Credibility before privatisation

The proposed privatization of Pakistan's power distribution companies has sparked interest among investors, both domestic and foreign. Around a dozen investors, including four foreign entities, have shown interest in Faisalabad Electric Supply Company, Gujranwala Electric Power Company, and Islamabad Electric Supply Company. However, the government must address concerns regarding the privatization, as it extends beyond the mechanics of selling shares.

Investors are pricing Pakistan's credibility risk into their bids, requesting protection against future contract reopenings, stronger regulatory guarantees, longer tariff control periods, timely tariff adjustments, and protection against arbitrary policy changes. This is not surprising, given Pakistan's history of revisiting commercial agreements and renegotiating contracts, which has left investors wary of the country's judicial environment and dispute-resolution mechanisms.

The government needs to distinguish between commercially reasonable demands and those that would transfer private-sector risks to consumers and the exchequer. Predictable regulation is essential; investors need confidence in a transparent methodology, timely tariff determinations, and approved investment plans not becoming hostage to political considerations. Contractual protections against arbitrary reopening should also be considered.

However, there are red lines. Foreign currency-linked returns are not suitable, as they would transfer exchange-rate risk to a country with a structurally vulnerable external account. Exemption from purchasing expensive electricity from independent power producers is also legitimate, as distribution companies must have the ability to procure electricity efficiently.

The government must clarify legacy obligations, including liabilities, pension obligations, outstanding receivables, and accumulated circular debt, to ensure the new owner can operate on commercial terms.