Restructuring the KESC
Control in line losses, power theft and bringing down the high tariff will definitely improve the situationBy AMANULLAH BASHAR
Feb 01 - 07, 1999
The Economic Coordination Committee of the Cabinet has approved the Power Bonds, worth Rs11.5 billion, to bail Karachi Electric Supply Corporation (KESC) out of acute cashflow crisis consequently leading to the worst-ever power shortage, currently being experienced by Karachi city.
The financial restructuring, including floatation of Power Bonds was proposed by the UBS, the financial advisor, to improve financial health of KESC before its privatization which has been deferred at least for one year.
The Power Bonds, guaranteed by the Federal Government, will be sold in the first week of February to the commercial banks and other financial institutions.
The entire amount, out of the Power Bonds, has to be used by the KESC for debt retirement. This means that Power Bonds may ease the mounting pressures on KESC for repayment of outstanding dues of the fuel suppliers. Here arises the question that how the KESC would be able to pay the commission to its Financial Advisors who have arranged the sale of Power Bonds. The commission, at the rate of one per cent, amounts to Rs115 million to be given to the UBS. Another question, which comes to mind, is that how the KESC, already facing acute financial crisis, would arrange payment of profit i.e. Rs1.035 billion to the Power Bonds holders after every 6 months. These are the questions which remain answered.
The huge financial liabilities, faced by KESC, continue to be aggravated by the line losses. The Transmission/Distribution losses including power theft were curtailed from 42 per cent in 1995-96 to 31 per cent in 1996-97. However, these technical losses once again jumped to over 46 per cent currently, it is learnt. It may be noted that one per cent of line loss costs Rs.1 billion.
The purchase of power from private sector, as well as from WAPDA, is another area causing liquidity crunch for KESC which has to pay in cash to two IPPs working under its lincensed area.
KESC has to pay:
Rs250 million to Tapal Energy per month in cash.
KESC pays Rs86.594 million to Tapal as Capacity Charges and Rs.128.925 million for energy charges (78,435,900kwh) units.
Rs250 million to Gul Ahmed per month in cash.
KESC pays Rs90.795 million to Gul Ahmed as Capacity Charges and
Rs.122.485 million for energy charges(79,722,500 kwh) units.
Rs250 million to WAPDA(This amount is, however, adjustable against different accounts) and not paid in cash.
At present KESC owes Rs12.9 billion to its suppliers primarily Pakistan State Oil (PSO) and Sui Southern Gas Company (SSGC). Although, the KESC, under an agreed formula, is paying in cash for purchase of fuel oil from PSO which is based on 70 per cent for current purchases and 30 per cent of the amount for debt servicing as the PSO has gone to extreme level by suspending fuel supply to KESC. Owing to shortage of fuel resulting the KESC had no option but to close down two of its Bin Qasim power units causing an immediate loss of around 350 MW. KANUPP which supplies around 80 MW is already out of operation for maintenance. How PSO, being a government owned organization, can take a decision of suspending the fuel supply to another government owned organization, is of course an amazing situation. It is interesting to note that PSO which also owes around Rs10.5 billion to National Refinery, is not clearing its dues and continues to get supply from NRL but has refused to meet the fuel demand of KESC. Although, the Governor Sindh, as well as, the Federal Minister for power Gohar Ayub Khan have asked the PSO to resume oil supply, yet the matter has not been resolved so far and it seems that until and unless the Power Bonds are floated and the dues are cleared the oil supply would not be restored and the consumers would continue to suffer.
The load shedding duration, which spans over 2-4 hours in most parts of the city including industrial areas, has already disturbed the export commitments of the manufacturing sector beside disrupting civic life. How the PSO or any other organization can be given a free hand in a democratic society to operate on its own will?
It is said that as a result of these mounting over dues from KESC, both PSO and SSGC have been unable to make payment to their suppliers and the situation has contributed to the increasing inter-corporate of "circular" Debt. KESC is pursuing recoveries of its dues from its consumers but it is unable to service its payables to suppliers from its cashflow. In order to ease the financial constraints, the payables are being restructured for over a 5-year period. Following steps are being taken for financial restructuring:
KESC will be issuing Power Bonds for five-year term, to PSO and SSGC against the total amount of Rs11.5 billion. These bonds will be placed with financial institutions like commercial banks, investment banks and other non-banking financial institutions in such a manner that once issued, they would pass through the balance sheets of all intermediary suppliers and become the direct obligation of KESC to the financial institutions, guaranteed by the Government of Pakistan.
In effect, these bonds will only momentarily touch the balance sheets of PSO and SSGC and their suppliers before being placed with the financial institutions. Since the bonds will be pre-placed with the financial institutions, the entire transaction, to be completed simultaneously with the involvement of the intermediary suppliers, would be in the form of a book entry. Because of the pre-placement mentioned above, there would be no need for PSO, SSGC or their suppliers to find a buyer for the bonds in the market.
The net effect will be that KESC will gain a period of five years within which it can stagger the repayment of these payables, making interest and principal repayments directly to the financial institutions holding the Bonds.
