ELECTRICITY DISTRIBUTION IN THE PRIVATE SECTOR: Prospects and Pitfalls
Nawab, Syed Hassan, Economic Review
The primary objective of privatizing any utility service is to improve its efficiency, so as to result in reliable service to its consumers at affordable prices. The privatization of electric distribution is also being considered with the same expectation.
Privatization of electricity distribution has been under discussion for almost a decade. M/s. Price Waterhouse conducted a study on the privatization of the Karachi Electric Supply Corporation (KESO) in 1991, in which they recommended to privatize the (KESC) as a single unit comprising generation, transmission and distribution functions. The Strategic Plan for the Privatization of WAPDA prepared by M/s. International Resources Group of the USA in 1992, recommended to privatize the distribution area boards of WAPDA by first converting them into corporate entities, and then off-loading them to strategic investors through the sale of their assets and liabilities. The process was to be completed by 1996. In 1995, the GOP appointed M/s. International Financial Corporation (IFC) as the financial advisor for the privatization of the Faisalabad Area Electricity Board, with a mandate to complete the transaction in two years. Subsequently various financial advisors have been appointed for the privatization of KESC. So far not a single transaction has been completed.
While there is complete consensus on the need for privatization, the procedure of privatization has remained subject to debate. Privatization of electricity distribution is absolutely essential to curtail the high distribution losses and pilferages that have plagued this vital industry. There are however significant issues that need to be addressed, before embarking on the process of privatization. This paper attempts at outlining some of those issues, for the purpose of enabling a debate aimed at arriving at workable solutions.
The first issue is the accurate assessment of assets and liabilities of any distribution system. This is necessary to enable the potential private investor to formulate a bid offer. The investor will be able to make an offer by first developing a financial model capable of reasonably forecasting the revenues and profitability of the privatized entity over the period of the distribution license.
The existing distribution assets have been financed largely through various power sector development loans borrowed by the Government of Pakistan from the multilateral development institutions over a period of time. On the books of account, their written down value might be rather low, but in terms of replacement value, they are quite significant. The question is, should these assets be sold on the basis of their book value or replacement value.
Obviously, the book value would be much below their actual value. It would therefore be an unfair transaction to privatize these valuable assets at below their market value. Estimating a reasonably accurate replacement value is in itself quite a difficult and time-consuming exercise. Once a fair value has been assigned to those assets, the liabilities can be accordingly worked out on the basis of their ownership structure. These assets are largely held by the GOP or by public sector financial and investment houses.
The owners of distribution assets enjoy a monopoly over the consumers in their respective distribution areas. The consumers have only one power line connecting their premises with the distribution system. If that connection or system fails, they are left to face a black out, or rely on self-generation during the outage period. Both options are undesirable. Since the responsibility of providing essential utilities to all citizens ultimately falls on the state, these distribution systems must be viewed as strategic assets, rather than purely commercial assets. Their security and maintenance is also ultimately the responsibility of the state.
Since these assets are located far and wide in every street and mohalla, they are at a high risk of arson and damage, both intentionally and unintentionally. …