KARACHI: Two of the parties that remained interested in the privatisation of two RLNG-based power plants have signaled their refusal to place any equity bids for the projects at the moment. They have told the government that they are watching the ongoing tariff renegotiations with the independent power producers (IPPs) that were launched shortly after the release of the inquiry report on the IPPs.

At issue are two power plants — Haveli Bahadur Shah and Balloki, both in Punjab — owned by the federal government. Both plants were built with government money with the intention to privatise them soon after they began commercial operations which happened in the middle of 2018.

In September last year, Adviser to the Prime Minister on Finance Dr Hafeez Shaikh said he was expecting to raise Rs300 billion from the sale of these two plants which, according to him, should happen by December 2020. However, in budget documents, the government has budgeted Rs100bn from privatisation proceeds.

Parties refuse to place equity bids citing uncertainty on tariffs

The privatisation programme has been troubled for a long time now. The government appointed Credit Suisse as its sell side adviser in March 2019, and its first attempt to invite expressions of interest (EOIs) in November 2019 met with a tepid response. The deadline was extended, and finally EOIs from 12 parties were received in January 2020. But with the onset of uncertainties from Covid-19, that number dwindled to three.

One of these consortia is led by the Qatar Investment Authority, with Nebras Power, Mitsui & Marubeni from Japan as partners. The other is led by Edra Power Holdings, a Malaysian power company owned by the China General Nuclear Power Corporation, in partnership with the Thailand-based Global Power Synergy Corporation.

In a recent online meeting attended by the privatisation minister and secretary, as well as the prime minister’s special assistant Nadeem Babar, among others, both consortia told the government they would not be submitting any equity bids for the projects until the outcome of the tariff renegotiations with 13 IPPs became clear. Those talks were launched after the release of the inquiry commission report on the IPPs.

The consortia also said they were unable to secure commitments from international lenders for long-term financing for the projects because of the ongoing talks, according to multiple participants of the meeting that Dawn spoke with.

“International lenders are now in a bit of a conundrum” regarding this transaction, one senior banker with deep familiarity of the matter tells Dawn. “International consortia bring the lenders with them, but in this case the lenders can’t figure out how to model this asset” considering its tariff could end up being renegotiated down the road.

In its public messaging, the Privatisation Commission has hinted at the challenges it is facing in helping prospective bidders arrange long-term financing for these projects. On July 23, for example, days after the two consortia told them of their difficulties, the privatisation minister flew to Karachi and met the presidents of large local banks along with officials from the power regulator. The meeting was held at the State Bank.

“These banks were asked to participate as lenders to successfully complete the subject transaction,” said an official statement released after that meeting. “As part of the privatisation process, the potential bidders will be required to re-finance [government funding as well as] existing commercial debt through foreign and/or local debt financing. In order to successfully complete the transaction, it is critical to ensure that potential bidders are able to secure sufficient PKR denominated financing,” the statement added.

But those who attended the meeting say this was not a straightforward sell. “Bank presidents wanted comfort on the tariff,” says one banker familiar with how the meeting went. “Should bids be on present tariffs or revised ones?” he asked. “The return that is built into the tariff is the key,” he adds, referring to the internal rate of return on equity that plays an important role in an investor’s decision.

But the problems for local banks don’t end there. According to his estimate, the total debt required to finance these two projects could be anywhere from Rs160bn to Rs180bn, including long-term financing as well as working capital. “The capital markets in Pakistan are not deep enough for this; it would be a tall order for local banks to substitute for international lenders in this transaction.”

Some on the government side agreed with the assessment. “The bankers made a reasonable argument in my opinion,” says Nadeem Babar, who also attended the meeting.

Another official emphasised the importance of “a mutually agreed framework” emerging from the talks between the IPPs and the committee set up to renegotiate the tariffs with them. The words point towards problems that could arise if the government is seen to be imposing an outcome on the IPPs in the ongoing negotiations.

The two projects on the privatisation list are not, strictly speaking, part of those 13 whose tariffs the government is seeking to renegotiate. But their tariff structure is substantially similar to that of the 13 under renegotiation, with fixed returns of 16 per cent on equity. Renegotiating the terms with the others and leaving these ones untouched will create two tiers of private power producers, in terms of the returns enjoyed by them, and possibly bolster the legal case for the 13 IPPs to say they are being unfairly targeted.

As the talks with the IPP committee drag on, a major plank of the government’s privatisation programme, as well as an important part of its revenue plan, now hangs in limbo. “Privatisation proceeds budgeted for current fiscal year is based on input by Privatisation Division and may vary depending upon the response of prospective investors,” the finance division said in a written statement for this article.

But in off the record discussions, finance ministry officials are a lot more direct. “It would be a dumb strategy to let the IPP negotiations sabotage this privatisation,” says a high official from the ministry. “The faster we can conclude those negotiations the better,” he continues. “It is more important to achieve closure than to try and extract maximum concessions from the other party.”

Dawn waited for 24 hours for a response to a request for comment from Minister for Power Omar Ayub and Muhammad Ali, the author of the inquiry report who is also a member of the committee negotiating with the IPPs, but nothing was received till the filing of this report.

Published in Dawn, July 29th, 2020