PRIVATIZATION OF KESC
A landmark in energy sector
By AMANULLAH BASHAR
Nov 01 - 07, 2004
The privatization of Karachi Electric Supply Corporation (KESC), scheduled on December 6, 2004, is going to be the event which may change the course of energy map of the country.
So far, the power distribution, management of the two major utility companies i.e. WAPDA and KESC operating responsible to cater to the needs of the consumers was in the hands of the state management. The privatization means that the managerial powers of the KESC, which is responsible to feed the power needs of the largest power consuming city of the country would now be transferred into the private hands.
After short listing of the intended investors, the Ministry of Privatization had selected three foreign groups keen in running the KESC affairs.
Among the three short-listed bidders which contesting to emerge as a successful bidder including, Kanoos Al-Watan group of Saudi Arabia, Independent Power Consortium of the UK and the Hasan Associates, representing a major business group from Malaysia.
Although there were indications that most probably Saudi group might be winning the bidding, yet irrespective to the results of the bidding, whosoever might be the winner, the deal is bound to open doors for foreign investment in the power sector at a massive scale. The successful bidder besides running the KESC would put in considerable funding to improve the infrastructure in Karachi which certainly brings improvement in power distribution of mega city. Despite the fact that the present management was endeavoring to improve the power supply to over 1.8 registered plus illegal consumers for the last three years. The present management as a result of its untiring efforts succeeded to some extent to overcome the problem of power theft to some extent, yet a major chunk of the power produced is drained out in the name of Transmission & Distribution losses, which is now estimated to the tune of 38 percent in KESC alone.
This huge pilferage in the KESC system is not only causing losses to the equal amount running in billions of rupees on one hand, but consequently responsible for high rates of electricity especially for the domestic consumers which according to an estimate paying more than Rs8 per unit. The losses it looks are being recovered from the pocket of the genuine consumers.
It is believed that the private management would certainly not like to allow the prevailing Transmission and Distribution losses at such a massive scale and take preventive measures including replacement of the naked copper wires with the under group cables. The areas which need immediate improvement in the KESC system would call the new management to inject at least $400 million for improvement of the present infrastructure, especially the distribution system which is extremely old, outdated, oxidized and overloaded.
The improved infrastructure which according to informed sources has already been agreed by all the three foreign investors would ultimately bring huge benefits to the new management by plugging the leakage through power theft. According to an estimate, the effective check on power theft with the improvement in the infrastructure would bring additional revenue worth Rs20-25 billion which should be an irresistible charm for the new comers because they are prepared to buy the company with the existing liabilities and revenues.
The present management led by Brig. Tariq Sadduzai has succeeded to improve various areas lying in shambles some three years ago when he took charge. A comparative study shows that KESC revenues which were at Rs12.7 billion in 1994-95 have been gradually increased over the years and have achieved a level of Rs42.6 billion in the year 2003-04.
The journey of revenue improvement can be seen in the following revenue collection year-on-year basis:
REVENUE AT A GLANCE
The impressive revenue collection which hit the unprecedented mark of Rs42.6 billion in the last financial year 2003-04 indicate that if the private sector management succeeds in plugging the transmission and distribution losses (37.8 percent in 2003-04), KESC will prove a gold mine for the lucky successor.
Besides reducing the transmission and distribution losses from 42 percent to present 38 percent, effective step were taken to do away with the culture of average billing which was at 60 percent in 1999 and today is even less than 11 percent. The minimum billing was also curtailed from 20 percent in 1999 to 06 percent in 2003 while rate of recovery was quantified from 80 percent to 97 percent today. With the improved revenues and recovery rate it is believed that the KESC is likely to become a profit-earning organization from next financial year.
In the backdrop of this scenario it is highly important for the government to ensure that the benefit of the improved revenues should be passed on to the consumers by the private sector management. There is a need of a legal cover to protect interest of the consumers to avoid the malaise of the monopoly status to be enjoyed by a single private sector company.
FACTORS BEHIND MASSIVE POWER THEFT
Both WAPDA and KESC are suffering from huge losses on account of power theft in their systems. The question is why there is countrywide trend of power theft, are we a nation of power thieves? Or the majority of the consumers with average income were forced to use Kunda (illegal connection) to avoid payment of electricity bills which they are unable to afford. There should be no second opinion that it is high cost of power which leaves no option with the people of low income group to steal power, otherwise they are not thieves by nature. This statement proves as true in the case of natural gas. I have a detail survey and investigation that at least among the urban gas consumers there is no any precedence of stealing natural gas. The price of the gas is quite affordable and people happily pay their bills.
