ANALYSIS OF KARACHI ELECTRIC SUPPLY COMPANY (KESC) PRIVATIZATION IN ENERGY SECTOR REFORMATION & RESTRUCTURING CONTEXT

Prepared by: Nasrullah Khan Fahad Khalil Irafn Ahmed (MS Energy Management) - FA11 REM 002 (MS Energy Management) - FA11 REM 001 (MS Energy Management) - FA11 REM 003 November, 2012 Supervised by: Mr. Shahzad Anwar Faculty of Energy Sector Reform & Restructure Department of Energy Management COMSATS Institute of Information Technology, Islamabad, Pakistan www.ciit.edu.pk

Table of Contents
Executive Summary...3 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. Introduction..4 KESC Privatization - Background and Rationale...6 Historical Overview and Reformation of KESC..8 Factors Leading to Privatization of KESC.12 Implementation of Privatization / Post Privatization Scenario Up to Date...13 Analysis of KESC Reformation, Decision Making & Benchmarking Process.15 Technical Innovation in KESC through Privatization.17 Analysis of KESC Privatization in Energy Management - Academic Context.19 Issues, Challenges and Discrepancies Identified20 Lessons Learnt / Outcome of Analysis..21 Key Results obtained through KESC Privatization Analysis...22 Conclusion/ Recommendations..23 References.25

List of Figures
Figure: 1 KESCs Objective - Value Chain Figure: 2 KESCs Financial Performance (from FY 09 12) Figure: 3 Overview of KESC Shareholding Figure: 4 KESC Post Privatization Scenario Figure: 5 Overview of Efficiency Improvement through Technical Innovation Figure: 6 KESC Plan - as a Public Service Entity

Executive Summary
Energy sector restructuring and reformation is although a relatively new, yet a useful methodology which is being exercised by the economies around the globe. The ultimate objective of reformation or restricting is to achieve the maximum profitability from a diseased or infected system, which is unable to perform due to the dis-functioning of one or more segments. Several types of restructuring and reformation are applied for the complete recovery of the system which may include privatization of the entire entity or privatizing the infected segment, policy reformation, prioritizing, foreign investment, third party involvement, revised regulation, multidimensioning, human resource reformation etc. The report analysis the privatization of Karachi Electricity Supply Company (KESC), which was underperforming due to in-effective government control and was decided by the government to prioritize in order to achieve the desired performance and result oriented delivery of the service. The KESC was privatized in year 2009 and after about three years, it is useful to academically analyze the outcome and results of the privatization strategy and to investigate the effectiveness of such methodologies used for energy sector restructuring and reformation. The report provides an historical overview of the KESC and discusses the factors which led to the privatization decision. The steps taken into account for ultimate privatization and the post privatization scenario as presented by the company is also investigated to identify the effectiveness of the privatization strategy applied. The report then provides an overview of the technological innovation utilized during and after privatization and examine the impact of such innovations in theoretical energy management aspect. The issues and challenges faced by the company during privatization process are discussed and scrutinized in order to determine the lessons learned and to discover the possible stratagem which may be used to avoid the identified constraints. Following the analysis the conclusion and recommendations are presented whilst considering the companys way forward plans, the recommendations generally cover the suppositions on the basis of best practices used by successful organizations and academic comprehensions, focused on sustainable performance enhancement of KESC.

KESC Privatization Report

IFN, Nov, 2012

Page 3

1.

Introduction

1.1. Karachi Electricity Supply Company (KESC) is the Karachi city's largest electricity supply organization which currently employees around 11,600 people, who work for the company. It is also one of the oldest companies in Karachi and was established in the city even before the creation of Pakistan in 1947. Incorporated on September 13, 1913, under the Indian Companies Act of 1882, the company was nationalized in 1952 but was re-privatized on November 29, 2005. KESC came under new management in September, 2008; a significant number of professional managers with experience are running the utility. 1.2. At present, KESC is the only vertically-integrated power utility in Pakistan and manages the generation, transmission and distribution of electricity. KESC covers a vast area of 6,000 square kilometers and supplies electricity to all the industrial, commercial, agricultural and residential areas that fall under its network. 1.3. KESC is the only vertically integrated power utility in Pakistan with licensing rights for the city of Karachi. 1.4. The Value Chain of KESC as defined by the organization, which encompasses the all three segments of utility including Generation, Transmission and Distribution to end-user is illustrated in Figure 1, below.
Figure: 1 KESCs Objective - Value Chain

1.5. Privatization - Role and Scope 1.5.1. The process of privatization is considered to be a mean of improving the efficiency and profitability of public enterprises without compromising its long term goals and objectives. The process and objective of privatizing a government owned entity is vast and versatile which endeavors for the following objectives.

It is considered to be the one of the most important components of socioeconomic reform programs across the world.
IFN, Nov, 2012 Page 4

KESC Privatization Report

To rectify the financial crisis in the power sector and the institutional weaknesses that have caused the crisis, the Governments around the globe decided to restructure the power sector and privatize the utilities. The privatization process is essentially an issue of changing ownership of assets. It commences with bringing the assets of the state-owned utilities under a parastatal.

