to Rs 14.8/KwH and finalisation of planned privatization of three DISCOs, IESCO, FESCO and LESCO which collectively contribute 47 per cent YoY to PEPCO systems, said an analyst at AKD brokerage house.

Taken at face value, these measures are expected to allow the government to raise Rs 181 billion (with total units sold for the period at 95.14TwH) and fit it into government’s aim of curtailing tariff differential subsidies by 47 per cent to Rs 118 billion.

A number of policy questions and possible implications of these actions are yet to be ascertained but the track record of the government with regards to privatization of electric utilities raises many questions about the outcome of announced measures and level of success to be achieved.

Thus the need to levy debt service surcharge, which on top of additional surcharges, raises the weighted average consumer tariff by 15 per cent to Rs 14.8/KwH. This means that the government will be further penalising the consumers rather than spending the amounts allocated under PSDP, the analyst said.

The line losses for the LESCO/FESCO/IESCO for FY14 and quoted at 13.4 per cent, 11.3 per cent, 9.5 per cent are much lower than the actual losses. The revelation of actual losses and poor recovery will play an important role in the ultimate sale of these entities, the analyst said.

Apart from this, a number of policy questions arise from these developments, that include – whether adequate monitoring and regulatory infrastructure has been created to oversee performance of privatized entities, – what impact will an increased cost of electricity have on industry if the cost of producing electricity is passed on to customers, when can the tariff setting process be completely rationalised.