THE PRIVATIZATION OF KESC

KESC should be privatized and working out modalities should not pose problems

By SHABBIR H. KAZMI
Jan 19 - 25, 2004

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 OVERVIEW

Installed Capacity

1756MW

Actual Capability

1316MW

Maximum Demand in 2003

1973MW

Units Generated in FY2003

8,807,595MWH

Revenues in FY2003

Rs 11,797mn

Total Customers

1.60mn

KEY ISSUES

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.

WAY FORWARD

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 possible.

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.