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IF you’ve been paying attention lately, you’ll notice a campaign is under way to lionise the former CEO and current board chairman of the Karachi Electric Supply Company — Tabish Gauhar. A string of adulatory articles have been appearing in diverse media — both domestic and international — sprinkled with many of the same data points. KESC has turned its first profit in 17 years under this new management we are told. They’ve invested more than $1bn of their “own money”, we are also told. Almost 1,000MW of new generation capacity has been added by this team, it is claimed, and line losses have been reduced significantly.
All the articles mention the fact that low recovery areas have a higher incidence of load-shedding. Then the company’s epic battle with labour unions gets a special mention, along with the bold decisions to lay people off by the thousands to clean up the operating costs of the company. And of course, the future plans for coal conversion, biogas etc.
It’s not necessary to repeat here all the accomplishments that are being claimed as part of the management’s legacy. You’ll hear plenty of that in days to come I’m sure, if you haven’t already. What is necessary, however, is to ask a few simple questions that are not being asked through this public relations blitz.
Question one: what is Abraaj Capital’s exit strategy in KESC? This is important because long after the management team is gone, we’ll still be here and what shape the company has been left in will matter a great deal.
Thus far very little is being said about the exit strategy, so we’re left to surmise. In a Harvard Business School case study written on KESC and its “turnaround”, three separate exit scenarios were discussed. One was an “unbundling” of the utility, where different distribution companies are created for different areas, and then the generation and distribution assets are sold off separately. Mr Gauhar himself pointed to this scenario in an interview in 2012.
The second scenario was a foreign buyer, perhaps a sovereign wealth fund, that simply buys out the entire company. And the third was an offloading of the shares held by Abraaj Capital on the Karachi Stock Exchange.
In their annual report of last year, the KESC management referred to their “unbundling plan”, saying they were ready for it to kick off, and even gave a few details. The city was divided into distribution zones, and against a franchise fee of sorts, rights to collect bills in each respective zone could be purchased.
Then ads appeared in the papers inviting proposals, but the subsequent year’s annual report carries no mention of an “unbundling plan”. It simply mentions that the two parties who purchased rights for distribution and billing in two areas are beginning to find their feet after an “initial period of teething difficulties”.
So what happened? Is the “unbundling plan” still on? And if so, what are its implications?
Question 2: What sort of return is Abraaj looking to make from their KESC exit? A few years ago I had the opportunity to interview Mr Gauhar face to face, and asked him this question point blank. I had looked up the figures the Abraaj website gave on the Internal Rate of Return they make on their investments upon exit, and those figures can range anywhere from 40pc to 75pc depending on the nature of the investment and the time horizon.
I asked Mr Gauhar if this is the sort of return he’s looking to fetch for his shareholders when the KESC exit strategy is put into effect, and this was his response: “I can assure you whatever returns are made will be hard-earned money.”
Frankly I wasn’t satisfied with the answer, and I hope it can be asked again during this public relations campaign.
Question 3: Doesn’t the claim about having installed 1,000MW of power generation capacity include a 560MW project that was actually begun, and financing arranged for it, long before this team came in? Meaning more than half of what they are claiming as their achievement actually belongs to someone else, although it is a fact that this team has seen through the implementation, which ought to have been complete more than three years ago according to the original timeline.
The distinction is an important one to draw, and the fact that they aren’t drawing it inspires other questions. For instance, of the $1bn they claim to have ‘invested’ in the company, more than half of that amount is loans raised against KESC assets and cash flows. And while we’re at it, let’s ask two other questions that deserve clear answers.
How much of the improvement in the cash flows is a result of the tariff increases the company has been given by the National Electric Power Regulatory Authority since 2008? Has ghost billing played a role in the stupendous declines in transmission and distribution losses that the company claims to have brought about since 2008?
But let’s give credit where credit is due. This is probably the best and tightest management KESC has ever had. They have taken bold decisions and risks, the biggest of which was to take over KESC in the first place. Before they leave though, it is our duty to ascertain the facts behind their claim to have turned the utility around and then ask: is it sustainable?
The writer is a business journalist and 2013-2014 Pakistan Scholar at the Woodrow Wilson Centre, Washington D.C.
Twitter: @khurramhusain
