Privatisation of HEC

After a long pause in the ongoing privatisation process due to the landmark decision of the Supreme Court of Pakistan to annul the divestment deal of the Pakistan Steel, the government has re-commenced the implementation of its privatisation programme.
The broad-based privatisation programme launched includes the state-owned enterprises (SOEs) operating in the engineering industrial sector, namely the Heavy Electrical Complex and the Pakistan Machine Tool Factory of the Ministry of Production.
The Privatisation Commission (PC) has invited by October 01, 2011 the Expression of Interests (EOIs) from prospective investors, domestic as well as foreign, for acquisition of 96% shares of the Company, along management control. Earlier, the government had announced the list of 23 SOEs including the HEC to be divested under the public-private partnership mode. But the divestment structure has now changed. A committee of the PC will evaluate the EOIs from various interested parties for pre-qualification of prospective investors on the basis of information presented by them in the statement of qualifications to be received by October 15. The information memorandum and bid documents to be issued to the pre-qualified parties, as well as the timeframe for the pre-bid conference, have already been finalised by the PC.
The only of its kind facilities in Pakistan Heavy Electrical Complex (Pvt) Ltd, commonly known as the HEC, has been established at Hattar Industrial Estate in Khyber Pakhtunkhwa, with the economic and technical assistance of the People's Republic of China, at a cost of Rs 1,158 million. The Company's current total assets amount to about Rs 1,171 million as on 30th June 2009, and equity of Rs 1,460 million as of to date. Its installed production capacity is to produce 148 Nos. power transformers of capacity ranging from 6.3 MVA to 40 MVA for 132 and 66 kV electricity transmission systems, which is translated into factory's total production capacity of 3,000 MVA.
Spread over a leasehold area of over 81 acres, the factory occupies 43 acres and has an integrated and the largest engineering, production and testing facilities - the only of its kind in the country - procured from China, Germany and Switzerland. The manufacturing facilities cover Insulation Shop including a 2,000-ton hydraulic press, Winding Shop consisting of ten winding machines, a 150-ton hydraulic press and horizontal autoclaves, core shop, mechanical shop, assembly shop and other modern facilities including testing, quality assurance and material handling.
The project suffered from its very initial days of conception at the hands of vested interest of the multinationals and their lobbyists in our own country that never wanted Pakistan to be self-reliant in the electrical capital goods required for the power sub-sector. Power transformer, an essential part of today's world economy, forms a vital link in the power transmission and distribution systems, but very few countries in the world have the capability to manufacture this kind of equipment because of high capital cost, complexities of technology transfer and costly value-added inputs. For this reason, the project, which was planned by the Pakistan Industrial Development Corporation (PIDC) in the early 1960s, initially in collaboration with a Western source, could commence construction only in April 1987. Again, it took another ten years to complete, though it was inaugurated much earlier, on 16th November 1994, by the then prime minister, Benazir Bhutto.
The single-product and single-customer project Executive Committee of the National Economic Council (Ecnec), while approving this single-product and single-customer mega project on 13th February 1986 had decided that the Pakistan Water and Power Development Authority (WAPDA) would sign a sale-purchase agreement for power transformers to ensure viability of the project. Subsequently, the agreement was signed in June 1987 under which Wapda committed to "procure from HEC at least 85% of their requirements of power transformers or 70% of the HEC designed capacity, whichever is lower", according to an agreed price formula. In spite of the legally binding and valid contract, WAPDA did not place orders on the HEC on successful trial-runs of installed machinery in 1994 and onwards and instead resorted to imports, either on the pretext of shortage of local currency funds or on issue of pricing.
Only orders for repair and rehabilitation of damaged power transformers, different makes and sizes, were placed on the HEC, which, in fact, the original foreign suppliers were not willing to undertake. Thus, the complex successfully carried out the rehabilitation of 94 old power transformers of Wapda and Karachi Electric Supply Company (KESC) by June 30, 2009. Having started its commercial operations in 1998, the complex, however, could secure limited orders of new transformers as a result of government intervention and subsequently, undertook manufacturing of 226 power transformers of various capacities until June 30, 2009. Thus, its production capacity utilisation during that period remained dismally low, not exceeding 28% in a year.
Improved present financial health: The gross under-utilisation of installed capacity, besides other impediments, played havoc with the financial health of the Company that was already cash-starved, as it was not provided with any working capital by the government. Resultantly, the Company had to borrow money from commercial banks to sustain its operations, but it was unable to bear the burden of debt servicing of the loans. Likewise, the Company failed to repay the Chinese and Swiss credits utilised for purchase of plant machinery. The management was therefore unable to pursue its diversification of products that was eventually aimed at the executing grid station/sub-station projects on turnkey basis.
