Public to private, finally
By AMANULLAH BASHAR
Apr 11 - 17, 2005
The much talked about privatization of Karachi Electric Supply Corporation (KESC), being considered as a turning point in the power sector of the country, is still in the process.
The new buyer Qanooz Al-Watan, a business group from Saudi Arabia has deposited the price i.e. around Rs20 billion in the New York branch of the National Bank. According to informed sources, the amount of sale proceed has yet to be transferred to the bank account of the Privatization Commission of Pakistan after addressing certain issues and reservations raised by the successful bidder before taking-over the charge of the KESC.
It is also learnt that the Saudi Group before transferring the money to the Government of Pakistan has sought certain assurances from the Government of Pakistan especially for guaranteed supply of fuel at a fixed price for next 10-15 years or permission to pass on the additional fuel cost to the consumers.
However, according to Brig. Tariq Sadduzai, the Managing Director of KESC, a five-year tariff formula has been agreed in an agreement between the Privatization Commission and the new buyer ensures that no increase in electricity charges would be made at least for next five years.
If the demand for guaranteed supply of fuel at a fixed price was true, it should be a matter of serious concern for all the stake holders' i.e. over 1.9 million consumers as well as the government having burnt their fingers in the past due to power purchase agreement with the Independent Power Producers.
Actually, people have started making comments out of curiosity due to delay in transfer of management to the private sector buyers. Since no official clarification has been made regarding change of hands in KESC management, rumors were also in circulation whether the deal would be materialized or not.
It may be recalled that under the existing arrangement for fuel purchase, the KESC had fuel purchase agreements with PSO and SSGC for supply of gas. However, under the privatization agreement, the new buyer is free either to enter into agreements with PSO or other Oil Marketing Companies or import fuel through their own resources.
According to Tariq Kirmani, Managing Director PSO, import of fuel oil especially for power generation costs around $600 million a year as the IPPs were operating through oil-fired system in Pakistan. On the other, the government under its new power policy did not allow new power generating units based on oil-fired system because of exorbitant rise in international oil prices. New power generating units are required either to operate on gas-fired system or other cheaper fuel like coal-fired or based on hydropower generating technology.
With this back ground the government would have the only option to offer guaranteed supply of indigenous natural gas or coal from Thar coal fields as the supply of fuel oil is obviously out of question because of its rocketing international prices.
Making comments over the situation, the chairman of SITE Association of Industry said that the interest of the industrial consumers was to get rid of the load shedding, power breakdowns and power fluctuations which cost heavily to the industrial output.
In order to ensure uninterrupted power supply, the new buyers would have to make substantial investment in the entire KESC network i.e. power generation, transmission, and the distribution system as the three segments have already come to their age and cannot deliver the job unless they are completely refurbished. He said that power consumers were already overburdened due to high tariff rates and government levies on power consumption, hence they may not sustain any further hike in power tariff if the new management was allowed to pass on the additional fuel cost to consumers.
The Site Chairman was of the view that the best option to make easy sailing was to ensure supply of natural gas to the new buyer to avoid increase in cost of power generation.
Summer has always been giving difficult times to the KESC and the consumers. The utility company operating with outdated generating units, has heavily overloaded transmission and distribution network. Confronted with a shortfall of around 1000mw, KESC has to manipulate to overcome the electricity demand through load shedding and the shutdowns in the face of a quantum jump in demand amidst scorching heat of the summer. The privatization of the KESC is being taken place at the threshold of the summer heat. It is the time when the KESC people would have to face the music from all corners of the city due to poor supply of electricity.
