Government-owned electricity companies sold to boost utilities investment in Oman

As the first step in a series of planned privatisations, 2019 should see the partial sale of two government-owned electricity companies: Oman Electricity Transmission Company (OETC) and the Muscat Electricity Distribution Company (MEDC). The motivations for the sell-off strategy are many, ranging from efforts to improve operational efficiency to addressing the country’s fiscal deficit. Privatising major state-owned enterprises (SOEs) is also expected to draw in greater foreign funding, pushing Oman up the rankings as a global investment destination for international utilities companies and financiers, while helping the country in its long-term economic diversification aims.

Big Plans

With some 70 SOEs in existence across a number of sectors as of mid-2018, each government ministry and holding company is tasked with submitting a five-year plan to the Ministry of Finance (MoF) detailing how they intended to move forward with privatisation goals. Implementation will be overseen by a dedicated committee, which was established by the government in July 2017.

According to the 2017 annual report published by the Implementation Support and Follow-up Unit, the committee tasked with overseeing the government’s economic initiatives, the transfer of SOEs to the private sector is expected to generate approximately OR700m ($1.8bn) in revenue for the government between 2018 and 2021. SOEs specifically targeted for the broader sell-off include Oman Tourism Development Company, Oman Food Investment Holding Company, Oman Global Logistics Group, Oman Oil Company and Nama Holding.

Nama Holding

The privatisation plan for Nama Holding, which is 100% owned by the MoF on behalf of the government, was decided on by the Cabinet. Given that the holding company is a SOE that itself owns shares in 10 different electricity and water procurement, generation, transmission and supply firms, including major entities such as OETC and Oman Power and Water Procurement Company, the privatisation plan is complex, with sell-offs being undertaken in a phased manner (see overview).

In October 2018 Nama’s top officials travelled to London to partake in a roadshow to announce the launch of its two-part privatisation programme for electricity transmission and distribution companies. Nama appointed a consortium of advisors to assist with the programme, with this jointly led by consultancy London Economics and French asset management firm Lazard Frères.

The plan will see the holding company maintain a controlling stake in OETC, although it will most likely relinquish its majority stake in MEDC, Majan Electricity Company (MJEC), Mazoon Electricity Company (MZEC)and Dhofar Power Company (DPC). The programme’s first phase will see Nama sell 49% of its shares in OETC and 70% of its shares in MEDC, while the second phase will see Nama sell 70% of its shares in MZEC, MJEC and DPC. Both phases are expected to be carried out before the end of 2019.

OETC

OETC is currently a closed joint-stock company with the main activities of transmitting and despatching electricity to the Main Interconnected System (MIS), which covers approximately 864,000 consumers and extends throughout the governorates of Muscat and Buraimi, and a large part of the northern governorates of Al Sharqiyah North, Al Sharqiya South, Al Batinah North, Al Batinah South, Al Dakhiliyah and Al Dhahirah.

Since 2014 OETC has also been licensed to dispatch electricity to the Dhofar region of southern Oman, following a reorganisation at another Nama entity up for privatisation, the DPC. With this step, the company established transmission control over around 95% of the country’s electricity market.

Although figures were down slightly in 2017 and the first half of 2018, the company is a profitable enterprise, with a near-monopoly position on electricity transmission and despatch. According to OETC’s financial statement, the company had total assets of OR1.27bn ($3.30bn) in the first half of 2018, indicating a marginal decline from OR1.28bn ($3.32bn) in the first half of 2017. At OR45.9m ($119.2m), revenue registered a slight dip to OR47.6m ($123.6m), while profit before tax increased from OR18.9m ($49.1m) to OR20.3m ($52.7m) over the same period. Profits before tax for the whole of 2017 were OR33.9m ($88m), down 17.5% on OR40.4m ($104.9m) in 2016.

MEDC

MEDC is also a major player in the local market. As the sole entity responsible for the supply and distribution of electricity in the Governorate of Muscat, MEDC covers the capital area, which includes Oman’s largest urban area and population centre, and its industrial and commercial heart. MEDC’s results for 2017 show its customer base expanded, up by an additional 26,368 accounts that year, taking the total to 362,891 at year-end.

According to MEDC’s annual report for 2017, revenue increased by 3% over the year, to OR313.5m ($814.2m), although net profits were down from OR14.6m ($37.9m) to OR2.3m ($6m). The company attributed this to an increase in income tax, from 12% to 15%, and revenue adjustments due to regulatory and other changes.

The company has made significant progress in upgrading its network and reducing losses in recent years. In 2009 losses accounted for some 17.6% of total distribution; however, by the end of 2017 that number had been reduced to 6.9%. Meanwhile, in November 2018 alone, MEDC signed some OR7.5m ($19.5m) in contracts to improve power supply around its area of jurisdiction. The company has also been expanding its e-payment services, with such transactions accounting for 29% of all payments at the end of 2017, up from 15% in January that year.

Making Economies

The combined assets of all five entities earmarked for privatisation is around $6.5bn, with OETC and MEDC comprising some $3.2bn of this figure. Privatisation efforts should therefore result in a significant transfer of funds to government coffers at a time when the country is tackling a sizeable fiscal deficit.

According to the IMF, Oman ran a fiscal deficit of 11.4% of GDP in 2017, due mostly to the effects of sustained low global oil prices starting in 2014. The recovery of energy prices throughout much of 2018 saw the national budget deficit fall by half during the first five months of the year. Nonetheless, with prices drifting down again as of November 2018, revenue from privatisation will be important for shoring up the state’s fiscal position.

Another expected benefit of the privatisation is a transfer of knowledge and expertise from private to public sectors, and from international to national staff. Upgrades in human resources are expected to improve operational performance and raise the global standing of local firms, easing their access to international financing, as well as the latest technologies and best practices.

Subsidies

The sell-off will also likely attract foreign investor interest in the Oman power sector, provided the detail of the final deal is attractive. One possible stumbling block is subsidies. The average cost per MWh in 2017 ranged from OR16.50 ($42.85) on the MIS to OR49.90 ($129.59) in Musandam; however, electricity subsidies mean that consumers pay the same rate for provision across Oman. This poses a clear challenge for any privatised licensed supplier as the subsidy bill reached OR456m ($1.2bn) in 2017.

Indeed, this was a question raised by international rating agency Moody’s in its analysis of the sell-off deal, which concluded that the privatisation of OETC and MEDC was “credit negative”. The concern was that privatisation might lead to a reduction in these subsidies and other government support, impacting the performance of companies.

Indeed, in January 2017 the government removed subsidies for electricity supplied to large-scale commercial customers with annual needs that exceeded 150,000 KWh. It has yet to extend this to residential consumers; however, there is increasing pressure for the government to take a less active role in electricity pricing going forward. The introduction of a spot market may also have significant implications for future tariffs (see overview).

While the details of the privatisation deal are not yet widely available, with the government maintaining significant shares in both OETC and MEDC, it is likely that the state actors will want to ensure that profitability continues. According to Moody’s, it is expected that “each electricity subsidiary will continue to play a strategic role for the government as an essential service provider, a facilitator of government policy to diversify the economy away from hydrocarbons, and an employer of Omani nationals, even in the case of a minority [state] ownership”.