ISLAMABAD, Feb 26: The federal cabinet takes up here on Wednesday the financial crisis in the two power utilities, including the financial restructuring of the KESC through a debt for equity sway of Rs70-80 billion.

“The financial restructuring is needed to reduce KESC’s excessive debt burden. This is to be done mainly by carrying out a debt for equity swap of Rs70-80 billion, thereby, eliminating KESC’s debt and allowing GoP to own 99 per cent of KESC shares,” said an official summary. The new buyer of the utility would be required to invest around $400 million to improve the KESC system.

A lingering dispute between Wapda and National Electric Power Regulatory Authority (Nepra) over power tariff increase would also come under discussion that according to Wapda has created severe cash flow problems.

Privatisation Minister Altaf M. Saleem and Wapda Chairman Lt-Gen Zulfiqar Ali Khan would brief the cabinet about the restructuring of the KESC and financial difficulties of Wapda, respectively.

Once the GoP becomes 99 per cent owner of the KESC, it will offer 74 per cent shares for privatisation. And when this process is completed and the KESC is turned around, the GoP will 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 the 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 GoP bonds immediately. The further swap of remaining debt would be completed at the time of privatisation. In the meantime, budgetary allocation would be made in the next year budget (2002-03) to support this swap.

A transitional regulatory framework for the KESC would also be approved that involved “inter alia, multi-year formulae 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 Nepra policies and be subject to regulation by Nepra going forward. Moreover, it could serve as a template for future privatizations,” said the summary.

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

The plan calls for GoP assurances in areas like “resolution of disputed accounts with 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 power to those who fail to pay their bills and “for 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 army management to new management over a period of around three years during which the police and armed forces personnel would remain attached with the utility.

The summary said 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.

“KESC finances are rapidly deteriorating, with monthly losses averaging about Rs1.2 billion. These are projected to double in 5-6 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 glooming picture of the KESC that provides energy to country’s industrial capital Karachi.

The summary pointed to tremendous under-investment in operations, particularly in 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.

The KESC also suffers from a number of organisational and human resource problems that will make any turnaround uncertain and gradual,” said the summary.

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

The summary said the transaction would be structured in a fashion that new investor will guarantee to fund required investment of around $400 million for the first few years.