KARACHI, May 17: The strategic investor for the Karachi Electric Supply Corporation (KESC) is likely to be offered 73 per cent shareholding as the government wants to retain a minimum of 25 per cent shares with a few minor shareholders.

Besides acquisition of about 73 per cent shares of the KESC, the strategic investor will be required to inject 150 million dollars worth of a convertible subordinated shareholder loan in Pakistani rupee amounting to about Rs8.8 billion.

“The subordinated loan will earn an interest rate of 8 per cent above the six month T bills in Pakistan, subject to upper and lower limits of 20 per cent and 15 per cent respectively,” a local investor who recently attended a meeting on KESC privatization quoted from a document that was handed over to all the participants.

Total funding projections in next three years after the privatization is estimated to be in the vicinity of Rs21 billion (about 350 million US dollars) including the 150 million dollars worth of subordinated loan. The investor is, however, expected to make his own assessment of future funding and prepare a financing plan of how it would be done.

Pakistan government intends to retain 25 per cent shares and wants to have representation on the KESC Board in post-privatization period till such time the company starts earning profit. “Pakistan government will not participate in day-to-day management and operations of the KESC after it has been handed over to private investor,” the local investor quoted the Privatisation Minister Dr Hafeez Sheikh as saying.

Well placed sources said that the Asian Development Bank has also indicated to acquire about 8 per cent shareholding of the KESC along with the strategic investor or from the investor. The shareholding would facilitate ADB’s representation on the board. The ADB has been involved in a number of energy related projects in Pakistan and its presence on the privatized KESC board is expected to help the investor.

The International Finance Corporation (IFC) has also indicated to offer financial assistance to the KESC after privatization, subject to the structure and terms of the sale.

The sources said that the Privatisation Minister Dr Abdul Hafeez Sheikh is now engaged in a hectic marketing of the KESC and has held meeting with Asian Development Bank officials and local investors.

The KESC was one of the seven public sector enterprises about which the former Privatization Minister Saleem Altaf has claimed in September last year that 90 per cent work to put them on auction bloc has been completed. In fact privatization bids for the KESC were due in September last year. It was put off for obvious reasons.

A meeting of the Cabinet Committee on Privatization held in November last year soon after the October elections with President General Pervez Musharraf in the chair decided to complete the privatization of the KESC, PSO, NIT, OGDC, PTCL, HBL and Pak Arab Fertiliser in next 12 to 18 months.

Dr Hafeez Sheikh, who is now in Karachi for last couple of days, has hinted at the possibility of coming out with a fresh bidding schedule for the KESC privatisation in next few weeks.

Prospective and potential investors are being given a firm assurance of army deployment at least for one year after the privatization. This deployment will be in accordance with the agreement to be drawn up with the consent of the strategic investor or consortium of investors as the case may be.

Present workforce in the KESC is over 11,000 which include about 1,400 officers and remaining about 10,000 employees. For long there had been a freeze on recruitment and also on the salaries which is reported to have been removed recently. But investors say that this has impacted on the efficiency and skill of the KESC.

The privatization model indicates staff level by 2004 to be over 11,200. The new owners of the KESC would be expected to draw up a redundancy package in 2004 or 2005 to bring down the number of staff to 8,500. An initial assumption of two months basic pay for every serving year for officers capped at 40 months and four months for staff capped at 80 months has been indicated in the lay-off package.

Besides providing tariff protection to the privatized KESC for at least next 10 years, the Pakistan government will ensure that it remains immune of the Monopolies Control Ordinance. A new Competition Act is expected to replace Monopolies Control Ordinance which is expected to keep privatized KESC outside the jurisdiction of the Monopoly Control Authority.

The KESC is a monopoly electric generation and distribution company with a consumer base of 1.7 million in Karachi, parts of Thatta in Sindh hinterland and parts of Lasbela in Balochistan. The KESC is an effective monopoly in the supply of electric to industrial, commercial and agricultural consumers living in 6,000 square km area with a population of over 14 million.

Pakistan army was brought in KESC in May 1999. But unaudited report of 2002 shows that line losses have increased to about 42 per cent. This loss is now being considered a potential area which can generate a lot of revenue. Investment will have to be made to reinforce transmission and distribution systems.

Bulk of the KESC’s debt burden has been eliminated in July last year with a swap of Rs83 billion loan to equity. The KESC management is still going ahead with financial restructuring plans to get rid of losses and deficits.