Economic reforms: Part - XV

By Waqar Masood Khan
March 06, 2018

The disappointment with the fate that PIA’s privatisation plans met pales in comparison to what happened with the plans to privatise the corporatised entities of Wapda.

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As we briefly discussed in the earlier parts of this series, eight distribution companies (Discos), three generation companies (Gencos) and one national transmission and dispatch company (NTDC) were incorporated when the power wing of Wapda was corporatised and jettisoned from the parent body. The eventual objective was to privatise these entities. In the Fund’s programme, the government made this plan a part of the public-sector reforms.

The settlement of the Rs500 billion circular debt (CD) at the outset of the government’s term was done by injecting fresh capital into these entities, thereby significantly improving their balance sheets. This was to form the basis of their preparedness for privatisation. Two entities were shortlisted: one Disco, the Faisalabad Electric Supply Company (Fesco) and one Genco, the Northern Power Generation Company Limited (NGPCL). Financial advisers (FAs) were appointed for the companies to be prepared for transaction. The plan was to be further expanded to include the Lahore, Islamabad and Jamshoro power companies.

The structural problems of the sector (losses, non-collection and tax anomalies) continued unhindered even after the circular debt was settled. Consequently, the debt started rising rapidly. The power sector reforms were jointly developed by the Asian Development Bank and the World Bank. The agenda of reforms was to restore the decaying health of the sector by setting tariffs at the cost recovery level, reducing losses, increasing recoveries, strengthening the institution, improving the regulatory regime and enabling the sector to attract the needed investments. The rising CD was a danger lurking around the reforms process. Accordingly, these institutions pressed for a capping plan to be put in place to stop the CD from rising.

Apart from a number of steps taken to address the accumulation of new arrears in the circular debt, the capping plan envisaged the proceeds of privatisation of the public-sector enterprises (PSEs) to reduce the stock of debt. This made the privatisation of the PSEs imperative for the continued viability of the power sector. Since Pakistan had already included power sector entities in its privatisation programme drawn in July 2013, the only requirement was to diligently implement it.

The delays in the preparation of transaction were inevitable but as long as the work continued, they did not disrupt the programme. Eventually, the preparations advanced to a point that a formal date of August 2015 was given for the completion of the Fesco transaction to the IMF Mission, during the 6th review of the programme, carried out in April-May 2015.

However, as the process advanced, so did the reaction from those who were stealthily building their opposition and using labour unions as a front. The alarm bells sounded everywhere in the organisation to resist the process. When the staff of the financial advisers visited the offices of the PSEs, they were manhandled and had to save themselves by fleeing the scene. They had to abandon their plan to seek information on-site and instead started operating from their offices. The chairman of the privatisation commission was furious, but couldn’t find any sympathetic ears in the Ministry of Water and Power (W&P).

In the 7th review (May 2015), more time was sought to complete the transaction and a new date for the end of June 2016, was set. Meanwhile, transactions for power companies in Lahore, Islamabad, Northern and Jamshoro were also being prepared and included in the plan. Each transaction was to be a strategic sale and necessary expressions of interests were invited and, in some cases, roadshows were also held. Contrary to many predictions, there was considerable interest from both local and foreign investors to participate in the bidding.

In early 2016, just before a meeting of the Cabinet Committee on Energy, the prime minister held an unscheduled, informal meeting with the minister and secretary of W&P. Later, the minister and secretary for finance were also called in. It was there that the W&P officials made the shocking proposal to drop the idea of privatising the power sector companies. The prime minister was reluctant to agree with this advice as it meant going back on a government policy; besides, the plan had also been included in the Fund programme.

To persuade the prime minister, the ministry’s officials argued that the Discos of Faisalabad, Islamabad and Lahore were the best performing companies. If these were privatised, the consumer tariff would go up, adversely affecting the public. It was further stated that labour unions with a strong political backing were also opposing the idea of privatisation. This changed the mind of the prime minister and he agreed that it would not be desirable to proceed with the privatisation process for now. The finance minister sensed that it was too late to seek a reconsideration of the decision. This sealed the fate of the privatisation of power sector companies under the present government.

It was an extraordinary reversal of policy. Everything was known about the privatisation plan and nothing new came to light when the process was rolled back. The commitments to IMF were made by the W&P officials attending the reviews. The concerns regarding the changes in tariff were known and fully built in the multi-year tariff applied by Nepra as part of the bidding process. In fact, the tariffs are likely to go higher with continued government ownership because of increasing losses and low collections. The reaction of the labour unions was also known. If this was a decisive consideration, then the idea should have been dropped at the outset, rather than after precious resources were spent in paying the FAs, holding roadshows and incurring other costs while the transactions were being prepared.

In order to put a brave face before the Fund Mission, we claimed that the method of privatisation has changed, and that the government would now carry out divestment through the stock exchange in small tranches of between five percent and 10 percent shares. The Fund programme will also come to a close without any progress, even under this changed stance. The CD (reportedly at Rs540 billion) is rising and putting in peril the functioning of the power sector, besides posing a danger for the fiscal finances. There is no plan at hand to deal with this dangerous situation.

To be continued

The writer is a former finance secretary. Email: waqarmkngmail.com

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