This structure will allow improvement of the Balance sheets of KESC and its suppliers and, therefore, result in resolution of inter-corporate/circular debt.
Debt servicing (principal plus interest) of these Bonds will be guaranteed by the GoP.
The Bonds will carry an indicative coupon rate of 18 per cent per annum, or a rate at which the financial institutions will agree to hold the Bonds.
The Bonds would have to be structured in a manner that they would be attractive for financial institutions to invest in. Among other modalities, this would require State Bank of Pakistan's approval for declaring these Bonds as part of the reserve requirements of financial institutions.
The Government has also guaranteed a short term loan of $50 million for KESC through Citibank. If the Citibank finalizes the sanctioning of the loan, the amount of 5-year term Bonds may be reduced by Rs2.2 billion from Rs 11.5 billion.
The KESC which operates on 100 per cent oil-fired power generation, is confronted with power crisis on account of short supply of furnace oil. Pakistan State Oil (PSO) which is the sole supplier of furnace oil. The short supplies have thrown two of KESC's five Bin Qasim units out of generation. The non-operational units have led to a gap of over 350 MW, forcing KESC to resort to unprecedented and unannounced load shedding in winter season.
KESC's Bin Qasim's five units, having an installed capacity of around 1100 MW were hardly running at 70 per cent capacity, producing around 750 MW only. With the closure of two Bin Qasim units, KESC's net power generation reduced to around 400 MW, while it is buying 250 MW from Independent Power Producers i.e. Tapal and Gul Ahmed, 80 MW from Karachi Nuclear Power Plant (KANUPP) and around 20 MW from Pakistan Steel. This makes a total of 750 MW against a demand of around 1400 MW in Karachi. WAPDA was also facing a shortfall owing to declining water level in rivers and a steep slash in KAPCO which is producing only 100 MW against its installed capacity of 1600 MW generation.
The PSO, on the other hand, has denied the charges that KESC was forced to resort to load shedding due to fuel shortage. Sources in PSO said that PSO was regularly supplying fuel to KESC.
Regarding dues, sources said that an amount of Rs.8 billion was outstanding against KESC in connection with the fuel price, supplied by PSO. Under an agreement, it was decided that KESC would purchase furnace oil worth Rs20 million on daily cash payment basis, and 30 per cent amount of the outstanding dues would also be deducted out of the cash payment. Under that arrangement, KESC is buying 3,700 tonnes of furnace oil on daily basis at a cost of Rs20 million. The daily requirement of furnace oil, KESC needs, is 5,000 tonnes. Although, PSO has claimed that KESC is buying 30 per cent less of its requirement which is the reason for consequences including closure of two units and load shedding.
According to agreement, the KESC had to have a reserve of 35,000 tonnes of furnace oil for emergency consumptions. However, KESC was forced to consume its reserves and on Dec.31, 1998 KESC had a reserve of only 14,564 tonnes of oil.
The PSO's contention that KESC was buying 30 per cent less of its fuel requirement, does not sound well, instead the KESC has no option but to buy 30 per cent less than its requirements because all the purchases have to be made on cash. It is not the case that KESC has a fatty purse and yet it is buying 30 per cent less than its requirement.
KESC's receivables from government during 1996-97 1997-98
KWSB Rs367million Rs779 million
KDA Rs38 million Rs4 million
KMC Rs25 million Rs19 million
Provincial government Rs104million Rs100 million
Federal government Rs1.13billion Rs 1.66billion
State owned departments Rs114million Rs160 million
Receivables from Private Consumers
Industrial Consumers Rs3.04 billion Rs3.85 billion
Domestic Consumers Rs6.41 billion Rs9.09 billion
TOTAL Rs11.23billion Rs15.68billion
In order to streamline recovery drive of over Rs15.68 billion outstanding dues and to check power theft at massive scale, about 1,300 army personnel are being inducted in KESC within a fortnight, it is learnt. Accompanied by army personnel, Rangers Jawans would also be assisting in the operation for removal of kunda and illegal connections causing over Rs40 billion losses of KESC revenue per annum.
The army personnel, apart from removal of kundas or recovery of long-standing dues, would also provide assistance for improvement in overall administrative work in KESC to eliminate corruption within KESC's rank and file.
Gohar Ayub Khan, Federal Minister for Water and Power has, however, assured that the power crisis in Karachi would be over within next one week, as the Prime Minister Nawaz Sharif has issued special directives to improve things within a week.
He was talking to a delegation of the industrialists including Majyd Aziz, Chairman, SITE Association of Industry, Siraj Kassam Teli, senior vice president, Karachi Chamber of Commerce and Industry, Zubair Motiwala, Chairman Sub-Committee on Power and other prominent industrialists. The delegation met the federal minister to apprise the him about the sufferings of the industry in particular and the general consumers in particular on part of worsening power distribution system which is almost on the verge of collapse.
The minister, while agreeing to various proposals of the industrialists said that steps are in the offing to bring fundamental changes in KESC which would be visible within next 15 days.
