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KESC requires Rs 4 billion to clear its dues

A prime example of the difficulties faced by the GoP in privatization

By SHABBIR H. KAZMI
Feb 05 - 11, 2001

The Karachi Electric Supply Corporation (KESC) has posted loss before tax of approximately Rs 12.787 billion for the year ending June 30, 2000 as against a loss of Rs 7.364 billion for the previous year — a whooping increase of 72 per cent. As at June 30, 2000, against a paid-up capital of Rs 4.8 billion, accumulated losses were Rs 32.2 billion. The situation seems to have further deteriorated during July-December 2000 period. This demands immediate probe into the factors responsible for persistent increase in losses. However, it must be kept in mind that the various financial restructuring done in the past have failed to yield results because hardly any effort was made to improve operational efficiency.

The most interesting observation is that its revenue of Rs 26.042 billion was not even enough to cover cost of fuel and power purchase amounting to Rs 26.118 billion. The other expenses were debt servicing charges (Rs 5.484 billion), depreciation (Rs 2.821 billion) and administrative, operations and maintenance (Rs 4.406 billion). Therefore loss before tax came to Rs 12.787 billion. One may also wonder on the quantum of receivables of the Corporation which is getting fatter with each passing day.

One may wonder about dependable capacity of KESC which has reduced to 1300MW as against an installed capacity of 1735MW. The maximum demand in its franchised area was 1730MW during the previous year. This clearly denotes that the Corporation is mainly dependent on its Bin Qasim power station.

As regards financial restructuring/fresh borrowing, the sector analysts strongly believe that the KESC is simply transforming the financial burden to a future date. The Corporation received a loan of US$ 225 million from Asian Development Bank (ADB) for development and restructuring, but the amount was actually used to payoff short-term liabilities. In December 2000 the KESC raised Rs 3.4 billion in loans from local banks in anticipation of release of fund from the ADB. Therefore, the use of fund for paying off liability instead of revamping generation and T&D network means no improvement in cashflow.

It is true that the persistent hike in furnace oil is a serious problem for the state-owned power generation companies. However, consumers are totally disgusted by the demand of KESC and WAPDA for further hike in electricity tariff. Since December 2000 global prices of furnace oil have lowered by nearly 30 per cent. According to the automatic tariff adjustment policy, approved by NEPRA, the electricity tariff should be reduced rather than allowing any further increase. Analysts say, "Any hike in tariff encourages more consumers to pilfer electricity."

Some sector analysts say, "Even the current management of the KESC is working without a game plan but their first priority remains the same — increase in electricity tariff." They also raise a question, "If the KESC management is not able to overcome the problems, despite induction of army, what could be the next strategy?" We face a situation, "can't shut it down, can't afford to keep it afloat." Therefore, the last and the only resort is to privatize the corporation. The sector experts suggest: first divide the company into one GENCO and 5 DISCOS and then sell each entity. As against a latent demand for more than 2000MW, KESC's existing dependable capacity is only 1300MW. Therefore, the potential investors would be willing to takeover small and manageable entities. As such with each passing day the probability to sell KESC as a compact utility is diminishing fast. They say, "Take any step before the system totally collapses."

The KESC management attributes these losses to T&D losses, power theft, meter tampering, wasteful expenditure and high cost of furnace oil. The argument presented by the KESC may be right to some extent but no one deny the fact that the management has been failing miserably in taking corrective steps as it has no game plan. According to a KASB report, "KESC is a prime example of the difficulty that the government will have in privatizing a majority of its units. The Corporation is heavily in debt, and hopes of generating positive cash flow in the near term are almost nil. Hence instead of an asset that can be sold for a positive sum of money, it faces the task of having to inject more money in from meager budget resources. This is not to say that the privatization of the unit should not go ahead, the efficiency gains are potentially tremendous of the country. But realistically, the privatization cannot happen unless the GoP abandons its "keep afloat" policy and actually sets about restructuring it. Correcting the ills, which beset this unit, though, will undoubtedly be akin to opening Pandora's box. One thing is for certain, the shareholder is not going to get any thing out of KESC for a long time to come.

Financial Highlights

. 99-2000 1998-99

Revenue (Rs. mln)

26,042

23,781

Expenditure (Rs. mln)

. .

Cost of fuel & power purchases

26,118

20,713

Debt Servicing Charges

55,484

3,042

Depreciation expenses

2,821

2,726

Administrative, Operation & Maintenance expenses

4,406 4,664
. 38,829 31,145
Loss before tax (12,787) (7,364)