KESC PRIVATISATION: CHALLENGES AND THE KARACHIITES
By MUHAMMAD BASHIR CHAUDHRY
Apr 07 - 13, 2003
The privatisation of Karachi Electric Supply Corporation (KESC), which has been incurring losses since 1995-96 due to various reasons, has reportedly been deferred by the Privatization Commission for the time being. This deferment provides an opportunity to the local investors particularly from Karachi for acquiring controlling interest in KESC, at present an integrated utility. KESC has been serving the people of Karachi for the past about ninety years and therefore is now a household name and the Karachiites might not wish to see its control passing to the international investors. Emotions apart, there are strong economic considerations for which the local investors might attempt to acquire control, as was the case before the government acquired majority share holdings in 1952.
It may be mentioned that KESC was incorporated on 13th September 1913 under the Indian Companies Act, 1882 as amended to date under the Companies Ordinance 1984. KESC is listed on Karachi, Lahore and Islamabad Stock Exchanges. The Ministry of Water and Power looks after affairs of KESC that is principally engaged in generation, transmission and distribution of electric energy to industrial, commercial, agricultural and residential consumers under the Electricity Act, 1910 as amended. Its licensed area is spread over entire Karachi and its suburbs up to Dhabeji and Gharo in Sindh and over Hub, Uthal, Vindhar and Bela in Balochistan. The total area covered is in excess of 6000 square kilometers.
Transmission and Distribution (T&D) losses in KESC system at 41% during FY 2001-02 are exceptionally high when compared to WAPDA system losses that are 24%. WAPDA operations are spread all over the country, excluding KESC licensed area of about 6000 sq. kilometers. Theft of electricity in the KESC system is cited as one of the reasons for such high losses. Pilferage might be one factor but the entire KESC system from generation to distribution being outdated; the losses are bound to be high due to technical reasons as well. The present management at KESC has been making efforts to control T&D losses. However, much more needs to be done in this regard through technical and administrative measures. Without considerable reduction of T&D losses, the financial health and profitability of KESC cannot be achieved.
KESC has in the past availed, for its various projects, large foreign currency loans from international financing institutions such as the World Bank, ADB, OECF, KfW, Japan EXIM Bank, etc. and Rupee loans from commercial banks and financial institutions. However, in spite of that the T&D system as well as the generation capacity could not be kept continuously up to the mark. The generation capacity fell short of the requirements of the customers and the transmission and distribution system also could not be maintained/upgraded to the acceptable standard, as was the case previously. This obliged KESC to make large purchases of power from WAPDA, PASMIC, KANUPP and the IPPs namely Tapal and Gul Ahmed. Poorly maintained transmission and distribution system contributed to high T&D losses. These factors contributed to high financial losses, liquidity constrains and neglect of improvement plans.
The T&D losses in KESC system were only 20.84% during 1989-90 after which losses started increasing. The T&D losses exceeded 30% for the first time during 1994-95 when net profit before taxation was Rs 189 million. Thereafter, KESC operations suffered high financial losses: Rs 6,779 million for 1996-97, Rs 6,857 million for 1997-98, Rs 7,364 million for 1998-99, Rs 12,787 million for 1999-2000, Rs 16,201 million for 2000-01 and Rs 17,741 million for 2001-02. In the face of such high losses, KESC survived only due to the determined help and financial support from the government. Such support, however, is not sustainable and real reasons for the loss situation have to be identified and corrected at the earliest.
The government has keep KESC operational for the Karachiites by pumping in huge cash as well as supporting its management through various means. The present KESC management has been taking steps to improve operations. A number of remedial measures such as New Customer Services Centres (One Window Services) in Defence Housing, establishment of Korangi Model Zone for Korangi Industrial Area, Industrial Billing (One Window Services), Review Committee for out of court settlement, Relief Package in recovery of outstanding dues, etc. have started giving positive results. However, the improvement has not as yet been translated into better financial operations. Therefore, much more needs to be done and quickly so that KESC is transformed into a modern service-oriented profitable utility.
