Wednesday, July 13, 2011
How to privatize DISCOs and reduce cost of electricity
The privatization of electricity distribution companies (DISCOs) involves some basic questions. The answers to these questions will lead to an alternative proposal that will be quite innovative, will expedite the process of privatization and start bringing in proceeds immediately.
Some basic questions are:
a) Why does the Government want to privatize DISCOs in the first place?
b) Why should a foreign or local "strategic investor" be sought, and that too for not more than 26%? Some related questions are:
i) What will be the buyer’s interest and objective?
ii) What will be the likely consequences of the take-over by him?
iii) What will be its impact on the electricity users?)
Let us take up the questions one by one and try to find their answers.
The objectives of privatization There are two main reasons why the Government wants to privatize DISCOs. One objective is to make the DISCOs efficient companies so that they can not only meet the electricity needs of the country but also make the required investment on their own. Autonomy to the managers of DISCOs under the present system cannot solve the problems because a bureaucratic set-up cannot be turned into an efficient organization simply by giving it autonomy. Habits and culture of bureaucrats may not change even after they are told that they are now "autonomous" in their working, just as an elephant in the zoo will not walk away as a free animal even after its shackles are removed,.
The second objective of the Government is to get substantial funds through privatization. The Government expects to get tens of billions of rupees with the sale of the shares of DISCOs. Since such a huge amount may not be possible to get from our own businessmen or even through the domestic stock exchanges, the Government believes that it can do it only if some foreign investors offer to buy the DISCOs (even if only a portion).
The consequences of hand-over to a foreigner buyer What will be the consequences if 26 percent shares are sold to foreign strategic buyers and, at the same time, management is handed over to them? Obviously, the strategic investors will be primarily interested in making as much money as they can and in as short a period as possible. It is as simple as that. The interests of the customers will not be their primary concern. As a case in point, the privatization of Karachi Electric Supply Company (KESCO) was a disaster that caused great hardship to customers and highlighted the harm that foreign investors may cause.
Savings not to be passed on to users Foreign buyers will make strenuous efforts to improve operational efficiency. They will not hesitate even in downsizing the present personnel as much as they can to get maximum output per employee. They will also reduce expenses to the barest minimum level.
The improvements, however, will be entirely in their own interest. They will be extremely reluctant to pass on the benefits of efficiency and savings to consumers. The Government will be hardly able to force them to reduce rates and charges in the interest of consumers.
Higher rates for electricity Foreign buyers will do their best to charge as much as possible in order to maximize profit. If a buyer is from a country, which is a big world power, he will not hesitate in using his government’s influence. (What the international investors in independent power projects have been doing indicates what may well happen.) Our Government will not be able to resist the pressures. The increases in electricity rates in recent years provide a good example of the shape of things to come.
No new assets Foreign buyers will not be interested in making any investment that is not recovered with maximum profit. (The present management of KESCO failed to honor its commitments regarding investment.) It takes years to expand infrastructure, such as construction of new transmission lines and replacement of present ones. It will not be in a foreign buyer’s interest to make long-term investments if returns are not to come soon. If he finds that he can no longer make as much money as he did in the beginning, he will look for more profitable opportunities elsewhere in the world. All that he will have to do will be to sell his shares to some interested party or unload them at the domestic stock exchanges. In other words, he will take his money and run.
Little interest The reasons are not hard to find why foreign strategic investors may not be coming forth soon.
a) A proper and comprehensive evaluation of the assets and liabilities of DISCOSs is not available.
b) There are huge liabilities in the form of outstanding dues that DISCOs have been unable to recover from influential defaulters.
c) There are far too many employees to run the operations efficiently and economically.
d) The prospects for profitability are not rosy at present due to high cost of electricity.
The needs of the people The consumers want basic improvements immediately:
a) They expect better efficiency and service after the DISCOS are in private hands. And they want the savings in costs (most, if not all) to be passed on to them in the form of lower rates and charges.
b) They want increase in electric supply to meet fully present and future needs.
c) They want improvement and expansion in the network so that connections are available also in all villages, even if service in some areas has to be subsidized.
A foreign buyer will be hardly inclined to "waste" his money on doing any of these things, if he does not himself get the major benefit. Nor will he feel any compulsion to do so.
Local buyers as an alternative Local strategic buyers, if available, may have the same thinking as foreigners and try to make as much money as they can. However, they live in this country and cannot afford to annoy the people and the Government beyond a certain limit. They may also be expected to have some consideration of national interest. Therefore, they would be preferable to foreigners. However, the purchase of even the specified minimum ratio (26%) of shares of a DISCO, not to speak of all, will require a sum that a local investor may not have.
