The KESC has been thickly in the red for the last several years. Recurring losses, high incidence of power theft and heavy debts have pushed the company’s accumulated losses to a staggering amount of Rs60 billion.
The government of Pakistan is keen on privatizing the KESC but has been unable to do so due to several outstanding issues. As a result, the government has to bear the cost of sustaining a financially un-viable organization on the one hand and bearing the criticism of the consumers on the other hand, for being unable to provide a regular and dependable source of electricity.
The government has always shown its keenness in privatizing the KESC. The first deadline for its privatization was set at March 1998, which has since been extended several times. The reasons behind the inability to privatize KESC remain the same: heavy line losses coupled with an unpresentable balance sheet. The privatization of the KESC is in the spotlight once again. The latest development in this regard is the Rs115 billion financial restructuring package for the KESC, which is also being dubbed as the ‘rescue package’.
Amongst the reasons for the delay in the KESC’s privatization, the issue of a financial ‘clean-up’ on the balance sheet is of paramount importance. The financial restructuring package of Rs115 billion for the KESC is intended to clean-up this mess and make the balance sheet more presentable, thereby paving the way for the swift privatization. Herein we take a close look at what the rescue package may achieve and what is left desired from it:
The Rs115 billion restructuring plan envisages no immediate cash injection in the company and merely talks about the government picking up the KESC’s accumulated losses. Out of the Rs115 billion, Rs30 billion are allocated for the issuance of the TFC’s which the government would pick up. No timeframe has been suggested for this TFC issue. In any case such a colossal amount cannot be issued to any state entity unless proper allocation is made at the budgetary level. No allocation for this amount has been made in the running budget and it seems quite unlikely that the government of Pakistan would allocate the entire amount of Rs30 billion in the next budget.
The break-up of this Rs115 billion, as wifely reported in the press, is as following: Rs35.340 billion government loans to be converted to equity, accumulated losses to the tune of Rs46.569 billion be converted into government equity and Rs 30 billion bond issue by the government on behalf of the KESC. Another version of this ECC (Economic Coordination Committee of the Cabinet) plan is that after converting the accumulated losses in government equity, the government would in fact write off its own share of equity in the KESC, to the tune of the losses accumulated by the corporation. A clarification by the ECC in this regard is required. Another thing that requires clarification is that out of this Rs115 billion, the use of Rs 3.091 billion remains unexplained (Rs35.340 billion government loans + Rs 46.569 losses to be taken over + Rs 30 billion bond issue = Rs 111.909 billion). A clarification in this regard is also required.
It is pertinent to point here that out of the Rs115 billion rescue package the KESC would, in fact, benefit only from the Rs 30 billion TFC issue. The reason being that the KESC’s problems originate from its operational inefficiencies and pilferage. Without acquiring any new assets, the company would have nothing tangible to improve on. Any saving from financial restructuring that may result in savings in the interest cost, might be off-set by the interest paid on the new bonds to be issued. Essentially the whole financial restructuring is what has an accounting jargon of “window dressing”. Moreover any increase in equity would further dilute the profits per share, whenever there are any profits in future.
What is required by the KESC is a comprehensive asset acquisition programme under which the outdated generation and distribution equipment can be replaced and modernized. Under the plan, the KESC should be provided with the necessary infrastructure that would enable it to make reliable assurances to its consumers of consistent power supply. The KESC has already lost a sizable portion of its industrial consumers to captive power plants and in-house power generation. These are the consumers whom KESC can only attract by assuring reliable supplies. So long as the power supplies are not made reliable and consistent, large industrial consumers would continue to go for in-house power generation and captive power plants. Customers who opt for in-house power generation, are lost by the KESC for good. Such customers are very difficult to get back and these are the customers from whom KESC could have made good money. in any case the nation has to bear the burden of such in-house power generation due to the use of imported diesel fuel in the generators. Much foreign exchange is wasted in the import of the power generators as well.
The KESC also requires an elaborate theft control programme as more than 40 per cent of the power goes unaccounted for. This quantum of power wastage is arguably one of the highest in the world. Without controlling these line losses and theft, any idea of a turnaround in the KESC would be a fallacy.
Coupled with the line losses and power theft, are the defaulters who are billed but no recovery is made from them. on top of the defaulter list is the name of several other state sector enterprises and government departments. The KESC is finding it easier to go to the government with a begging bowl but doesn’t have the willingness to persuade the government into expediting the recovery of dues from its own departments. How can any intentional player be expected to buy KESC without strong assurances from the government of prompt recovery of dues, given the fact that the government itself is the biggest defaulter of the KESC. Any new buyer would not be so sympathetic towards continuing the electricity supply to defaulting government departments, regardless of their essential service nature. All of these issues should be addressed in an elaborate operational restructuring plan.
A financial restructuring carried out without providing a working plan for theft control and recovery of dues, is bound to meet with failure. An operational restructuring plan is far more important than a financial restructuring plan. What if The KESC collapses after its privatization? Would the new owner feel a commitment towards running a perpetually loss-making concern? Any theft control and recovery operation is dependent upon the cooperation of the local administration and law enforcement agencies who have until now been unable to help the KESC. The KESC alone cannot act to recover what is due to it. If the attitude of the local state machinery remains uncooperative, as it has always been, any new owner of KESC would remain unable to control theft and recover dues. What would happen then is that the new owner would have to shut down its operations, just like any other industrialist would do under similar circumstances. The only difference would be that such an investor would shift the burden of the KESC back to the government and seriously hamper any privatization attempts of other state-owned enterprises.
As a first step, the financial restructuring plan is OK. But it must be supported by a workable operational plan for upgrading the equipment, theft control and dues recovery. Timing is also of essential importance here.
Already the accumulated losses of the KESC have reached a staggering amount of Rs 60.552 billion, representing a loss per share of Rs 5.28. The third quarter results of KESC for the year ending 30th June 2002 are depicting a loss of Rs 3.271 billion for the period, up from Rs 3.125 billion for the same period a year ago. It is obvious that the losses are piling up. While the financial restructuring plan talks about converting accumulated losses of only Rs 46.569 billion into equity, what would happen to the remaining accumulated losses. Due to the fast increasing accumulated losses, by the time the restructuring plan is actually implemented, a new round of financial restructuring may actually be required. Therefore timing is of essence here.
Any privatization attempt carried out after the financial restructuring only, while shifting the responsibility for new investments on the potential buyer, will only result in a lower price at the time of its privatization. It would be difficult to find a buyer willing to inject a further sum of millions of dollars into the KESC, after having paid for the purchase of the entity. In any case the new buyer would demand several concessions from the government in terms of steep tariff increases and massive layoffs, both politically sensitive issues.
The government needs to work out a proper cost-benefit analysis and clearly arrive at a decision about the privatization of the KESC. maybe such a study would reveal that it would be cheaper to maintain the KESC as it is than to spend such a massive amount just to make it ready for privatizaion. At stake is the concern of millions of consumers and thousand of employees. A very dangerous precedent would be set if the privatization of the KESC results in a collapse of the organization in the hands of the new owners. It would become irrelevant then that companies from the USA or Germany were amongst the new owners of KESC, or that the government managed to secure a few million dollars from ADB (Asian Development Bank) as energy sector restructuring loan.