The privatization of the Karachi Electric Supply Corporation Limited (KESC), which has been incurring losses since 1995-96 due to various reasons, has reportedly been deferred by the Privatisation Commission (PC) for the time being.

This deferment provides an opportunity to the local investors, particularly from Karachi, for acquiring controlling interest in the KESC, at present an integrated utility. The KESC (established on 13th September,1913) has been serving the people of Karachi for the past about 90 years and therefore is now a household name and the Karachiites might not wish to see its control passing to the international investors. Emotions apart, there are strong economic considerations for which the local investors might attempt to acquire control, as was the case before the government acquired majority share holdings in 1952.

Transmission and Distribution (T&D) losses in the KESC system at 41 per cent during FY 2001-02 are exceptionally high when compared to Wapda system losses that are 24 per cent. Wapda operations are spread all over the country, excluding the KESC licensed area of about 6000 sq. km. Theft of electricity in the KESC system is cited as one of the reasons for such high losses. Pilferage might be one factor but the entire KESC system from generation to distribution being outdated, the losses are bound to be high due to technical reasons as well. The present management has been making efforts to control T&D losses. Without considerable reduction of these losses, the financial health and profitability of the KESC cannot be achieved.

The KESC has in the past availed, for its various projects, large foreign currency loans from international financing institutions such as the World Bank, the ADB, the OECF, the KFW, the Japan EXIM Bank, etc. and Rupee loans from commercial banks and financial institutions. However, in spite of that the T&D system as well as the generation capacity could not be kept continuously up to the mark.

The generation capacity fell short of the requirements of the customers and the transmission and distribution system also could not be maintained/upgraded to the acceptable standard, as was the case previously. This obliged the KESC to make large purchases of power from Wapda, the PASMIC, the KANUPP and the IPPs namely Tapal and Gul Ahmed. Poorly maintained transmission and distribution system contributed to high T&D losses. These factors contributed to high financial losses, liquidity constraints and neglect of improvement plans.

The T&D losses in the KESC system were only 20.84 per cent during 1989-90 after which losses started increasing. The T&D losses exceeded 30 per cent for the first time during 1994-95 when net profit before taxation was Rs189 million. Thereafter,the KESC operations suffered high financial losses: Rs6,779 million for 1996-97, Rs6,857 million for 1997-98, Rs7,364 million for 1998-99, Rs12,787 million for 1999-2000, Rs16,201 million for 2000-01 and Rs17,741 million for 2001-02. In the face of such high losses, the KESC survived only due to the determined help and financial support from the government. Such support, however, is not sustainable and real reasons for the loss situation need to be identified and corrected at the earliest.

The government has kept the KESC operational for the Karachiites by pumping in huge cash as well as supporting its management through various means. The present management has been taking steps to improve operations. A number of remedial measures such as new customer services centres (one window services) in Defence Housing, establishment of Korangi Model Zone for Korangi Industrial Area, industrial billing (one window services), review committee for out-of-court settlement, relief package for recovery of outstanding dues, etc. have started giving positive results. However, the improvement has not as yet been translated into better financial operations. Therefore, much more needs to be done and quickly so that the KESC is transformed into a modern service-oriented profitable utility.

It may be noted that the KESC is sort of a mini-Wapda and its problems are similar to that of the later. In order to better appreciate various aspects and problems of the KESC, certain extracts picked from the Chairman’s Review/Directors Report to members contained in the KESC Annual Report for FY 2001-02 are presented below:

1. In the year under report, all available resources were utilized for financial improvement of the KESC, but exorbitant increase in the price of furnace oil, heavy burden of financial charges and increasing trend of T&D losses continued to affect liquidity position of the corporation. The revenue from the existing tariff is insufficient even to cover the cost of fuel and power purchase. The result has been heavy losses and constant cash shortfall. GOP has been providing funds to the KESC each year to ensure uninterrupted power supply to Karachi area and keep it operational.

2. Higher net loss of Rs17,741 million for the financial year 2001-02 as against last year figure of Rs16, 201 million is attributable in particular to enhance financial and other charges. The expenditure under this head increased from Rs5,840 million in 2000-01 to Rs8,617 million in FY 2001-02 due to financing of shortfall from borrowings.

3. The KESC has prepared a comprehensive plan, involving an investment of Rs13,349 million for improvement of the transmission and distribution system and to minimize theft of power. The GOP has already agreed to finance the above investment through budget funding. After the completion of these projects the T&D losses and the theft of electricity is expected to reduce from existing 41 to 24 per cent by 2006. The implementation of the plan will also ensure availability and reliability of supply and improved customer service.