The local investors can, however, do it collectively if they agree to join hands in taking over DISCOs, hire professional management, and do not allow any one of them to dominate, if not oust, the others. This will be a tall order.
The third alternative When selling to foreign buyers is not in the national interest and local counterparts are not available, what should be the way out? Go to the people, as wise men say.
At present, the DISCOs have over 20 million customers in total. Why not offer the shares to all of them? Collectively, they may have enough purchasing power to buy all shares, in quarterly installments, if necessary. Of course, not all will get the same number of shares. Some of them may be able to buy just one share each, while others may be able to get big lots.
How to do it? The chief executive of every DISCO will issue a share to every connection holder in his area (for Rs 10 or 100) and include the amount in the next month’s electricity bill. There will be no need for a share certificate. The DISCO records will show that every consumer is a shareholder and a customer will have the electricity bill as proof.
To sell more shares, a DISCO will send a letter to all of its customers, offering its shares to them. The letter, in Urdu, may explain the benefits of buying DISCO shares and the procedure for purchase. It will bear the customer’s name, address and other identifying information as it appears on the monthly bill and will be attached with the bill. Thus, the offer letter will be delivered to every customer along with the bill.
At the bottom of the offer letter will be a form in which the subscriber will fill in the number of shares (in figures as well as words) that he wants to buy and enter the amount that he will pay. Then he will fold the self-addressed, postage paid letter and mail it. The DISCO will enter the payment in the next month’s bill. It may also confirm the sale of shares through a letter to the customer.
The DISCO will deposit the total amount collected through the sale of shares in the Government account with the State Bank towards the retirement of public debts because that is the primary objectives of the privatization.
Offer to be repeated The DISCOs will repeat the offer of shares to customers once every quarter or once every six months. This will facilitate purchases by small customers, who can buy shares from their savings only at intervals. A DISCO will also offer its shares to every new customer on approval of his new connection. As a result, the paid-up capital of every DISCO will continue to grow while simultaneously it will get additional interest-free funds to finance expansion and modernization.
No premium on shares The shares will be sold at face value and no premium will be charged. The reasoning is simple. The people own DISCOs, while the Government is only a representative of the people, or an attorney, so to speak, not the real owner. Therefore, the Government, being only a manager of DISCOs, cannot ask the people – the real owners – to pay any premium on shares.
Direct sale and purchase The sale and purchase of shares will be directly between a DISCO and its customers. If a customer wants to sell his shares, he will surrender his allotment letter against a receipt at the nearest DISCO revenue office or service center. The revenue office of the area, which issues monthly bills to the customers, will immediately give credit to the subscriber’s account for the value of the surrendered shares, while sending the allotment letter to the DISCO head office for cancellation of shares. The credit amount will then be adjusted in the monthly bill of the customer.
This arrangement will have a great benefit. The customer will get his payment for the shares while the DISCO will not have to strain its cash reserves.
Payment of dividends The payment of dividends will also be through credit in the monthly bill of the customer-shareholder. As soon as dividend is declared, whether interim or final, the amount will be credited directly to the bills of all customers-shareholders. The great advantage of this arrangement will be that the DISCO will not have to spend a huge amount on the preparation, issue and safe delivery of dividend vouchers to the customers. It will also save a similar amount on the payment of dividends through banks. The DISCO will have to neither deduct this extra expenditure from the total dividend amount nor add to the company’s normal expenses. In either case, the customers will be the beneficiaries.
Management The Chief Executive of a DISCO will be elected directly by the majority of total shareholders. Before election, every candidate will be required to submit to the shareholders his plan for improvement in operations and services. Every shareholder will have a single vote, irrespective of the number of shares held by him, to avoid dominance of the rich shareholders.
At the end of every quarter, the Chief Executive will submit his progress report, comparing achievements with his target, in a letter that will be attached with the next month’s bill of every customer. At the end of every 12 months, the Chief Executive will seek a vote of confidence from at least two-thirds of the shareholders. He may continue in office as long as he gets a vote of confidence. It will always keep him on his toes.
There will be no need for a Board of Directors as they turn out to be mostly parasites. (The Boards of Directors did little to stop the rot in PIA, Pakistan Steel and other public sector organizations.) However, the powers of the Chief Executive will be defined precisely. In all major matters, he will seek approval of customers through a referendum.
