A ‘draft strategic report’ leaked to the Sunday Standard details how the Botswana Government is considering unbundling the cash strapped Botswana Power Corporation (BPC) and selling or leasing it to investors to finance the electricity supply industry.
The report titled “Draft Strategy” and was prepared for Public Enterprises Evaluation and Privatization Agency (PEEPA) by AF-Mercardos Energy Markets International in collaboration with Collins Newman & Company shows that BPC as at 31st March 2013 was valued at P15 286 million, a value which is less than the corporation’s controversial P11 billion Morupule B project.
The Terms of Reference for the consultants set specific requirement for the valuation; “to carry out an asset and business valuation of BPC, using whatever techniques are appropriate for the Electricity Supply Industry and including an analysis relevant tariff scenarios.”
The consultants split BPC into two components for valuation, namely; the existing Generation Business Comprising Morupule B Units 1 to 4 and the Transmission and Distribution Business.
“If tariffs simply cover costs, including the financing debt, the value of BPC would be equal to the value of its net assets provided the Regulator (assuming a regular is in place) does not disallow any costs BPC valuation today will be valued at P15 286 million,” states the report.
Under one of the options considered by the consultants, if BPC becomes corporatized, which it would need to if there is to be Private Sector Partnership (PSP) either through a full or partial floatation on the Botswana Stock Exchange (BSE) or through some form of sale to strategic investor, then the business becomes subject to taxation and the overall business value decreases slightly to P14 341 million.
The report shows that BPC has been making operating losses for the past eight years and these have steadily been increasing.
“In some years a tariff subsidy has been paid by the Government aimed at compensating the corporation for the failure to increase tariffs to cost-reflective levels. Despite this the corporation recorded comprehensive loses as follows for the past three years; 2010/11- P797 million, 2011/2012-P1123 million and 2012/2013-P1624 million respectively,” says the report.
The report says BPC is completely dependent on Government for investment funding if the private sector is not involved.
“The generating level has risen from extremely low levels prior to the borrowing required for Morupule B, to 65 percent in 2013. There is therefore little or no potential for further borrowing without Government guarantees,” states the report.
The continuing losses, the report says are draining cash from the company and causing operational problems such as inadequate maintenance expenditure, inadequate stock for network operations including making new connections.
The report states that BPC has significantly increased its indebtedness, partly with the development of Morupule B and partly through charging a lower tariff than the cost of electricity supply.
Working capital for the last three years has been negative; that is the value of Current Liabilities has exceeded Current Assets and the value of Net Assets less Regulatory Assets has also been negative. “Consequently we have not made provisions for the costs of financing working capital.”
As one of the electricity supply options in Botswana, the consultants say “…a proven business such as an operational power station is an attractive long term investment”.
“During the due diligence investigations we met a pension fund and a bank in Botswana that expressed considerable interest in such an investment,” states the report. The consultants state that finance can be raised from infrastructure funds and Pension funds or alternatively trade investors can be accessed to provide particular skills in rehabilitation operation, through Lease Operate and Transfer or Rehabilitate Operate and Transfer.
For the existing business of BPC, the consultants suggest that all or part of the business could be floated on the BSE. However it may also be possible to sell majority or minority stake in the business to a trade investor.
The private sector could also become involved in the existing generation assets principally as a way to raise finance.
“Morupule Units 1 to 4 could be sold and as an operational power station it would be an attractive investment, particularly for local financial institutions,” states the report.
The consultants also suggest that proceeds of the sale could then be used to finance the construction of Morupule 5 and 6, avoiding the need for expensive project finance and potentially enabling the development to proceed more quickly.
“The rehabilitation of Morupule A has been initiated by Government. However an alternative to a direct Government funded project would be to invite bids for a Rehabilitation, Operate and Transfer development,” says the report.
For some of these options, (electricity supply options in Botswana) the consultants suggest, unbundling of BPC would need to be commercialised so that transitions can be separated financially and legally from the remainder of the business.
For the core distribution and supply business if kept intact, the consultants recommend among other things, floatation on BSE of less than 50 percent of the share and bringing private business discipline to the governance of distribution business.
“Floatation on the BSE of more than 50 percent of BPC shares and Government would be likely to retain policy control but would cede control of the business to the shareholders,’ the report says.