KARACHI, Oct 11: The International Finance Corporation (IFC), the private sector lending arm of the World Bank, is expected to participate in the financing of the Karachi Electric Supply Corporation after its privatization.
Reports emerging from Islamabad suggest that IFC has indicated to participate in the financing of the KESC, if the successful bidder agrees on the terms. The IFC's involvement in KESC may be warranted because the successful bidder would have to commit an injection of $150 million (about Rs9 billion at the current exchange value) immediately after offering the bid for acquisition of about 74 per cent shares of the company in the first week of the December.
The Privatization Commission is organizing dis-investment of the KESC on December 6 after holding a pre-bidding meeting with three big groups of the investors this week in Islamabad. Each of the three prospective investors are reported to have carried out due-diligence and are expected to participate in the bidding on December 6.
Overall, the financial model prepared for the KESC privatization indicates a total additional investment of $350 million to $550 million (from Rs21 billion to Rs38 billion) over next three years.
The successful investor is, however, expected to be given an opportunity to make his own estimate of investment requirements and submit an investment plan to the Privatization Commission.
Well placed sources closed to the Privatization Commission quote the detailed memorandum prepared by the foreign consultant Price Waters Coopers two years ago for the privatization of the KESC.
According to this document, the immediate injection of $150 million will be in the form of a convertible subordinated shareholders loan. In 2002, the proposal was to give an interest rate of 8 per cent above yield of 6-month Treasury Bill subject to upper limit of 20 per cent and lower limit of 15 per cent. Based on interest rates as on June 30, 2002, the interest rate payable on the loan was 15 per cent.
The subordinated loan will become convertible into KESC ordinary shares at a price based on a multiple of audited earnings per share, as and when KESC starts reporting profits after interest and taxation in three consecutive years.
In the event that this subordinated loan is not converted into shares, it shall become repayable ten years after financial close out of surplus cash flow after meeting any payment obligations to existing and future senior lenders to the KESC.
Accoprding to the plan, the government intends to retain 25 per cent of the KESC's shareholding to ensure its presence on the board of privatized the KESC. The Asian Development Bank has also expressed intention of acquiring 6 to 7 per cent shares of the KESC. The ADB's international experience in power projects is likely to be utilized in the KESC management.
In last two years, the government has put in over Rs90 billion in the KESC by way of debt-equity swap and the value of shares being offered to the bidders have been brought down to Rs3.50 a share from Rs10 originally.
The KESC is a 90 years old company set up in 1913 which served the citizens when the consumers were in hundreds. Now the total number of customers is well over 1.7 million of which an overwhelming majority are the domestic consumers.
The KESC remained one of the best companies of the countries till the decades of sixties. Things started deteriorating in 70's when the impact of proliferation of irregular residential settlements of the migrants from Punjab and NWFP came.
Finally the merger of KESC with Wapda sounded the death knell and induction of army in 1997 and finally take over of management by army in 1999 did not bring any improvement in the KESC affairs.
The power shortage in Karachi reached about 800 megawatt in June 03 and now ranges between 400 to 450 megawatt. Line losses are over 40 per cent. Of this 12 per cent comes from what is known as kundas through which unrecorded power supply is ensured to large number of kutchi abadis. Also responsible for electric power theft is the neo rich class in their residences and in their industrial and commercial establishments.
The power generation capacity of the KESC is about 1,700 megawat. But hardly 1,100 to 1,150 mw is generated. The government has taken up a Rs13 billion generation and distribution system recently and intend to continue it even after privatization. There is, however, no indication whether this investment would be turned into loan or would be treated as part of the privatization deal.