The insiders were of the view that the private sector management was deliberately avoiding to assume responsibility during the summer as they don't want to become the target of criticism of the consumers soon after taking over the charge of the utility. It is said that prior to take charge, they are waiting for completion of KESC-HUBCO direct link. The direct link with HUBCO is currently in the pipeline at an estimated cost of Rs3 billion. Once the project of direct link with HUBCO was established, it will turn the entire power supply situation enabling KESC to meet the city demand, which is currently exceeded to over 2000mw. Though the KESC has an installed power generating capacity of 1730mw, yet its old generators hardly produce 100-1200mw a day and renders this largest industrial hub to face breakdowns, shutdowns and load shedding obviously due to shortfall of around 1000mw. The new buyer is not willing to earn a bad name of poor management in the eyes of the consumers. Hence, it cleverly waiting to get through the hue and cry of the consumers during the summer.
The new managers of the KESC will be operating in technical cooperation of the Siemens Engineer Company which specializes in producing electricity equipment such as transformers, meters, generators and other gadgets. The new management has vowed to come out with a perfect distribution network without any sort of overloading in the entire system. To achieve a smooth distribution, the buyer plans to reinforce the distribution system by installing over 10,000 PMTs in the initial stage.
According to Brig. Tariq Sadduzai, the new management determined to reduce the load almost to half to do away with the power breakdowns or load shedding due to overloaded PMTs or transmission lines. Uninterrupted power supply would be the hallmark of the new management for which they would inject at least Rs400 million in the first phase of rehabilitation of the entire system.
Meanwhile, Liaquat Ali Jatoi, Federal Minister for Water and Power who visited the KESC head office last week has reassured that even after privatization of the KESC the government which is a stakeholder by virtue of 25 percent shares of the corporation would continue to oversee the performance of the organization, better services to the consumers and job security of the employees.
The main plank of the government policies and the agenda for economic reforms initiated by President of Pakistan General Pervez Musharraf was to encourage privatization of the public sector organizations and to bring foreign investment in the country.
"Government has no business to do business" Jatoi remarked. Mentioning his experiences during his recent visit to Moscow, he said that even in Russia, the privatization of state-owned enterprises were moving ahead. While emerging economies like Malaysia, Indonesia and Singapore were also pursuing the policy of deregulating their businesses, industries and services.
Liaquat Jatoi emphasized that the performance targets determined by the government vis-a-vis reduction of transmission and distribution losses and recovery of the electricity bills must be achieved by the organization during the current fiscal as the government was fully committed to the new buyers of the KESC regarding the operational performance and would provide protection and law enforcement support as needed by the new management.
MD-KESC Brig. Tariq Sadduzai informed that the reduction of T&D losses have already been achieved, in fact the target was 34% while through better planning the present T&D loss stood at 33%. One percent loss meant a saving of Rs500 million per annum. He said efforts for recovery of electricity dues were being made as usual according to the recovery schedule.
The outstanding dues of the Karachi Water and Sewerage Board (KWSB) were again accumulated to the tune of Rs1.1 billion. The KWSB was defaulting in payments since last four months.
Liaquat Jatoi, however, while appreciating the efforts of the KESC billing and recovery officials advised that they should keep on their efforts to achieve 100% recovery of the current bills irrespective to the social status of the consumers. The Ministry of Water and Power will provide them all possible support even after the new management takes over the corporation, said Jatoi.
Present team of management led by Brig. Tariq Sadduzai has completed five years of KESC's charge. The army was inducted in KESC with a special target to reduce T&D losses which at the time of taking over the charge were soaring to the level of 42 percent and to bring fiscal discipline, reducing financial liabilities, recover huge outstanding dues and rehabilitation of the operational network.
Significant progress has been made during this period in operation of financial areas by which KESC has in fact been converted into a viable, efficient and service-oriented utility to a great extent. In fact, the privatization of KESC proves that corrective measures taken during last 4-5 years have placed the utility company in a state to attract attention of the investors.
Present management claims that the situation is improved to a great extent as the revenue has almost been doubled during the period through control over leakages, widening of the consumer base, improvement in sales mix and hectic efforts to control theft of power with nominal increase in tariff.
The rising trend of T&D loses has been effectively checked and for he first time in many years a reduction of 3 percent has been achieved last year. Effective implementation of the project for system improvement and reduction of losses launched since June 2003 has also started showing positive results in all areas including the improved consumer services.
