The privatisation process of Kot Addu Power Company (Kapco), Pakistan’s largest independent power producer, has run into snags due to government’s inability to provide investors with a satisfactory response over the fate of a power purchase agreement and shift in state’s coal consumption policy.
The indecisiveness on the part of the Ministry of Finance and the Ministry of Water and Power has started hurting the share price of Kapco that has gone down by over 16% in the last three and a half months, according to market analysts.
In rupee terms, if the government decides today to sell its remaining 40.25% stake in Kapco, it will get Rs5.1 billion less because of the sharply lower share price compared to July 4 – when financial advisers completed their work and submitted a report to the Privatization Commission.
A consortium of financial advisers hired to sell shareholding in the 1,600-megawatt power plant had advised the government to timely address half a dozen issues in order to fetch a better price, according to the advisers’ report.
During road shows, prospective investors asked questions about extension in the power purchase agreement (PPA), which will expire in 2021, and the planned addition of a 660MW imported coal-fired power plant.
However, these issues remained unresolved and the revised deadline for the submission of Expressions of Interest and Requests for Statement of Qualification (RSOQs) by the prospective bidders also ended on October 20.
Four investors showed interest in acquiring Kapco including K-Electric but none of them submitted the RSOQs, according to officials of the Privatization Commission.
A summary to give another extension or stop the privatisation process is awaiting decision of Finance and Privatisation Minister Ishaq Dar.
Even if he decides to give the extension, the government may not be able to get a better price due to delay in resolution of the PPA issue.
According to officials, Dar has directed the power ministry to issue a comfort letter declaring that the PPA would be extended further. However, the ministry and the Water and Power Development Authority (Wapda) “had never been willing partners”.
Impact on price
On July 4, Kapco’s share traded at Rs89.56, which went down to Rs75 on October 25, a drop of 16.2% or Rs14.56. This has brought down the price of government’s 40.25% stake from Rs31.73 billion to Rs25.57 billion.
In case of a 10-year extension in the PPA, the stake is valued in the range of Rs33.3 billion to Rs37.3 billion under the Discounted Cash Flow (DCF) model, according to the financial advisers.
On various occasions, the government had promised to give a comfort letter for extending the PPA but it did not happen, said a senior Kapco official while talking to The Express Tribune.
Sources said there were also doubts over whether the Kapco management would add the 660MW coal-fired power plant as market perception was that the project had been put on hold due to a change in policy.
Earlier, power plants were set up based on imported coal, but the government has now switched to domestic coal.
“The coal-fired power plant has not been put on hold but there are challenges to the project,” the Kapco official said, adding that this might have affected the company’s share price.
Kapco was working on the greenfield coal power project under the China-Pakistan Economic Corridor.
There is also an issue of liquidity damages amounting to Rs27.7 billion claimed by Wapda. The financial advisers said the buyers may require the government to provide adequate comfort in the unlikely event that this contingency materialised.
So far, the government has earned more than $1.7 billion through easy capital market transactions. Such transactions do not meet objectives of privatisation such as improved service delivery to the people and minimising losses to the public exchequer.