Efforts are once again been made to privatize the
Karachi Electric Supply Corporation (KESC). However, unless the factors
ailing the utility are addressed properly it will not be possible to
complete the transaction. It is necessary to reiterate that the demand
of electricity in KSEC's franchised area touches 2000MW as against a
dependable capacity of around 1200MW and its dependence on Independent
Power Plants (IPPs) and WAPDA has touched a level whereby probability of
meeting the enhanced are diminishing. On top of this transmission and
distribution (T&D) network has become so depleted that it is
incapable to handling the additional load. Since the public sector
utilities are not allowed to establish additional power plants, the only
way out is to expedite establishment of more IPPs in KESC's franchised
area and revamp its T&D network.
According to some equities analysts KESC's stock
price is likely to react positively to news of its possible sell-off by
March 2004. However, the bullish sentiments are likely to be short
lived, as privatization of this entity in the current fiscal year seems
rather impossible. While KESC is a valuable franchise, the proposed
privatization of the entity is likely marred by several issues, which
makes KESC a difficult transaction. KESC is a much more complicated
transaction with issues like electricity theft, high line losses, huge
receivables and huge liabilities. Therefore probability of completing
this transaction within the current financial year seems are far cry.
Four bidders had shown keen interest in acquiring the
government's stake in KESC. AES of USA, which was one of the initial two
parties interested in KESC, has reportedly pulled out. AES has also sold
out its interest in two IPPs in Pakistan. It is believed that the
US-based firm is curtailing its investment in developing countries. AES
has not submitted a fresh EoI for KESC, which was invited recently,
therefore, one should not expect that it will at all participate in
privatization of KSEC.
The other parties that have submitted Statements of
Qualification are 1) Hasan Associates (Private) Limited Consortium
including Al Bayarak Al Baida Co., Kuwait, and ABB; 2) Independent Power
Corporation PLC and Eskom, South Africa; 3) Corner Stone Partners UK; 4)
Kanooz Al Watan for Project, Saudi Arabia/Siemens Germany.
KESC- A BRIEF
Maximum Demand in 2003
Units Generated in FY2003
Revenues in FY2003
KESC is a difficult transaction for privatization.
Some of the issues that are likely to be source of concern for the
bidders are: Rs 4 billion payable to National Refinery. This amount was
originally payble to PSO by KESC for the supply of furnace oil. However,
to facilitate the privatization of PSO, the government transferred these
receivables from PSO to National Refinery. So far no mechanism has been
devised for the settlement of these payables. KESC's T&D losses
stand at a very high level of 40%. These are mainly on account of
electricity theft and can be controlled. On top of every thing KESC
requires huge investment in infrastructure. The government had
previously indicated that the new owner of KESC will be required to
invest around US$ 300-400 million in infrastructure. High recievables is
another area that is likely to have a major influence on the bid price.
KESC's receivables stood at Rs 10,170 million as of 30 June 2003. The
majority of these receivables are due from government organizations.
Privatization Commission has been facing numerous
hurdles in the privatization of state-owned enterprises. Privatization
of Pakistan State Oil Company (PSO), which is a relatively simple
transaction, has taken months and still the Commission has not been able
to bring the oil giant to the bidding table. Saying this, it will not be
fair if one does not recognize the efforts of the Commission that made
privatization United Bank and Habib Bank possible. These two
transactions were also very difficult but only the willingness made them
Therefore, first of all the Commission should develop
a conviction that it wants to privatize KESC and then take the necessary
measures. The commitment can be expressed by divesting at least 10%
shares of the company through public offer.
PAGE has repeatedly expressed that selling off
KESC as a compact utility is not an easy task. The utility should be
first dividend into one generation company, one transmission company and
four distribution companies and only then be offered for sale.
It is true that KESC suffers from huge electricity
theft but it has also been able to identify and curtail the pilferage in
certain areas. For further control of theft it needs some capital
expenditure. It is also true that interruption in supply has been
increasing the number of unsatisfied customers, particularly industrial
consumers. The sale of proposed generation company with specific mandate
to cater to industrial consumers can help in overcoming twin problems,
frequent interruption and high tariff.
Reaching the conclusion that KESC should be
privatized working out modalities should not pose problems. Private
Power Infrastructure Board has already solicited EoIs for establishment
of IPPs in KESC's franchised area. The decision may be made in the light
of proposed strategy.