April 12, 2008	Saturday	Rabi-us-Sani 5, 1429

ISLAMABAD, April 11: The Auditor General of Pakistan has found irregularities in the privatisation of the Karachi Electric Supply Company (KESC), including its valuation.

In its report, which has been forwarded to the Public Accounts Committee of the National Assembly, the audit department said the valuation of KESC was performed by the financial adviser of the Privatisation Commission (PC) – Price waterhouse Coopers (PwC) – and not by an independent body.

As per Section 24 of the PC Ordinance, 2000, the valuation of the KESC had to be done by an independent valuator, which could have provided the vendor (PC) with a means of checking reasonableness of offers and also helped it in subsequent negotiations with the bidders.

The financial advisers, the audit said, were entitled to receive completion fee (success fee).

In order to get the success fee, the advisers often went for conservative valuation so as to attract buyers.

The report said the Asian Development Bank (ADB) had appointed the financial adviser (PwC) for the valuation of the KESC and despite an objection by the government the firm was not withdrawn from the valuation process.

Despite the reservations of the PC, the retainer fee of the PwC amounting to Rs123.72 million was not adjusted in the success fee of Rs309.6 million in contravention of the rules of financial propriety and amounted to double payment for the same task.

The report said the amount of sales proceeds of KESC (Rs15.85 billion) had not been used by the government for the purpose of debt reduction and poverty alleviation as per the requirement of Section 16 of the PC Ordinance. Instead, Rs13.698 billion was invested in the KESC under the Financial Improvement Plan (FIP) which continued even after the privatisation of the company.

The Rs100 million confiscated from Kanooz Al-Watan for backing out of the bidding process was not remitted to the government and was held by the PC in its own interest bearing account.

Similarly, Rs6 billion received from the Consortium of Hasan Associates as first instalment of sale proceeds of KESC was not remitted to the government and instead held by the PC.

The case of KESC was not placed before the Council of Common Interests for consideration before the final privatisation.

The KESC was not an overstaffed entity, but still the rights of the employees were not properly safeguarded in case of restructuring and no rehabilitation programme was devised as per the PC rules.

The report said the performance of the KESC had deteriorated since 1986 with its annual losses reaching Rs17.8 billion in 2001-02. The losses were met by the government.

The bidding for the company was held in Feb 4, 2005, and the letter was issued to M/s Hasan Associates (Pvt) Ltd on Nov 19, 2005.

It said the KESC was becoming a burden on the national economy, but most of its losses were due to transmission and distribution, which were controlled through managerial reforms.

But the government made huge financial reforms in the shape of equity swap of Rs108 billion and capital reduction of Rs57 billion, besides the FIP.

The entity was sold at Rs15.589 billion while in actual the government paid more than Rs15 billion back to the new management in the shape of large number of concessions which included the Financial Improvement Plan (FIP) of Rs13.698 billion, indemnifying the claims of the KESC in, post-privatisation period of almost Rs1 billion, besides giving the new management cash of Rs2.445 billion, lying at KESC at the time of privatisation.

It said the KESC was not merely a business but a vital entity with lives of millions of consumers dependent on it.

The government’s aim of getting rid of the entity was not appreciable.

The real objective of privatisation should have been to ensure better health and performance of the company, which was a strategic value also.