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Chinese offer to buy KESC

Consumers will be the ultimate beneficiary

Apr 23 -29, 2001

At present consumers in Karachi Electric Supply Corporation's franchised area face long hours of load shedding. This disruption is partly due to some technical reasons but mainly due to a huge gap in in-house power generation and dependence on WAPDA. While the peak demand in the area exceeds 2000MW, KESC has a dependable capacity of 1300MW. To meet the shortfall KESC is dependent on WAPDA and two IPPs located in its franchised area. The current Power Policy does not permit KESC to increase its generation capacity.

It has been proved beyond any doubt that unless KESC is privatized no fresh investment can be made to increase power generation capacity and to revamp transmission and distribution (T&D) network. While efforts are being made for its privatization, achieving the objective seems very difficult due to a number of factors. These include lack of will, prevailing investment climate in the country and above all financial condition of the Corporation. Till privatization of KESC becomes a reality, problems faced by consumers have to be resolved in some way and at the earliest.

Sector analysts foresee two immediate alternatives: an agreement with HUBCO for direct supply of electricity or establishment of a 1000MW IPP in KESC's franchised area. While there are indications that the GoP is studying the first option very seriously, this arrangement cannot be made without certain changes in the original agreement of HUBCO with WAPDA and approval from its lenders. Making such arrangements may not pose any serious problems but supply to WAPDA will be curtailed by the same magnitude. Besides, additional investment will be required to link HUBCO with KESC grid. However, financing for this arrangement is a key consideration, will KESC bear the cost or HUBCO will be ready to finance the project?

Establishing an IPP of around 1000MW in KESC's franchised area seems a more plausible alternative but who will do this? It is feared that very few investors will be interested in establishing an IPP in Pakistan for the time being and particularly in KESC's franchised area not because the terms and conditions offered to sponsors will be different from those made available to HUBCO but due to precarious financial conditions of KESC. Besides, it will not be advisable to allow establishment of an IPP in the area without revamping KESC's highly depleted T&D network.

The obsolete T&D network is the major reason for exceptionally high technical losses and theft. For a compact utility like KESC, T&D losses should not be more than 15 per cent. Whereas, these losses touched as high as 60 per cent in the recent past and are estimated around 35 per cent at present. According to some sector analysts one per cent T&D loss costs Rs 40 million to KESC. Since Asian Development Bank now owns nearly 25 per cent shares in KESC, it must also explore ways to reduce T&D losses. Unless these losses are controlled additional supply of electricity cannot improve cashflow of the Corporation.

Looking at the prevailing conditions what could be a more convincing solution? The one and the only solution is privatization of KESC and that too at the earliest. Will there be any buyer? At the face value, receiving an attractive proposal may seem a remote possibility. However, some analysts have strong faith that if the GoP shows its commitment and seriousness many investors are still willing to buy out KESC. The existing gap in demand and supply, compact area of operation and the potential for reducing T&D losses makes KESC a very attractive buy.

According to reliable sources, some investors from China have shown interest in buying KESC and discussions have been going on at the top level. While some analysts classify this an interesting 'rumour', others term this an irresistible option. One also gets a feeling from the acts of KESC management an inclination towards its privatization. Apparently the management has given up recovery drive particularly for overdue amounts and efforts are being made to improve collection of current bills and to reduce T&D losses. Whatever may be the reality, one must explore why the option looks attractive.

The fresh investment in KESC is required for increasing generation capacity and revamping T&D network. The magnitude of this investment is estimated in billions of dollars. According to some sector analysts, "China is a competitive and dependable source for 'hardware' as well as financial assistance. The desired ROE of investors from China is normally much lower than the return demanded by investors from America, Europe or Japan and the interest rate charged on loans is also substantially low." If the cost of expansion and revamping is low, financial and depreciation charges will also be lower. Therefore, the Chinese investors will be able to generate electricity at a lower cost and then distribute it more efficiently. The ultimate beneficiary of such an arrangement will be the consumers.