POST-PRIVATISATION KESC'S PERFORMANCE

SHAMSUL GHANI
(feedback@pgeconomist.com)
May 3 - 16, 20
10

The first transfer of KESC management to the private sector took place in November 2005 when with the transfer of 73 per cent government shares the management control was handed over to a consortium comprising Hassan Associates (Pvt) Limited, Premier Mercantile Services (Pvt) Limited and KES Power Limited (KESP) - a company incorporated in Cayman Islands.

At the fag end of 2008, a special purpose vehicle (SPV) Abraaj of Abraaj Capital took over the management of KESC. The first ever privatisation of a gigantic electricity generating and distributing company in Pakistan evoked a mixed response from the business circles, industry and consumers.

The proponents of free market economy took it as a welcome sign and predicted vast improvement in the services and profitability of KESC. Based on their practical experience, the consumers-household, commercial and industrial-have virtually tabled a no-confidence move against the privatisation of a socially and economically important organisation.

While the private sector management's so-called failure to handle the affairs of KESC to the expectation of its consumers has not much to argue about, it will be unfair to give call for a reversal of the decision. It will be fair to wait till 2012 when KESC is supposed to reach certain landmarks regarding its generating capacity and operational management.

The 560MW plant at BQPS is underway and is expected to be completed in 2012. Its timely commissioning could well save the day for KESC.

One would like to analyze why the KESC privatisation move did not pay off while telecommunication sector greatly benefited from this move. One obvious difference is the complete lack of competition which has mad the management a bit lax.

KESC enjoys monopolistic situation with its ever-rising product prices and an easy demand management tool in the shape of load-shedding. The profit maximisation objective - or in this case, loss minimisation objective is also easy to achieve through the manipulation of generation mix.

This also gives KESC a reason "not to do more". The usual supply gap of 300MW - 600MW can be played with by keeping oil-based generation to the minimum and acquiring cheap hydropower from WAPDA to the maximum.

Moreover, the doubts about KESC ever reaching a turnaround also deter the management from burning its dollars in the heat of much needed capital investment. The huge loss making capacity of KESC which has resulted in a negative net equity also disqualifies it from raising debt capital from the market in the absence of a government guarantee which is not always easy to procure. These factors have kept the new management from showing real commitment to change KESC to a sound, financially viable private sector organisation - particularly during the period 2005-08.

Some developments on generation capacity enhancement during the later period have however rekindled the hope of revival. Again, it will be premature to attach a great deal of optimism to the revival issue. Perhaps June 2012 will be the right time to assess what is held in the store for KESC and its consumers. The involvement of IFC and ADB - and of course the government of Pakistan - with the financial issues of KESC in the shape of loans and equity participation is a positive development that could well put KESC on the road to financial stabilisation followed by a much improved operational performance.

A summarised version of KESC's last five years' financial performance holds a lot for analytical minds.

KESC'S OPERATIONAL AND FINANCIAL PERFORMANCE 2005-09

GENERATION & DISTRIBUTION

2005-06

2006-07

2007-08

2008-09

2009
(JUL-DEC)

Installed capacity (000)

1756

1756

1739

1955

2350

De-rated capacity (000)

1324

1478

1501

1514

NA

Firm capacity (000)

1324

1478

1375

1423

NA

Units generated (000)

9130

8169

7998

7643

3770

Units purchased (000)

5370

6708

6527

7005

3970

Units sold (000)

9060

9367

9569

9396

5055

Units lost in transm/dist (000)

5440

5510

4956

5252

2685

% T & D losses Financials
(Rs in million)

37.5

37.0

34.1

35.9

34.7

Revenues & other income=a

43861

46586

69889

87709

36427

Generation cost=b

29217

28600

35884

37451

17785

Power-purchase cost=c

23991

29364

32861

44921

27075

Tariff adjustment=d

9482

14447

-

-

12558

Gen/Dist/Admn/Fin expns=e

14765

15026

17216

20822

13015

Subsidies from GoP=f

7576

-

-

-

-

Surplus (Deficit)=a-b-c+d-e+f

(7054)

(11957)

(16072)

(15485)

(8890)

Total assets

65600

77321

92976

130784

151579

- Fixed assets

43698

52013

64031

82194

87939

Current assets

21902

25308

27999

47766

63057

- Trade debts

7683

8641

12416

19114

21938

- Other receivables

7158

6530

7187

20037

27281

Non-Current liabilities

16307

20562

32945

70344

59316

- Long term financing

1454

1137

8814

45030

33198

Specific grant from GoP

1986

4702

4036

1626

1658

Current liabilities

18467

33599

53111

60261

87255

- Trade & other payables

11952

22099

38407

30290

56792

- Short term borrowings

3600

7596

10231

9137

9714

Share capital

46085

50594

52068

52068

66281

Reserves

5881

5881

5716

5544

5484

Accumulated losses

(22617)

(34793)

(50865)

(66350)

(75167)

Net Equity

29349

21,682

6919

(8738)

(3402)

Transmission and distribution losses maintaining a stubborn range of 34-38 per cent are KESC's Achilles' heel. KESC claims to have added 450MW to its installed capacity, which now should stand at 2350MW. Some sources, however, refute this claim by putting the existing installed capacity at 2021MW. Argument aside, KESC has surely added to its generating capacity under the changed management. This is evident from the size of its fixed assets, which have more than doubled after privatisation. The circular debt factor is definitely not affecting KESC as it had total trade debts and receivables of Rs.49.2 billion against total trade and other payables of Rs.56.8 billion as of 31 December 2009.

Unfortunately, despite being a monopoly, KESC has turned out to be an efficient loss-making entity after privatisation. Its accumulated losses stood at Rs22.6 billion in June 2006 which grew up to Rs75.2 billion in December 2009. Its negative net equity of Rs3.4 billion could have appeared more formidable had the sponsors not injected $206 million as equity out of the total committed amount of $361 million to be invested within a period of 3 years. Its negative equity debars it from going for further gearing until and unless guaranteed by the government of Pakistan.

KESC's operational and financial performance is dotted by negatives and positives. As earlier said, 2012 will be the year when the wisdom of privatising KESC and the commitment of its new management to achieve a turnaround would come under the scanner.