KESC NO MORE GOVERNMENT'S LIABILITIES

The government was providing an annual subsidy of Rs12 billion to make up the corporation losses

By ASHRAF KHAN
Feb 14 - 20, 2005

A Saudi group on February 4 this year offered the highest bid for Pakistan's southern electricity supply monopoly in an auction as part of the country's privatisation plan.

Kanooz Al Watan, the lead bidder with co-bidder Siemens offered Rs20.24 billion ($340 million) for acquiring 73 percent shares of Karachi Electricity Supply Corporation, a sole source of power supply to the largest industrial city of Pakistan.

"Of total bid price, Rs15.8 billion are the company price whereas the successful bidder would mandatorily inject Rs4.4 billion as ready investment in the KESC," Pakistan Privatisation official told PAGE from Islamabad.

A consortium led by Hasan Associates Private Limited, a Pakistani company, made the second lowest bid of Rs13.2 billion.

KESC has a installed capacity of 1,750 megawatts and its supply network is spread over entire Karachi and its suburbs with total coverage area of around 6000 square kilometers.

The bid had been formally submitted to the Cabinet Committee on Privatisation (CCoP) for approval who has fulfilled the ritual to seal the historic deal.

The power company has been making huge financial and technical losses for past many years, which are attributed to high rate of electrical theft. Transmission and distribution losses average around 36 percent of its total generation capacity. In this regards, Pakistani government was providing an annual subsidy of 12 billion rupees to make up the corporation losses.

KESC coming under hammer witnessed much seesaw after it was formally placed on privatisation list in 1997. PricewaterhouseCoopers (PwC) was appointed Financial Advisor together with the Asian Development Bank. Privatisation Commission had invited Expressions of Interest (EOIs) from qualified utility operators and strategic and financial investors in September 2003 for sale of up to 73 percent shares of KESC. Initially five bidders came forth but later backed out leaving the Saudi Al Watan as well as Hasan Associates, a consortium backed by big fish in Pakistani capital market.

"We would see a definite turn around in the company's performance in next couple of years besides saving the Rs12 billion subsidy to the company," the official of the Commission said.

The present army-led management of the KESC after many endeavors successfully bring the T&D losses to 34 percent this year as compared to over 41 percent last year, howsoever analysts may be skeptical of the claim.

However, the existing plans set a formidable task ahead of the new owners of the corporation, who are likely to take charge of it by mid-March. This task envisages further four percent cut in T&D losses to 30 percent next year and further six percent in 2007 so as to achieve financial break-even.

The present physical infrastructure is the major caveat to reach the targets. KESC's financial and technical wizards believe the corporation needs about Rs40 billion in coming years to improve the infrastructure. This includes restructuring of transmission system, grids, distribution system, new feeders, PMTs and setting up of SCADA system.

According to a financial investment plan (FIP), drawn by the Government of Pakistan, the new company could raise about Rs7 billion by issuing right issues whereas rest would come from banks and financial institution.

Another challenge, Al Watan would face, is fast growing power demand which has already outstripped supply from KESC's own generation capacity. Of total of 2,070 mw current power needs, the corporation's plant generate 1,200 to 1,500 mw whereas rest is imported from the two private power plants and Wapda.

"KESC would face shortfall of 1,500 mw in next couple of years necessitating the need of inducting more power plants at its own or invite private parties," said an official of the KESC.

TARIFF ISSUE

Common, commercial and industrial consumers, nevertheless, are keen to see the new management tackling the pinching issue of tariff rationalization. Ever increasing fuel prices provide a fair pretext to the power utility for higher tariff. The private owner may have their own set of priority but winning their consumers confidence logically ought to be on the top.

The latest developments show that present management of KESC has approached NEPRA for an increase in the power tariff. This would, if granted, be yet another blow on the consumers, being ground by exorbitant energy costs in terms of gasoline and diesel.

The KESC proposal to NEPRA also appears highly irrational in view of the fact that KESC has been bearing nominal losses on account of tariff whereas the largest chunk of recurrent losses goes to mismanagement and T&D losses.

"The current tariff structure causes a 10-paisa losses to KESC," said an insider at KESC.

This comes to about one billion rupees (9 billion units) that is less than even 10 percent of about 12 billion annual losses of the KESC. The government could not easily make up for such a tinny loss on account of tariff but also provide a much needed relief to the consumers by granting a couple of billion rupees out of its total net savings of Rs12 billion. Does it make any sense to Islamabad?