December 24, 2001	Monday	Shawwal 8, 1422

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ISLAMABAD, Dec 23: The government has decided to convert Rs80 billion debt of Karachi Electric Supply Corporation into the federal government equity.

This is part of financial restructuring of KESC “that is to be done mainly by carrying out a debt for equity swap of Rs70-80 billion” and would allow the federal government to own 99 per cent of KESC shares.

The federal cabinet would give its formal approval later this week, a senior official of the privatization ministry told Dawn. The summary on the subject has already been approved by the board of the Privatization Commission, the official said.

Once the government becomes 99 per cent owner of the KESC, it will offer 74 per cent shares for privatization. And when this process is completed and the KESC is turned around, the government would sell its remaining 25 per cent stake through a public offering.

According to the summary, this equity swap would be followed by a petition to the Sindh High Court to write down capital by about Rs50 billion to eliminate the negative equity of KESC. This would enable the utility to issue dividends once it becomes profitable.

As much as Rs40 billion worth of debt guaranteed by the federal government would be converted into the government bonds immediately. The further swap of remaining debt would be completed at the time of privatization. In the meantime, budgetary allocation would be made in the next year’s budget (2002-03) to support this swap.

A transitional regulatory framework for KESC would also be approved that involved “inter alia, multi-year formalae for tariffs, cost pass through rules for certain items and progressive reduction in cross-subsidies” to address bona fide investor concerns on risk.

“This framework would be congruent with the National Electric Power Regulatory Authority (Nepra) policies and would be subjected to regulation by Nepra going forward. Moreover, it could serve as a template for future privatization,” said the summary.

The Monopolies and Restrictive Trade Practices (Control and Prevention) Ordinance would also be amended to ensure that KESC that will remain a monopoly regulated by Nepra, is not confronting the law.

The plan calls for the government assurances in areas like “resolution of disputed accounts with the federal and state governments and commitment to timely settlement going forward”. This would include the assurance for the ability of the new buyer to disconnect those who fail to pay their bills and “for the GOP guarantees on the payment of bills by institutions where safety or security concerns may preclude disconnection”.

A guarantee would also be provided for smooth and managed transition from the army-led management to the new management over a period of around three years during which the police and the armed forces personnel would remain attached with the utility.

The summary said that these measures were necessary because the quality of service and tariff levels were constraining economic growth in Karachi and causing hardships to households and business.

“The KESC finances are rapidly deteriorating, with monthly losses averaging about Rs1.2 billion. These are projected to double in five to six years. The KESC had a negative equity of Rs37 billion in June 2001, which is projected to increase to Rs52 billion by June 2002. Its debt over this period is projected to grow from Rs79 billion to Rs92 billion. Virtually all the debt is provided or guaranteed by the GOP and there is little prospect of repayment,” said the summary presenting a gloomy picture of the power utility.

The summary spoke of tremendous under-investment in operations particularly generation and distribution. Partly, as a result, energy losses are very high. “Officially, these (losses) stand at 36.7 per cent but are possibly higher. KESC also suffers from a number of organizational and human resource problems that will make any turnaround uncertain and gradual,” said the summary.

The summary said if the regional uncertainties were sufficiently reduced, marketing efforts would begin in February 2002 and a short-list of qualified investors could be available for bidding by June, selection of bidder by July, finalizing negotiations and documentation in August and transaction close by September 2002.

The summary said that the transaction would be structured in a fashion that new investor would guarantee to fund required investment for the first few years.