The situation today is very different as the company has registered profits for the three consecutive years - during 2005-06, 2006-07 and 2007-08. The company registered net sales of Rs 756 million during financial year 2008-09, but incurred an operating loss as a result of the ongoing privatisation process. The company, however, has now significant orders in hand for the manufacture and supply of power transformers. These purchase contracts placed by the Wapda/NTDC and the KESC are valued Rs 800 million. In addition, these power utility companies have placed fresh orders for the repair and rehabilitation of old power transformers.
To facilitate the divestment, the government has done financial restructuring of the Company. It had picked up in July 2008 a major portion of commercial bank loans and foreign currency loans, a total amounting to Rs 800 million approximately. The financial position of the company being healthy for the last few years, it serviced a commercial bank loan of Rs 70 million through its own resources. In a recent move however the government has approved conversion of all outstanding loan liabilities, amounting to over one billion rupees after adjustment of brought forward losses, into government equity.
Attractive and commercially viable entity: The overheads are minimal. There are 255 employees at present, but except for engineers and a few executives on permanent roll, all other 228 persons are recruited on contract or on labour-contract basis. Resultantly, there exists no workers' union. The PC may decide to share equally with the new buyer the cost of the Golden Handshake Scheme (GHS) and Voluntary Separation Scheme (VSS) to be offered to its employees of all categories. There is no housing colony and no major welfare scheme operative either. The factory is located in a front-line industrial estate in Khyber Pakhtunkhwa, with all requisite infrastructure facilities.
The present status makes the complex very attractive and financially viable for inviting overseas investment and domestic capital market mobilisation. But the challenge lies ahead for the private sector investor to maintain market leadership thereby meeting future demand of higher voltage power transformers and to cater to increased operational level accordingly. Future market prospects are promising, as demand is fast growing. Wapda's power transmission and distribution projects envisage the installation of power transformers of cumulative capacity of over 18,000 MVA during the next five years. This means that there would be a demand of about 580 transformer units valuing Rs 16 billion at the current market price.
Promising future business prospects: To connect new electricity generation capacity to the transmission grid, a number of 500 kV and 220 kV transmission lines are planned to construct either by the WAPDA/NTDC or the new Independent Power Producers (IPPs) as per Power Policy in vogue. Export markets can also be explored as many electricity transmission projects are coming up in Afghanistan and the Central Asian Republics. It is therefore imperative for the HEC to widen its product range by going for manufacturing of higher capacity (160 MVA, 200 MVA) and higher voltage (500/220 kV, 220/132 kV) power transformers also.
This, nonetheless, would require plant modernisation, technological improvement including acquisition and assimilation of technology, and augmenting the in-house testing facilities. With creation of some additional manufacturing facilities, the production programme can also be widened, simultaneously, to cover other grid station equipment, such as circuit breakers, disconnectors, isolators, current transformers, instrument transformers, lightening arrestors and power factor improvement panels.
Major key-players show interest: At this juncture, however, the PC needs to be aware of the fact that earlier attempts to privatise the complex did not yield positive results and it should, in all earnestness, learn from that experience. The PC has to ensure that the pre-qualified investors have background of manufacturing similar products and a visible commitment to further develop these capabilities indigenously.
Realising the need of adopting a different methodology to divest heavy engineering units, instead of a direct sell-off, it was decided some time back to explore the possibilities of establishing a joint venture with world-renowned companies already active in a similar field. The spadework to identify such companies and to invite them to agree to invest in the HEC both as equity and technology partner was entrusted to State Engineering Corporation, the holding corporation of HEC.
Concerted efforts were made in this direction, and logically, first a proposal was made to the Chinese partners, in the last quarter of 1995, to convert their loan into equity participation, thus taking over the management. The proposal was discussed at the government level also and subsequently at the Pak-China Joint Economic Commission meetings held at Beijing and Islamabad. Though the initial response of the Chinese was encouraging, there could be no further headway. Then, the major global key players in the field were contacted, and, fortunately, three giants namely Siemens, ABB and Skoda showed their willingness in the late 1996 and early 1997 to form a proposed joint venture with the HEC, in a bid to finally acquire the HEC through privatisation.
In this scenario, the privatisation process of November 2005 was successful insofar as the response from the multinational companies is concerned. These companies were Siemens Pakistan, ABB Switzerland, Areva T&D, France, Pak Electron Ltd Pakistan and Iljin Heavy Industries, South Korea. Most of these companies had completed due diligence at that time, which is considered an essential prior to making investment of this size and nature. When the PC re-invited the EOIs in May 2011, all these companies renewed their interest to buy the offered 88% shares of the HEC, along other prospective investors. Somehow, the PC decided to ask for the EOIs once again, with a different transaction structure.
It is hoped that the privatisation of the HEC would be successful this time and a strong base created for the development of high voltage electrical equipment in the country would not erode and remain operational, acquiring latest technology in the specialised field.
(The writer is former chairman of Heavy Electrical Complex)