Investors seek tariff guarantees before bidding for Discos

Lahore - In order for foreign investors to commit to purchasing three Pakistani power distribution companies, the government must offer stronger guarantees regarding tariffs, regulatory oversight, and market freedom, according to an investor feedback report prepared for the Privatisation Commission. Potential bidders expressed concern that uncertainty in these areas could hinder the planned privatization process.

The most pressing demand was for longer multi-year tariff periods, extending the current 5-year framework to 7-10 years, as investors believe the shorter timeframe makes it difficult to invest in long-lasting distribution assets. They also advocated for a shift from a uniform tariff system to one that links tariffs to individual company performance and efficiency, arguing that the current system penalizes better-performing companies.

Concerns about regulatory predictability were also significant, with investors fearing that tariffs and contractual agreements could be altered by future governments or courts. To mitigate this risk, they called for contractual safeguards to protect key investment plans, capital expenditures, and tariff details until bidding begins.

Additionally, investors questioned the efficiency of the power regulator, requesting timely tariff decisions, accountable service standards, and clearly defined enforcement powers. Domestic investors specifically sought limits on regulatory discretion, while foreign investors worried about exchange rate risks on overseas borrowing for capital expenditures and repatriation of dividends.

Ownership rules were another contentious issue, with most investors favoring full ownership of the distribution companies, though some wanted permission to acquire stakes in multiple companies, provided there are safeguards against excessive concentration. Some preferred retaining a minority government stake in Islamabad Electric Supply Company due to its large number of government consumers.

Investors also emphasized greater freedom to purchase electricity from competitive suppliers and expressed opposition to privatised distribution companies being burdened with costly legacy IPP obligations as consumers transition to cheaper energy sources. They saw additional revenue opportunities in the Discos' assets and customer networks, including telecom infrastructure, EV charging, and smart metering, but demanded clear rules for leveraging these businesses and sharing resulting revenues.

Delayed government subsidies, particularly those owed in connection with Azad Jammu and Kashmir, were identified as a significant cash flow risk, and investors called for an automated settlement mechanism, compensation for delays, and a defined dispute-resolution process. While investor interest in Fesco, Gepco, and Iesco appears genuine, converting that interest into competitive bids will hinge on the government's ability to provide a credible and predictable framework before the bidding stage.