The financial losses and cash shortfall have been substantially reduced. In fact, cash surplus of Rs1.6 billion on completion of the project has been targeted by the management by 2006-07 with a targeted reduction of T&D losses to 24 percent and 100 percent recovery ratio.
Within the installed capacity of KESC, generating stations was 1735mw while the actual capability was claimed at 1342mw. The maxim demand for power has crossed 2000mw.
On one hand, the KESC was facing continuous growth in the power demand while also going through acute shortfall in availability of power on the other hand. In order to overcome the shortfall, the government has allocated eight gas turbines from UAE for installation on emergency basis ensuring supply of 240mw power by June this year. Besides reinforcement of supply through installation of gas turbine probably donated by Kuwait government, work was also taking on far footings for establishing direct link of transmission line from HUBCO to KESC.
Meanwhile various international power generating players have also approached the government for setting up power plants within KESC franchised area. Currently, the two IPPs namely Gul Ahmed and Tapal Energy which are also contributing around 250mw into the KESC system have also been granted permission to double their production capacity.
In fact, there is no dearth of investors in power generating area in Pakistan because of available energy-starved market. The privatization of the KESC was selling-off the huge consumer market to one company which would enjoy a monopoly over such a lucrative consumer market. The new buyers would have keep an eye over rapid increase in demand of power in Karachi due to establishment of a number of industrial zones, and industrial cities in outskirts of Karachi. The growth in economic activity around Karachi would require enhancement of power generating capacity of KESC which could only be met through arrival of more generating units by the private sector. The only bottleneck in the way of growth in power generation is the cost of fuel. Under the situation, corrective and speedy measures are required to develop natural gas resources besides early completion of the cross border pipeline. The targets are uncertainly ambitious but have to be achieved to attract investment which help in meeting growth rate set at 8 percent in next two years.
KUNDA CONSUMERS (ILLEGAL CONNECTIONS)
The theft of power at a massive scale in KESC and WAPDA is the real contributor to erode the financial stability of the two utilities which share the power distribution system of the entire country. This nuisance has been given a technical name i.e. Transmission & Distribution (T&D) losses. This nasty term is responsible not only for huge financial losses to the utility company or the government but consequently instrumental for higher power rates in Pakistan because the loss is believed to being passed to the genuine consumers.
Insiders told an interesting story that when the issue of power theft was brought into the notice of the new buyers they put a counter question "are the electricity consumers were so poor that they cannot pay even their electricity bills? They, however, come out with a solution to address the issue of power theft in the KESC network. They would like to accommodate the Kunda users in the Zakat Fund of their company, provided these illegal consumers get them registered with the company under the Zakat provision. This facility would be available to the poor consumers, however, the consumers willfully involved would be brought under the revenue generating list for which preventive measures are already underway. The steps include insulated overhead and underground cables and other devices to prevent power theft.
The new buyers, however, have identified the root cause of power theft by saying that the consumers were so poor that they cannot pay the electricity bills! This statement makes it clear that the power charges are beyond the reach of the common man. Whatever the causes for higher electricity price may be whether due to government duties or growing cost of power generation, the fact remains that people in the normal income groups cannot afford to pay huge electricity price which jumps higher in case they consume slightly above 300 units a month. When the foreign investors can offer to adjust the poor in their Zakat fund why not the Government of Pakistan accommodate the power consumers living below poverty line in its Zakat and other funds allocated for poverty reduction.
Sooner or later, change of hands from public to private sector would take place in KESC. Over 20,000 employees of the KESC seemingly were happy as the new management has assured to allow trade union activity from the day the new management takes over the charge. They are also assured of getting a 20 percent rise to their salaries with a promise of complete job security. The consumer's interest of keeping tariff at an affordable level is the responsibility of the government. Although the privatization of KESC would allow a monopoly status to the buyer of the KESC, yet it is hoped that an improved infrastructure would offer quality service with uninterrupted supply power to the citizens of this electricity starved commercial hub of Pakistan.