Although the KESC management has good reasons for high power tariffs especially in the face of heavy impact due to abnormal rise in fuel prices. According to an estimate, the KESC has to face an additional impact of Rs50,095 due to increase in fuel oil prices which forced the KESC to increase power tariffs. On one hand the additional impact, according to official figures of the KESC was estimated at Rs50,095 due to rise in fuel prices while the increase in revenue due to increase in tariff was estimated at Rs11,002 million which leaves a shortfall of Rs39,093 million.
These figures may be good and valid in the past when the KESC system was running on oil-fired system. But the situation in respect of fuel cost should altogether different because now the entire KESC power generation system has been shifted from oil to natural gas which must have drastically cut down the fuel expenditures. This reduction in fuel cost must also be accepted by the KESC with open heart and should prove itself as the consumer friendly organization by passing on the benefit to the consumers. Another factor behind the abnormal price of power in our country is the government levies on electricity consumption.
The taxes on power consumption are yet another area which calls for an immediate attention of the economic managers of the country. It is the harsh fact that high cost of electricity due to taxes discourages the consumption of electricity even in the areas which can generate more revenue through economic activities if they were given cheaper electricity. The utilization of the utility services as tax collecting agencies has a serious impact on economic growth especially the cottage industry which is considered as the spinal cord of any economy. It is the cottage industry which creates the job opportunities at a massive scale. Power alleviation is one of the top priorities of the agenda of the present government. Certainly, the government has taken various steps to reduce the level of poverty in our society; however, there was no visible impact of these efforts so far. In fact, the high cost of electricity is a major contributor to increase the poverty level instead of addressing the issue. Liaqat Jatoi, the Federal Minister for Water and Power in a meeting had agreed that the price of electricity needs serious consideration of the government and had assured that he would take up the matter at the highest level.
When you have a look at the electricity bills, it gives a shock to the consumer when he goes through an array of taxes which include surcharge, additional surcharge, income tax, electricity charges, fuel adjustment charges, meter rent and the recently imposed TV charges. The TV charges have imposed across the board whether the consumer is a mosque, school or medaressa, water pumping or other consumers have no sense of using television. The billing department should have some common sense or it should have gone through some painstaking prior to issuing the bills studded with TV license fee. This also shows how our government departments are least bothered to make things a laughing stock. Supervisingly, now the KESC has issued an application form or NOC form and issued it to the consumers that if they are not the user of any TV set, they should submit that NOC form with the KESC billing department to escape from being imposed of such a tax.
KESC CAN BE DIVIDED INTO FIVE COMPANIES
Karachi which is not only the largest city of Pakistan but according to statistics, it is larger than 87 countries of the world. Each of the five districts in Karachi is a big city itself while we look at the population and the area it covers.
Currently, KESC has to cater to over 1.8 million consumers besides providing consumer services to this city of distances. Though the situation has been improved a lot and the complaints are attended promptly by the staff, yet it is not humanly possible for a single management to look into all technical, financial and administrative matters single-handedly besides providing quality services to such a large number of consumers. Hence it is highly advisable to divide KESC into five companies belonging to each district which would ensure better consumer service and a better quality of uninterrupted power supply. The bifurcating of KESC into five companies would also help creating a healthy competition among the private companies which ultimately improves quality of services and bring down the cost of the electricity. In this respect, we can refer to the ideal situation developed in the telecommunication sector where the prices have come down to an unimaginable level following the arrival of different companies in the field of telecommunication. The privatization of the power sector should also follow the footprint of the telecommunication sector which has brought a revolution in the life of the people of this country. A monopolistic status is feared to create problems for the consumers instead of making life easy for electricity consumers.
DEMAND AND SUPPLY
As against a demand of over 2000mw of power, the existing installed power generation capacity of the KESC is estimated at 1300mw, but it is only installed capacity as far as actual generation is around 700-800mw because most of the time, two or three units always remain under service as most of the generating units have already come to their age.
The gap in demand and supply is bridged from different sources including 250mw from two IPPs i.e. Tapal and Gul Ahmed, an insignificant amount of around 50MW is contributed each by KANUPP and Pakistan Steel while 500MW are purchased from WAPDA. Although the KESC management claims that the net shortfall in its system is merely 22mw but the frequent power break downs and load shedding betray the claim.
According to the assessment made by the KESC about the projected demand of power may rise from the current demand of over 2000mw to 2469mw by the year 2006-07.
However, these figures do not speak about the real demand and supply situation in the light of various factors.
