The federal minister for privatization has reportedly asked the Karachi Chamber of Commerce and Industry (KCCI) members to form a consortium or a business group and come up with a bid for privatization of the Karachi Electric Supply Corporation (KESC) , which would be undertaken before June 2004.
He said the KESC has a monopoly market of some 12 million people and already four expressions of interest (EoIs) have been received. He recalled that Wapda had been restructured into several companies of which the Jamshoro Electric Generation and the Faisalabad Electric Company would be privatized within this fiscal year.
The minister said he was in favour of opening up the privatization process so that more and more people could be brought into the procedure. According to him, the Privatization Commission's approach is based on transparent process, appropriate price, as well as genuine bidders.
The invitation to the KCCI for forming a group or consortium and making a bid is an encouraging development. The privatization process for the KESC is already on and now it is a matter of few months, when the Karachiites would know what is in store for them.
The Karachi Chamber must realize that the new owners would wish to earn a higher rate of return, no matter if the electricity tariff or other charges were raised in the process. This paper touches major aspects about the KESC privatization and offers suggestions for consideration by the government and other investors including members of the KCCI.
The KESC was incorporated on September 13,1913, under the Indian Companies Act, 1882 as amended to-date under the Companies Ordinance 1984. It is listed on all three stock exchanges. The government of Pakistan (GOP) took its control by acquiring the majority share holdings in 1952. The ministry of water and power looks after its affairs. It has a customer base of 1.7 million predominantly urban consumers. The age and condition of the asset base varies considerably. The KESC's own generation cost is low as compared to the rates at which it is obliged to purchase power for meeting deficit, from Wapda, Kannup, the Pakistan Steel and the two IPPs. The KESC has converted all generating units of the Bin Qasim Power Station on natural gas. The immediate impact will be reduction in fuel cost.
The government handed over the KESC's management control to the army in 1999. The army management has made progress in a number of areas, such as reductions in commercial losses, decreases in accounts receivable and restructuring of the organization aimed at increasing the quality of customer services and the profitability of the company.
The KESC had 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 and D losses and theft of electricity is expected to reduce from the existing 41 per to 24 per cent by 2006. Sometimes ago, the government had allocated one billion rupees for revamping the electricity system and now a bigger allocation has been indicated for the purpose.
As against the KESC's installed capacity of 1,756MW, its dependable capacity is around 1,200MW. In addition, the KESC has a dedicated capacity of 265MW from the private sector IPPs, and small capacity from Kannup and the Pakistan Steel. This is not enough to fully meet the maximum system demand estimated around 1,900MW. The gap ranging from 250MW to 500MW is met with power supply by Wapda under special arrangements. During the next 3-4 years, the power supply deficit is expected to increase to around 1,000MW and would keep increasing if new power plants were not established or power supply from other sources such as the Hub Power Company does not materialize.
The KESC has been experiencing abnormally high transmission and distribution losses in the past 10-12 years although the position has somewhat improved in the recent years. In 1989-90 the losses stood at 20.84 per cent. Since then the situation has deteriorated each year and the losses increased to 40.23 per cent in 1999-00. One can imagine the improvement in profitability if losses were brought down to reasonable level.
The KESC suffered a loss of Rs12.787 billion in 1999-00 that increased to Rs16.201 billion in 2000-01. For FY 2001-02 and FY 2002-03, the KESC experienced loss of Rs17.741 billion and Rs8.143 billion respectively. Major portion of the losses has been due to high interest cost on borrowings.
The government had reduced the KESC's debts through debt-equity swap and the beneficial impact is evident from reduced losses for the year 2002-03. Theft of electricity in the KESC system is cited as one of the reasons for high losses. The utility survived only due to the financial support from the government which has kept it operational by pumping in huge cash.
The KESC's total assets have slightly declined from Rs65.491 billion in 2001-02 to Rs65.090 billion in 2002-03. During the period, its total liabilities that stood at Rs103.430 billion in 2001-02 have reduced to Rs45.999 billion in 2002-03 as a result of capital restructuring. To improve the financial health of the KESC and increase its attractiveness to potential investors, major capital restructuring has been implemented, whereby Rs83 billion of debt was swapped for equity by the government.
Additionally, a capital reduction of Rs57 billion was made to offset the accumulated losses. As a consequence the GoP's shareholding in the KESC has increased from 65 per cent to about 98 per cent. Due to restructuring, the interest burden has significantly reduced and the deficit on the reserves has been eliminated.