It may be noted that KESC is sort of a mini-WAPDA and its problems are similar to that of WAPDA. In order to better appreciate various KESC aspects and its problems, certain extracts picked from the Chairman's Review/Directors Report to Members contained in KESC Annual Report for FY 2001-02 are presented below:
1.In the year under report, all available resources were utilized for financial improvement of KESC, but exorbitant increase in the price of furnace oil, heavy burden of financial charges and increasing trend of T&D losses continued to affect liquidity position of the Corporation. The revenue from the existing tariff is insufficient even to cover the cost of fuel and power purchase. The result has been heavy losses and constant cash shortfall. GoP has been providing funds to KESC each year to ensure uninterrupted power supply to Karachi area and keep it operational.
2.KESC has converted all generating units of Bin Qasim Power Station (BQPS) on natural gas. The utilization of such an option is full of advantages. The immediate impact will be the reduction in fuel cost.
3.Higher net loss of Rs. 17,741 million for the financial year 2001-02 as against last year figure of Rs. 16,201 million is attributable in particular to enhance financial and other charges. The expenditure under this head increased from Rs. 5,840 million in 2000-01 to Rs. 8,617 million in FY 2001-02 due to financing of shortfall from borrowings.
4.KESC has been carrying on its operation with very old generation plants. Its transmission and distribution system is also outdated and overloaded. The T&D losses have reached to the level of 41%, which includes theft of electricity on large scale. It has become imperative to take concrete measures to improve KESC system and curb higher T&D losses through technical and administrative measures.
5.The KESC has prepared a comprehensive plan, involving an investment of Rs. 13,349 million for improvement of the Transmission and Distribution system and to minimize theft of power. The GoP has already agreed to finance the above investment through Budget Funding. After the completion of these projects the T&D losses and the theft of electricity is expected to reduce from existing 41% to 24% by 2006. The implementation of the plan will also ensure availability and reliability of supply and improved customer service.
6.It is informed that subsequent to the balance sheet date, Government of Pakistan (GoP) has paid to WAPDA a sum of Rs. 8 billion on behalf of KESC. Ministry of Finance has been requested to provide the breakup and details of amounts paid to WAPDA. KESC has also requested the Federal Government for waiver of interest on WAPDA dues. It is expected that the interest on WAPDA dues will be waived off as is being done in case of utilities, oil and gas companies by the Government of Pakistan.
7.The Government of Pakistan (GoP) is the majority shareholder in the capital of KESC. GoP has recently approved Financial Restructuring Plan of KESC entailing conversion of GoP and GoP Guaranteed Loan of Rs. 65.341 billion into equity and reduction of paid up capital of the Company by Rs. 57.202 billion to extinguish accumulated losses. The shareholders have also approved the above proposals by way of passing Special Resolution at the EOGM held at on May 27, 2002. Conversion of GoP loans has since been effected in July 2002 after obtaining permission from SECP and completing all legal & statutory requirements. Whereas, High Court of Sindh has confirmed reduction of capital of KESC in October 2002. The effect of the capital restructuring would be completely reflected in the Financial Statements for the period ending December 31, 2002. With the implementation of above Financial Restructuring Plan, the book value of KESC shares would be Rs. 4.16 (Positive) vis-a-vis Rs. 96.47 (Negative) prior to restructuring based on figures as on December 31, 2001.
8.GoP has been providing funds to KESC to keep it operational. It is, however, imperative to convert it into a self-sustaining unit. The proposed plan for system improvement and reduction of T&D losses holds the promise of radical change in the financial state of the Corporation. The goal can only be achieved if the required funds for implementation are timely arranged. Failing which substantial load shedding in Karachi will be imminent and not only the residential and commercial consumers, but also the industrial production of Karachi will be badly affected. Reduction in industrial production of the city, generating major portion of the country's revenue, will also affect the whole economy of the Pakistan.