Benefits of being a customer as well as a shareholder A DISCO’s customers will benefit in several ways as its shareholders:
a) They will get the entire profit that accrues to their DISCO. After all, the profit will come from what they themselves pay to the DISCO through their monthly bills.
b) They will get the benefit in both ways: (i) higher dividends in case of profit due to efficiency in operations and reduction in expenditure and (ii) better services due to investment in infrastructure.
c) The ordinary operations and services will improve tremendously as the Chief Executive will keep the employees on their toes in removing complaints and problems. (Poor service will not get him vote of confidence next year.)
Main benefits The implementation of this proposal will have the following main benefits:
a) The process of privatization can be started immediately. There will be no need to spend time in making any preparations.
b) The privatization will be done on "as is" basis, without any need for any detailed studies or restructure.
c) In a unique situation, the shareholders will also be the customers of the DISCOs and will be the direct beneficiaries of both lower costs and higher profits.
d) Every DISCO will have the widest possible ownership base. No individual or group will become the majority shareholder. (In case of KESCO, we know what may happen if it occurs.) As a result, there will be no pressures to increase profits at the cost of the customers.
e) The capital base of the DISCO will continue to expand, allowing it to have interest-free funds to invest in the expansion of its infrastructure. In other words, the expansion and its financing will occur simultaneously.
f) The middle class investors will get an opportunity for a very safe and profitable investment.
g) Despite the huge volume of the DISCO shares, there will be no volatile effect on the stock exchanges because the shares will be sold and purchased directly by the DISCOs.
h) With the entire management being Pakistani, the security and protection of national interests will be ensured.
Reducing cost of electricity
The DISCOs, as buyers, will decide how much to pay for electricity, not the producers determining its price. In other words, DISCOs will decide what price to pay for electricity and to get supplies from which producers.
On the purchase side will be DISCOs: (Hyderabad, Quetta, Multan, Lahore, Gujranwala, Faisalabad, Islamabad, and Peshawar.) Add to them Karachi Electricity Supply Company, which may be asked to sell all its shares to its customers.
On the supply side will be: hydel power producer (WAPDA), thermal power producers, independent power producers, rental power plants, nuclear power plants, others. New power producers will emerge, with their own financial resources. The government will no longer have to allocate its limited resources for power generation, including large dams.
PEPCO will be disbanded because central control of purchase and distribution of electricity will no longer be required. (It is already on its way to abolition.) As a result, its agreements with power producers will be cancelled. (It will not be legally possible to impose present agreements on privatized DISCOs, which will now be public limited companies, owned by its customers.) NEPRA will also be abolished because it will no longer be able to impose its prices on DISCOs.
Consequently, power producers, both public and private, will have to negotiate directly with DISCOs and offer lowest possible prices. DISCOs will not sign long-term agreements because they will always switch to new producers that offer lower prices. Thus, the present producers will have to decrease their costs all the time so that they remain competitive. As lower prices become available, the expensive power producers will go out of business. National Transmission Dispatch Company will continue to get power from producers and transmit to DISCOs, in accordance with the agreements between the sellers and buyers.
Not subject to NEPRA decisions, new power producers will offer lowest prices to DISCOs. Hydel, wind, solar, coal and other alternative energy sources will flourish. The power plants running on very expensive furnace oil and scarce natural gas will seek cheaper energy or will have to be shut down. Chief executives of DISCOs, being answerable to customers-shareholders, will dare not accept higher prices from any supplier at the cost of lower prices available from others.
The suppliers will offer electricity to buyers at their lowest prices. The buyers will select suppliers and place orders with them, depending on price, convenience and other factors. A DISCO may persuade power producers to set up generation plants in its areas on mutually agreed terms.
Line losses A major cause of financial difficulties of DISCOs is line losses. The Chief Executive, under our plan, will formulate targets for reducing line losses to the absolute minimum. He will ensure that his field staff meets the quarterly targets, as he will face a vote of confidence after 12 months.
Power theft through various means will become impossible. If it occurs, the field staff will face the wrath of the bosses as well as the customers. Default in payments of bills, even by the powerful and government departments will also not be tolerated. A DISCO will not have any reason not to recover payments, as it will not be under political pressure. It will be answerable to its customers, not any government authority.Conclusion The privatization in the past has been more beneficial to investors than the people, who are the real owners. The proposed method will give all benefits to the people, who will be consumers as well as shareholders. The same method may be adopted of Pakistan Telecom Company (PTC), whose customers can be made also shareholders for the shares still owned by the Government. The method of privatization will be a new model for other industries as well as for other countries.