4. It is informed that subsequent to the balance sheet date, the GOP has paid top Wapda a sum of Rs8 billion on behalf of the KESC. The ministry of finance has been requested to provide the breakup and details of amounts paid to Wapda. The KESC has also requested the Federal Government for waiver of interest on Wapda dues. It is expected that the interest on Wapda dues will be waived as is being done in case of other utilities and oil and gas companies.

5. The GOP is the majority shareholder in the capital of the KESC. The GOP has recently approved financial restructuring plan of the KESC entailing conversion of the GOP and the GOP-guaranteed loans of Rs65.341 billion into equity and reduction of paid-up capital of the company by Rs57.202 billion to extinguish accumulated losses. The shareholders have also approved the above proposals by way of passing Special Resolution at the EOGM held on 27.05.2002. With the implementation of the financial restructuring plan, the book value of the KESC shares would be Rs4.16 (positive) vis-a-vis Rs96.47 (negative) prior to restructuring based on figures as on 31.12.2001.

6. The proposed plan for system improvement and reduction of T&D losses holds the promise of radical change in the financial state of the corporation. The goal can only be achieved if the required funds for implementation are timely arranged. Failing which substantial load shedding in Karachi will be imminent and not only the residential and commercial consumers, but also the industrial production of Karachi will be badly affected. Reduction in industrial production of the city, generating major portion of the country’s revenue, will also affect the whole economy of the Pakistan.

The clear warning sounded by the chairman of the KESC, deserves careful attention of the Government, the industrial and commercial consumers and the Karachiites in general as existing or prospective consumers of electricity. It is suggested that the government and other stakeholders might jointly consider various probable solutions to KESC problems. Some of the important areas for such consideration are briefly discussed as under: The privatization approach earlier pursued for the KESC may be reviewed for a change. The KESC was being privatised as an integrated utility entailing much larger investment outlay as against the approach adopted for privatisation of the Power Wing of Wapda, which was first restructured into eight distribution companies, three generation companies and the National Transmission and Despatch Company (NTDC). In due course, these new generation and distribution companies would be privatized while NTDC would stay in the public sector. In fact, privatization process has been already initiated for the FESCO and the Jamshoro Power Company.

On Wapda’s pattern, the KESC may also be divided into two or three generation companies and about five distribution companies. The transmission and dispatch part might eventually be merged with the NTDC. This arrangement would be more conducive for privatization and the local investors would be able to easily finance the investment.

The privatization process may be initiated preferably with the distribution companies. The outcome of the integrated privatisation approach for the KESC and the interest shown by the prospective international bidders was not entirely unpredictable as this approach entailed much larger upfront investment outlay, beyond the acceptable risk and returns profile.

The capital structure of the KESC that emerges after conversion of the government funds into equity may also be assessed for appropriateness and balance. During FY 2001-02, the financial charges were nearly 25 per cent of the total revenue for the year. The capital structure must be conducive for raising additional funds to finance additional generation capacity as well as the plan for system improvement and reduction of T&D losses.

The generation capacity required for reliably supply of electric power to the existing and prospective consumers in the KESC license area might be re-assessed. The managing director, KESC, in a recent talk said that presently the KESC was short of 400 mw of electricity, besides 250 mw of pending load. He was quoted as saying that during peak hours the demand went up to 1,800 MW as against generation of 1,100 mw, additional supply of 300 MW by the IPPs and that the gap was met with the supply of 400 MW by Wapda.

He cautioned that during the next 3-4 years, the power supply deficit would rise to some 1,000 MW and it would keep increasing if new power plants were not established. As the gestation period of power generation plants is relatively longer, efforts for the additional generation capacity must be initiated now to effectively meet the projected demand. The situation might also improve if the KESC transmission line is constructed to Hub Power Company and the reasonable tariff arrangements could be finalized with the parties involves.

The KESC plan for the system improvement and reduction of T&D losses is estimated to cost Rs13, 349 million, for financing of which the government has reportedly agreed. The technical scope of the plan and its adequacy might be thoroughly re-examined to fully modernize the entire transmission and distribution system, including overhaul/replacement of transformers, the installation of bulk meters, replacement of electro-mechanical meters with electronic meters and installation of other essential equipment.

The KESC makes bulk purchases of power from public sectors power producers as well as the IPPs. The arrangements with these suppliers including the determinants of dispatch priority may be reassessed. This should be in conjunction with the proper determination of generation, transmission and distribution cost of the KESC; using independent reputed consultants for the purpose. Karachi and the KESC, both are of critical importance for the country. In the post-WTO scenario this importance has further increased for the national economy. Their relationship and inter-dependence are such that one may not flourish for long without prosperity of the other. Therefore, the federal and the provincial government, the industrialists and the businessmen and the Karachiites are all urged to give special consideration for resolving KESC’s problems.