T&D and AT&C Loss Comparison – KE vs. XWDISCOs
Despite operating in a significantly more challenging operational environment, KE’s operational improvements including T&D and AT&C losses have outperformed state-owned DISCOs
During the last 10 years, KE is the most improved distribution company in the country
Had KE not been privatized and shown improvements in AT&C loss only similar to XWDISCOs (c. 2%) in last 10 years – would have cost the economy c. PKR 50 Billion annually
Estimated impact of privatization of XWDISCOs and assuming similar improvements as KE – c. PKR 300 Billion annually
Source: State of Industry Reports
1. Improvement in AT&C losses of DISCOs (c. 2%) x Sentout FY 19 x Average Tariff 2. Improvement in AT&C loss of KE since privatization (c. 11%) x Sentout FY 19 x Average Tariff
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KE’s Operational Improvements vs. IESCO & FESCO
Through significantly higher investments, KE’s operational improvements have outpaced IESCO and FESCO
Source: State of Industry Reports, Financial Statements
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Continued Financial Losses of XWDISCOs
Due to lack of cost reflective tariff and other structural issues dominant in the sector, even good performing DISCOs have remained in losses – GoP’s heavy reliance on commercial banks, resulting in continuous accumulation in loans parked with Power Holding Private Limited (PHPL)
Cumulative losses of XWDISCOs in the last three years have been over PKR 350 Billion
IESCO (PKR 55 Billion)
FESCO (PKR 73 Billion)
MEPCO (PKR 79 Billion)
Financial Losses of XWDISCOs have resulted in continuous increase in loans parked with PHPL
PKR Billion
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Based on available data, 7 out of 10 state-owned DISCOs reported losses in 2018 and therefore are not able to honor their obligations
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GoP has to borrow on behalf of these DISCOs to keep their operations afloat
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Government has to borrow from commercial banks, typically 5 to 7 years at KIBOR + 2%
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Servicing of PHPL loans is party made through surcharge in tariff – impact of c. PKR 40 Billion annually
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Further contributes to the issue of circular debt, thus putting sustainability of the sector at risk
Source: Financial Statements of DSCOs, Circular Debt Report 2018, IMF
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Circular Debt – Sector Sustainability at Risk
Circular debt has clogged capacity and stifled liquidity in the power sector – as a result of continuous accumulation, power sector’s circular debt is now around PKR 1.9 Trillion
Driven by continuous accumulation, circular debt stands at c. PKR 1.9 Trillion – putting sector sustainability and the overall economy at risk
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KE is in a net receivables position and has no contribution towards circular debt
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High Capacity Costs, Lack of Integrated Planning & Policy Misalignment
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Regulatory Gaps & Need for Cost Reflective Tariff Setting
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Operational inefficiencies & Governance issues in state-owned entities
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Accumulation of Receivables from Government Entities / Departments
Source: News Reports (Express Tribune)
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KE’s Returns Significantly Lower than IPPs
KE’s average return on equity has remained well below other private industry players in the generation segment, mainly due to unreasonable tariff setting for distribution business
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Being vertically integrated and not having any sovereign guarantee, KE’s risk profile is much higher, however, KE’s returns are significantly lower than IPPs
KE’s average Return on Equity in the last 10 years has been around 5%, whereas, other private entities made returns between 26% to 37%. All profits earned since 2012 have been reinvested into the business by KE
Source: Financial Statements; KE’s RoE includes revaluation surplus and excludes losses
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Impact of Rupee Devaluation on Investor Returns
Due to significant rupee devaluation since privatization, KE’s equity has eroded by almost 43% since privatization
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Equity Value (USD Millions)
- KE’s risk profile is significantly higher thanIPPs
- However, KE’s average RoE (USD based) since privatization has been around negative 3%1, whereas IPPs are allowed guaranteed 15% to 17% USD based returns
- Further, unlike IPPs, KE has reinvested all the profits earned since 2012
Note: Equity value includes reinvestment of profits (1) Excluding revaluation surplus
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