The industrialists pointed out that Karachi was still contributing 67 per cent of the total revenue generated from all over the country. However, if the infrastructure facilities, specially power system, were not improved the industrialization would be at stake. It may not only discourage fresh investment in the manufacturing sector but would be paralyzing the effects on the existing investments, the industrialists warned.
Siraj Kassam Teli while highlighting various corners in the KESC's system, said that problem does not lie in the power generation or other systems, infect it is the gross mismanagement which has crumbled the whole working of the KESC. Radical steps are needed to be taken to combat the mismanagement, Siraj suggested.
The delegation also pointed out to the minister that as a matter of fact the industry has been sandwiched between the poor power supply situation and the red-tapism of the bureaucracy. They explained that a large number of industries have imported gas-fired generators to cope with the disturbed power supply situation. These imported generators are lying unused as the relevant authorities have not issued "NOC" for use of gas to run these generators. Such snags will have to be removed immediately to save the industry which is struggling for its survival.
Majyd Aziz, Chairman, SITE Association informed the minister that undisturbed supply of power to industry would contribute more than Rs2 billion revenue to the exchequer. However, instead of improving the revenues, the interrupted power supply is adding to the problems of the industry as well as the government exchequer. The irregular power supply has increased the cost of production and damaging the industrial raw material, equipment and machinery.
The industrialists also suggested to eliminate the middleman's role of PSO by allowing direct import of fuel to KESC or WAPDA. The PSO miserably failed in meeting its fuel supply commitments to the upcountry power generating units despite arrangements of railway bogies by the government. Steep cut in KAPCO's power generation due to fuel shortage is a glaring example.
Gohar Ayub said that his visit to Karachi was the part of the improvement programme as he especially flew in to look into the KESC's affairs. Regarding the proposed increase in power tariffs, the minister attributed it to the IMF conditionalities which he felt have to be taken as bitter pills for recovery of the national economy. He, however, indicated that steps are in the offing to bring speedy and marked improvement in the KESC system.
The National Power Regulatory Authority (NEPRA), it may be pointed out, has approved 11 per cent increase in power tariff from April this year. The increase has been notified to the concerned government departments. The tariff with this 11 per cent increase would stay till March 2000.
NEPRA, according to informed sources, was of the view that the proposed increase would not be double as recommended by the World Bank and other donor agencies.
The tariff has been determined by NEPRA based on the filings to be done by WAPDA and KESC. The official circles say that detailed scrutiny of the rationale behind the tariff adjustment was done to safeguard the consumers' interest. It is claimed that the increase in tariff is the part of the national programme to arrest deteriorating trend of financial inefficiency in power utilities. This increase is also a part of pricing reforms for electricity aimed at reducing cross-subsidies and adjusting average tariff to fully reflect changes in the costs, have been implemented rapidly.
There is no second opinion that financial situation of WAPDA and KESC has rapidly deteriorated. There has been a substantial build-up of cross arrears between the government, the utilities and the fuel suppliers putting WAPDA and KESC both in great difficulties to meet their financial obligations.
It is however generally felt that increase in power tariffs would not help improving the situation unless the leakages within the KESC and WAPDA are plugged. The increase in tariff is exactly like the increase in salaries which in no way helps in controlling the inflation rather it fans to the inflationary pressures. The domestic, commercial and industrial energy consumers already crying over what they called exorbitant power rates are in no mood to swallow any further increase. They said that the current power tariffs heavily loaded with different types of taxes including fuel adjustment charges, meter rent, additional surcharge, surcharge, electricity duty, income tax and fixed charges altogether have a cumulative effect which are three times more than the actual energy charges. Keeping in view the excessive taxation on electricity, Prime Minister Nawaz Sharif had given a 30 per cent relief in electricity bills a few months back which earned a lot of applause and political gains for the present government. However, the proposed 11 per cent increase in power tariff would again offset the relief given by the Prime Minister because overall incidence of the 11 per cent increase would have a cumulative effect of around 30 per cent in the presence of different taxes stated above.
WAPDA and KESC both are suffering from serious financial crisis mainly because transmission and distribution losses amounting to over 40 per cent, on account of power theft. The solution of financial crisis lies in the control of line losses costing Rs40 billion per annum to KESC as one per cent loss costs Rs 1 billion. Instead of taking administrative measures, rationalization of power rates could be more effective. The gas prices can be cited as the glaring example of this concept as the gas consumers pay their bills more promptly.
Although, the number of gas consumers by and large are equivalent to the electricity consumers but no average or inflated billing is done in that area because the gas consumers are always willing to pay what they consume.
It is the will which guides the people to pay for what they consume and not the administrative steps which may produce temporary relief but not a permanent solution.
It is a generally believed that the only reason behind the power theft at such a massive scale is due to irrational and exorbitant power charges. The inflated billing also gives way to power theft through illegal means in connivance with the KESC staff.
Infact the electricity charges are so exorbitant that the word "utility" has lost its meanings.