Existing privatization scheme: The government on October 7, 2003 had invited the EoIs from qualified utility operators and strategic and financial investors interested in acquiring up to 73 per cent of equity in the KESC with the management control. Salient points of the scheme as announced are: (i) acquisition of controlling interest in the integrated power utility for generation, transmission and distribution of electricity to Karachi; (ii) commitment to continue support by the GoP during the turnaround period; (iii) possible co-investment by the ADB which may also be willing to take an equity interest of 7.67 per cent from the available 73 per cent at privatization;(iv) in addition to Karachi, the KESC supplies power to the industrial areas of Thatta (in Sindh) and Lasbella (in Balochistan); (v) the KESC franchise area covers approx. 6,000sq km with a population in excess of 12 million; and (vi) the government has undertaken to continue with the approved current investment programme (until June 2006) to upgrade transmission and distribution system and to underwrite the formula based tariff regime as determined by Nepra, in September 2002.
The present scheme of privatization involves selling it as an integrated electricity utility. All generation, transmission and distribution assets are being offered together as a block to private investors.
The monopolist position of the integrated utility would stay; merely its ownership will transfer through privatization from public sector to the private sector. If this is the case, the scheme might not deliver full potential benefits of privatization to the consumers, local businesses and the investors.
Competition is essential for ensuring relatively lower tariff and better services to the consumers; this might not be possible immediately but the privatization process should aim at that. Moreover, privatization is largely for controlling the distribution losses, as transmission losses are relatively small.
The point is why privatize the 'generation' and 'transmission' when the problem is mainly with the 'distribution'. Why not start with the spin-off of the distributing from the main body? Let the private sector assume distribution function and earn profits through better control of distribution losses.
The interest so far shown by the international bidders has not been entirely unpredictable as the privatization of integrated utility in one block entails much larger upfront investment outlay, purportedly exceeding their acceptable risk and returns profile. As against usual 51 per cent shareholding sale, here 73 per cent shares are on offer while the sale of shares to general public through the stock exchanges has been totally ignored. Instead, a multi-stage approach as described below is expected to attract more investors and is likely to yield better results.
New Approach: Starting the process with the spin-off of the distribution function to a number of private sector companies may facilitate participation by local investors; introduce more competition with possibly better sale price to the government and regular supply of electricity to the people at competitive cost.
At present the KESC has 50 or so grid stations. Depending on the number of consumers and geographical spread, each power distribution company (PDC) may initially be allowed electricity distribution in the area now covered by seven to ten grid stations.
For the time being, the KESC will sell power in bulk to each PDC and meters at each grid station will record energy sold. Under this arrangement, there will be an arm's length relationship with the KESC and/or other power generation companies and therefore the allegation of pilferage energy at bulk level will be sorted out. This will be the beginning of the competitive pricing at bulk and retail level. Also, each PDC will initially take on its roll all the KESC employees associated with the distribution. In due course one PDC may acquire the other PDC or they may decide to merge for better synergy.
While continuing the purchase of power generated by the KESC, the PDC may in due course start bulk power purchase directly from Kannup, two IPPs in the area and other sources that emerge in the meantime. To meet the supply gap, the private sector may install additional generation capacity for bulk power sale to the PDCs. This arrangement would be more conducive for the privatization and the local investors would be able to easily finance the investment.
For some time the KESC will continue managing and continuously improving both generation and transmission. As long as the KESC retains its generation and transmission assets, it would have fewer problems in obtaining power supply from Wapda's generation companies as well as from the Hub Power Company.
In the next phase the government might sell the KESC's generation assets to two or three private sector companies. In the end the KESC will be left with bulk Transmission Grid in its license area. This might in due course be merged with the National Grid owned and operated by the NTDC, a company that has emerged from restructuring of the Power Wing of Wapda.
Karachi has a number of large industrial estates in its fold. The KESC provides electric power to the city and all the industries located in and around the city. Karachi and the KESC, both are of critical importance for the country's economy. One may not flourish for long without prosperity of the other.
Therefore, the government and the industrialists/businessmen are all urged to give special consideration for resolving privatization and rehabilitation issues of the KESC, which is much more than a public sector utility.
In the circumstances, it is up to the resourceful members of the Karachi Chamber to join hands and take the leadership role for public good of ensuring regular power supply to the consumers at reasonable rates.
They are also urged to realize that within the cosmopolitan area there is an urgent need to take similar positive initiatives for resolving problems of water, sanitation, sewerage, health and education confronting the Karachiites.