Actually, over 500mw of power is currently being generated by the textile industry through its own captive power plants. These textile units which have been allowed use of natural gas for power generation have become self-sufficient in power generation in Karachi alone, however, there is a demand for yet another 500mw for self-power generation in the private sector. The gas connection for power generation has been given by the SSGC only to the export-oriented industries which provide a certificate that over 80 percent of their products are exported. This has also created some unrest among those industrial units which do not come under the bracket of export-oriented industries. These units, however, have strong and valid arguments that though are not directly involved in export business but they are saving the foreign exchange by manufacturing import substitutes which is equally important as far as the foreign exchange was concerned. However, such units which do not produce exportable products are not eligible for gas connection to go into self power generation. This gives an idea that there is much appetite for electricity in Karachi and the situation calls for immediate remedial steps to overcome the power shortage in this industrial and commercial hut of the country.
PROJECTS IN THE PIPELINE
In order to reinforce power supply situation in the KESC system, the HUBCO-KESC direct link project is currently in the pipeline which is expected to be completed by June 2006. KESC would have an access to additional power of around 1400mw produced by HUBCO, once the direct link project between HUBCO and KESC established. This would certainly ease the situation to a great extent, however, the growing demand for power calls for more steps to meet the future demand in an effective manner. In this respect, the KESC was seeking government support for establishment of new power generation plants having capacity up to 1000mw by 2007 in its system. It is also suggested that immediate action is required on war footing for establishing small power generating units having a minimum capacity of 50mw. The units should also be allowed in different corners of the city to meet power demand in future, besides issuing licenses for barge mounted power plants.
It may be noted that the government has recently allowed for power plants each of 150mw to the private sector, but they are reluctant to go ahead as they are not assured for a long term guaranteed gas supply agreement by the SSGC.
KESC is no more an organization with a huge financial mess because the present government has pumped in huge funds to restore the financial health of the organization to make it an attractive deal for the intended buyers from the private sector.
To give a healthy financial look, the government had undertaken a major capital restructuring exercise in the KESC and had provided Rs83 billion to swap the debt for equity. Besides providing huge funding by the federal government, an additional fund of Rs57 billion was also made available to reduce its liabilities. Consequently, the debt and interest burden on the corporation was off loaded and the deficit on the reserves was eliminated, however, this funding enabled the government to increase its share holding in the KESC from 65 to 98 percent. Hopefully, the privatization of strategic shares to the tune of 52 percent may compensate all previous financial assistance provided by the federal government.
The experts in the energy sector were of the view that among the three contestants for assuming the management control of the KESC, the Saudi Group i.e. Kanoos Al-Watan has an edge over other contenders due to certain reasons. Besides being financially stronger, the Kanoos group has also offered to bring investment at a massive scale in other sectors such as Housing and Construction industry besides investment in infrastructure development which is also one of the priorities of the present government.
It is said that the privatization experience of the KESC will open doors for foreign investment in the power distribution sector and the change of hands in the remaining utility companies under WAPDA may not take more time.
People of Pakistan have gone through various experiments in the past as well which did no good as far as the lot of the average people was concerned in our country. The national economy in general and the people in particular had to undergo the ambitious plans of nationalization of the private sector entities on the pretext of equitable sharing of the national resources. That radical change had change the entire complexion of the economic scenario of the country by producing a crop of lethargic government servants. That crop of lethargic government servants did nothing except exploiting the national resources for personal gains. That experience played havoc especially with our education system which reduced to the bottom line besides hampering the literacy rate in the society. That setback to the education system stalled the way of knowledge based economic growth in our country.
After miserable failure of the adventure of nationalization, the nation was again put in yet another process by reversal of the nationalization into denationalization. The benefit of the exercises went only to the elements having political or other influences while the real stake holders that are the masses of this country were not allowed to share the cake in any case.
Privatization of the state-owned entities is yet another experience which was initiated by the last three governments including Nawaz, Benazir and the present government to use the sale proceeds for retirement of the foreign debt. We hope that the people of this country at least get rid of the formidable foreign debts which have been deferred through successful rescheduling by the present ruling team, however the sword was still hanging over our heads unless the debt was retired to an easy serviceable status as early as possible.
Currently, the international forces and donor agencies are showing a friendly gesture towards Pakistan mainly because of the dynamic attitude of the present leadership. However, the mood of the global political winds has always been unpredictable. The debt trap is generally used as a political lever against the growing or developing economies. We as a nation we should always keep in mind especially in the context of the foreign debt which had been a gray area of our economic independence in the past as well.