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Without improving cashflow through reduction in T&D losses no financial package can be of any help

June 17 - 23, 2002

The GoP is trying hard to make Karachi Electric Supply Corporation (KESC) an attractive entity to ensure its swift privatization. One of the recent moves was debt equity swap. About Rs 83 billion debt has been converted into equity. The key reason for this swap was said to be very heavy debt servicing liability of crisis laden utility. This was estimated around Rs 10 billion per annum. Out of this about Rs 6 billion pertains to interest and redemption of TFCs issued in mid nineties. Therefore, the financial experts believe that the KESC will only get an advantage of Rs 3 billion per annum. The TFCs will mature in year 2004 and then only the real advantage of this swap could be realized.

Despite this reenginnering a debt of Rs 30 billion, mostly belonging to commercial banks has to be reprofiled. The GoP wanted to issue bonds offering 10 per cent interest per annum. But banks did not accept this proposal. They insisted to lend this money against T-Bills only and agreed to 7 per cent per annum rate of return. An average person may ask, why did the bank agree for lower return and insisted on T-Bills? The money market experts say, "The bank wanted an instrument which could help in preserving liquidity and should also reflect in SLR. While Bonds did not offer any of these, T-Bills met both the objective.

According to KESC sources, the main reason for financial crunch has been fuel cost and power purchase from other sources, including two IPPs and WAPDA. Whereas, other analysts say, "The main reasons for the pathetic financial conditions are: about 40 per cent T&D losses mostly comprising of theft, very high receivables, high level of inefficiency and mismanagement. Therefore, unless operations are improved no financial package can ever improve financial conditions of this utility."

At present KESC's in-house power generation primarily comprise of Bin Qasim Thermal Power plant, having a designed capacity of 1260 MW. It is nearly ten year's old plant which, at the best, translates into a dependable capacity of 1150 MW. It is neither prudent nor advisable to run all the units round the year. Therefore, if one unit is shut down for repair and/or maintenance, the dependable capacity of this plant is reduced to just 950 MW. The depending capacity of other smaller power plants put together, at the best can be taken at 150 MW. The installed capacity of two IPPs operating in KESC's franchised area is 250 MW. Therefore, KESC has to depend for supply of 200 to 500 MW on WAPDA.

As against this the peak demand of KESC's franchised is estimated around 2000 MW in summer and about 1600 MW in winter. While there is reduction in demand, power generation at WAPDA's hydel power stations also goes down, to about 50 per cent. Since providing electricity to its own franchised area is prime responsibility of WAPDA, in case of any shortfall in generation, KESC is first to be denied supply. Therefore, the residents of Karachi have to bear load shedding or load management throughout the year.

An option is to allow the KESC to increase its generation capacity. However, it is not possible due to the GoP policy, an embargo on state-owned power generation companies on adding capacity. This is also a face saving because, even if there is policy, the KESC cannot undertake expansion due to non-availability of resources. The KESC management cries about limited availability of unit available for despatch, but has been failing in reducing T&D losses. Whereas, the reality is, it does not have funds to maintain and improve existing T&D network, leading to many interruptions in supply and surges in voltage.

As result of debt equity swap the KESC management has succeeded in changing the complexion of its balance sheet. Prior to this the situation was a negative equity of Rs 32 billion and debt of Rs 64 billion. After the swap, it has a positive Rs 10 billion equity and debt of 33 billion. Till full redemption of TFCs the KESC will continue to post a loss of Rs 1.2 billion per month. The KESC management demanding another Rs 25 billion and proposes to post profit after three years. Will the banks be willing to accept this proposal?

The sector experts say, "We have tested many options but financial condition of KESC is going down from bad to worse. Now only one option is left, sale of KESC to private sector. The investors expressed keen interest in taking over control of KESC in the past and they are still keen. After the latest financial restructuring, it is an ideal opportunity to sell the KESC. Only one point, an existing market for over 2000 MW and also a latest demand of 500 MW, is the biggest attraction. The successful bidding of Pak Saudi Fertilizer and United Bank must give courage to the Privatization Commission to decide the fate of KESC.