The clear warning note sounded by the Chairman of the KESC Board, deserves careful attention of the Government, the industrial and commercial consumers and the Karachiites in general as existing or prospective consumers of electricity. It is considered that bringing KESC out of existing difficult situation would help maintain Pakistan's competitive advantage in industry, commerce, services and agriculture. Therefore, it is suggested that the government and other stakeholders might jointly consider various probable solutions to KESC problems. Some of the important areas for such consideration are briefly discussed as under:
1.The privatisation approach earlier pursued for KESC may be reviewed for a change. KESC was being privatised as an integrated utility entailing much larger investment outlay as against the approach adopted for privatisation of the Power Wing of WAPDA, which was first restructured into eight distribution companies, three generation companies and the National Transmission and Despatch Company (NTDC). In due course, these new generation and distribution companies would be privatised while NTDC would stay in the public sector. In fact, privatisation process has been already initiated for FESCO and Jamshoro Power Company. On WAPDA's pattern, KESC may also be divided into two or three generation companies and about five distribution companies. The transmission and despatch part might eventually be merged with the NTDC. This arrangement would be more conducive for privatisation and the local investors would be able to easily finance the investment. The privatisation process may be initiated preferably with the distribution companies. The outcome of the integrated privatisation approach for KESC and the interest shown by the prospective international bidders was not entirely unpredictable as this approach entailed much larger upfront investment outlay, beyond the acceptable risk and returns profile.
2.The capital structure of KESC that emerges after conversion of the government funds into equity may also be assessed for appropriateness and balance. During FY 2001-02, the financial charges were nearly 25% of the total revenue for the year. The capital structure must be conducive for raising additional funds to finance additional generation capacity as well as the plan for system improvement and reduction of T&D losses.
3.The generation capacity required for reliably supply of electric power to the existing and prospective consumers in the KESC license area might be re-assessed. The Managing Director, KESC in a recent talk reportedly said that presently KESC was short of 400 MW of electricity, besides 250 MW of pending load. He was quoted of saying that during peak hours; the demand went up to 1,800 MW as against generation of 1,100 MW, additional supply of 300 MW by the IPPs and that the gap was met with the supply of 400 MW by WAPDA. He cautioned that during the next 3-4 years, the power supply deficit would rise to some 1,000 MW and it would keep increasing if new power plants were not established. As the gestation period of power generation plants is relatively longer, efforts for the additional generation capacity must be initiated now to effectively meet the projected demand. The situation might also improve if KESC transmission line is constructed to Hub Power Company and the reasonable tariff arrangements could be finalized with the parties involves.
4.KESC Plan for the System Improvement and Reduction of T&D Losses is estimated to cost Rs 13,349 million, for financing of which the government has reportedly agreed. The technical scope of the plan and its adequacy might be thoroughly re-examined to fully modernize the entire transmission and distribution system, including overhaul/replacement of transformers, the installation of bulk meters, replacement of electro-mechanical meters with electronic meters and installation of other essential equipment.
5.KESC makes bulk purchases of power from public sectors power producers as well as the IPPs. The arrangements with these suppliers including the determinants of despatch priority may be reassessed. This should be in conjunction with the proper determination of generation, transmission and distribution cost of KESC; using independent reputed consultants for the purpose. This exercise would also help review the System Improvement Plan.
6.Tariff and the input costs are the key elements for reforming KESC financial position and profitability. A critical review of these elements would give a truer picture of KESC operations and help the management take appropriate decisions.
7.As is apparent from KESC Annual Report for the FY 2001-02, WAPDA and KESC relations/transactions are complicated and need early resolution. Through a special meeting convened by the government, the financial matters between these two institutions may be resolved. Similarly, issues if any with the Pakistan State Oil, Pirkoh Gas Company and the National Refinery may be satisfactorily resolved at the earliest.
Karachi and KESC, both are of critical important for the country. In the post WTO scenario the role of both is important for the economy. Their relationship and inter-dependence are such that one may not flourish for long without prosperity of the other. Therefore, the federal and the provincial government, the industrialists and the businessmen and the Karachiites are all urged to give special consideration for resolving KESC issues. KESC is much more than the usual public sector entities and its privatisation and rehabilitation may be handled accordingly.