The market remained relatively flat with a miniscule 0.01% improvement in the KSE-100 Index to close at 1663 level this week as against the last week, a reflection of the conservative investment behavior after witnessing extreme volatility in the week earlier. The average daily volume (ADV) declined by 6% to 114million shares this week as against 122million shares in the last week.

On Monday the Russian Deputy Foreign Minister Anatoly Safonov arrived in Pakistan to push forward Russian President Vladimir Putin's proposal of arranging face-to-face dialogue between Pakistani and Indian leaders with a hope to avert the growing tensions between the two countries. The KSE-Index recovered 52 points and breached the 1,700 level psychological barrier to close at 1,715 level for the day. The upward rally created a huge investor appetite for scrips like Hubco that finished the trading session close to its circuit breaker ceiling limits. Other scrips that followed the lead were ICI, Engro and FFC Jordan.

On Monday evening, President Pervez Musharraf was to address the nation regarding Pakistan's stance on the deteriorating relations with India. The next day (Tuesday) the market responded negatively to the speech and shed 42 points to close at 1,673 level as compared to the 1,715 level a day earlier. The perception of the U.S and Russia defusing tension at the LoC seemed to have faded out and the investors decided to liquidate their positions in stocks like the BOC, POL, PSO, Lever Brothers and Wyeth Pakistan that led the volumes by 35million shares for the day.

Institutional investors extended support to the market on Wednesday and the KSE-100 Index recovered another 27 points to close at 1,700 level as against 1,673 level of a day earlier. Similarly, average daily volume (ADV) increased to 156million shares as against 35million shares on Wednesday. Hubco was the highlight of the day —c not just domestic buying but also foreign buying was felt in the scrip that led the entire market to close at relatively higher levels. The market opened by gaining 30 points, in the due course it did go through some correction but towards the ending of the session it once more rebounded.

On Thursday the news about the attack on Indian police camp in the occupied Kashmir plunged the market back to square one and the KSE-100 Index shed 30 points to close at 1,670 level as against 1,700 level on Wednesday. While, mainly the weak holders displayed sell-side sentiment, gloominess prevailed in the entire market with anticipation of India's retaliation towards the attack by Muslim militants. The investors decided to remain on the sidelines in order to avert undue financial risk and therefore selling was felt in the earlier inflated prices of scrips like PSO, Shell and Hubco.

Friday, President Pervez Musharraf announced that he was considering withdrawing troops from anti-terrorist operations on the western borders for their deployment on the eastern borders. Further, Pakistan, Turkmenistan and Afghanistan signed a trilateral agreement for a multi-billion dollar gas pipeline, which would run from Daulatabad gas-fields in Turkmenistan to Gawadar. However, these developments could not offset the market apprehension and consequently the market fell by 7 points to close at 1,663 level as against 1,670 level on Thursday. Displaying confused sentiments by the investors and extreme vulnerability of the market towards political unrest.

In its FY02 economic plan, the government appears to have shifted focus away from thermal power generation and towards natural gas/hydel electricity. The reason is the high cost of imported furnace oil and its negative impact on the country's foreign exchange reserves.

The total installed capacity of electricity generation in Pakistan has increased by 76,045 GWh since 1991 to 152,923 GWh as on 30th June 2001 driven by 48,907 GWh capacity additions of new IPPs since 1997. Hydro electricity accounted for 28% and thermal generation (gas and FO) and other (nuclear/coal) equalled 72% of total generation in 2001. The installed capacity of hydel electricity generation has remained static since 1995 at 42,276 GWh.

GoP owned national utility WAPDA, remained the leading electricity generator in 2001 with a share of 50% in total electricity generated of 68,117 GWh. KESC (GoP owned utility), HUBCO and KAPCO (International Power of UK) produced 11.7%, 10.5% and 9% of total generation, respectively, whereas the share of other IPPs remained close to 16% in 2001. There are thirteen listed IPPs on the Karachi Stock Exchange (KSE) out of which, the "famous" Hubco commands almost 85% of share in power sector's market capitalization. Even excluding Hubco, there are only three IPPs with a generating capacity of over 100 MW each, with ten IPPs (total generating capacity of 3,907 MW) unlisted.

Oil remained the leading source of input for electricity generation during 2001. Natural gas, on the other hand, saw an increase to 32% in 2002 from 29.8% in 2000 as the second largest source of electricity generation in Pakistan. Hydel power generation saw a drop to 25% during 2001 from 29.3% in 2000 whereas coal and nuclear energy gained slightly to 3.3% in 2001 from 1.2% in 2000.

Domestic (Household) sector consumed around 47% and industrial set ups utilized 29.5% of total electricity generated in 2001. Even though the total generation is around 68,117 GWh, the total recorded consumption comes out at 48,585 GWh in 2001, according to the Pakistan Energy Year Book, signifying the high level of Transmission and Distribution (T&D) 'system' losses. Though, the T&D losses have declined last year as army took control of WAPDA and KESC, they rose significantly during the last five years from 23.5% to 31.5% in 1999.

The future outlook of Pakistan's power sector improved drastically as the tussle between the government-owned power-utility Water and Power Development Authority (WAPDA) and the IPPs on the issue of electricity tariffs came to a end through mutual agreement last year.

In addition to the tariff renegotiations, the important issue of dividend payouts to international shareholders seems to have balanced out with rising foreign exchange reserves, the approval of a US$1.30bn Poverty Reduction and Growth Facility by the World Bank and the IMF, as well as through recent flows of foreign exchange in developmental aid to Pakistan.

According to the Ministry of Water and Power, the World Bank's (WB) visiting mission recently has expressed its satisfaction regarding the current power sector reforms in Pakistan. In our opinion, even though the pace of the reforms is slow, the recent invitation by the Government of Pakistan for Expressions of Interest (EoIs) from qualified financial advisory consortiums to assist the government in privatizing two thermal power units of Genco-1, Jamshoro Power Company Limited, has assured the WB of the GoP's desire to restructure the power sector.

GoP has divided WAPDA into 12 independent entities, including three power Generation Companies (Gencos), eight Distribution Companies (Discos), and one Transmission Company as part of its corporatisation plan. According to government sources, the successful sale of Jamshoro Power Company Limited would set the tone for privatization of other government owned power generation companies going forward.

We believe that the power sector reform process is likely to continue as International Financial Institutions have linked future funding with these power sector reforms and the GoP would be inclined to service its tariff agreements with various Independent Power Producers (IPPs). Further, the GoP is planning to announce a new power policy focused on Hydel generation to attract long-term investment into the sector.

The GoP has finally decided to begin the marketing for sale of Karachi Electric Supply Corporation (KSEC) with the aim to privatize it within 2002. However, this is not the first time that the government has planned a sell off for KESC as it was due for disposal in December 31, 1998, but the plan continued to be postponed due to heavy financial and T&D losses.

In our opinion, the successful privatization of WAPDA's thermal units, KESC and gradual power sector reforms to utilizing cheaper domestic inputs (natural gas and coal) for power generation, coupled with recent hydel power generation enhancement plans by the GoP are likely to improve the power sector profile, going forward.

We believe that the increasing pace of power sector restructuring in Pakistan is going to have a positive impact on the operations of the three listed (under KASB coverage) IPPs in Pakistan namely Hub Power (Hubco), Kohinoor Energy (KEL) and Southern Electric Power (SEPCOL).