1.5.2. The most common privatization path undertaken by the majority of countries has been: the corporatization commercialization issuing of management contracts and stopping the entry of new independent power producers (IPPs), so that the existing system can be adequately privatized.

1.5.3. There are important lessons that can be drawn from the developments, achieved through privatization. 1. First and foremost, it appears that privatization of distribution entity appears to be more difficult to implement than privatizing the generation facility. 2. Secondly, by examining well performing utilities in the region, it can be concluded that privatization appears not to be the ultimate solution for long term sustained performance of the utility.

KESC Privatization Report

IFN, Nov, 2012

Page 5

2.

KESC Privatization - Background and Rationale

2.1. The power sector in Pakistan, which consists of two public sector utilities, namely, KESC and Water and Power Development Authority (WAPDA), which is facing an unprecedented financial crisis that basically stems from weak governance, political interference in decision making, poor staff morale, and disregard to prudent business practices. The worsening problems in these areas have had a major impact on the financial performance of the utilities, and have hindered the effectiveness and sustainability of the power sector. Specially, weak governance has resulted in inefficient utility operations, power theft, reduced billing and collection, and nonpayment of arrears. Given the long history of operational and technical inefficiencies, mismanagement, and political interference, the Government recognized the urgent need to restructure the power sector on commercial principles and transfer the ownership of the utilities to the private sector. 2.2. KESC was in majority-owned by the Government, which held a 91 percent equity stake, controlled directly (63 percent) and indirectly (28 percent) through public sector organizations. The remaining 9 percent of shares were privately held. The Government, through the Ministry of Water and Power controls its management. KESC ranks among the top 15 Pakistani companies in terms of market capitalization and is listed on the Karachi, Lahore, and Islamabad stock exchanges. It is a vertically integrated electric utility that supplies power to 1.4 million customers in Karachi, Pakistans largest city and the countrys commercial, industrial, and financial capital. KESCs performance has deteriorated significantly in recent years due to high losses and weak cash flows. Transmission and distribution losses have been on the rise and in FY1999 were officially reported at about 49 percent, of which 17 percent represented technical losses and 32 percent is due to nontechnical losses, primarily theft. KESCs financial condition is extremely serious. Its equity has become negative due to accumulated losses since FY1996. 2.3. In view of the serious financial and operational crisis, the Government decided to restructure the power sector on commercial principles. Governments initiatives for structural reforms in the power sector was considered essential given the urgent need to introduce competition as the driving force for improvement and private sector participation as a vehicle for creating a competitive environment. The Program focused on the following five key areas of reform: i) Financial restructuring and privatization of KESC, ii) restructuring of WAPDA and privatization of corporatized entities, iii) development of legal and regulatory frameworks, iv) creation of an enabling environment for a competitive electricity market, and v) resolution of the Independent Power Producers issue. 2.4. The process of privatization of state-owned enterprises in Pakistan commenced in 1988 following the recommendation of a Government-appointed adviser. The early transactions were conducted through the Finance Division (investment wing) of the Ministry of Finance and Economic Affairs. In 1991, the Government formally constituted the Privatization
KESC Privatization Report IFN, Nov, 2012 Page 6

Commission (PC) and established the Cabinet Committee on Privatization (CCOP). The Privatization Committee (Power) was formed in 1992 to deal with privatization of the power sector entities. In 1993, all privatization activities were amalgamated by the Government into PC. An expanded privatization program was developed in December 1996 under the then caretaker government. The Privatization Board of Pakistan (PBP), chaired by the Prime Minister, and a PBP committee (to substitute for the CCOP) chaired by the minister of finance was formed in 1998. However, the CCOP was reconstituted in place of PBP in February 2000. KESC Privatization is on the priority list of PC. 2.5. Since February 1996, the Government has been in the process of privatizing KESC through the sale of an equity stake of up to 51 percent of the companys share capital together with management control to a strategic private investor. A panel comprising the representatives of PC, Ministry of Water and Power, and KESC was constituted for the KESC privatization. The Government used the services of two financial advisers (FAs) for the KESC privatization. The work done by the first FA broadly covered privatization and sales strategy; business and operational issues of KESC; and restructuring recommendations and action plans, which was taken over by the second FA appointed to complete the process of KESC privatization by December 1998. In the meantime, the country faced an unprecedented financial and economic crisis, and the privatization was further delayed. Consequently, the agreement with the FA was terminated on December 1999. The work of these FAs will be reviewed and made use of by a new privatization adviser (PA) to be engaged under the TA. 2.6. KESC Mission Statement The mission statement of KESC, as specified by company, is to: 1) Generate, transmit and ensure smooth uninterrupted electric power supply and distribute to consumers in and around the city of Karachi at optimum rates Ensure the long term financial stability of the corporation Ensure reasonable dividends to its shareholders and Ensure the welfare of its employees

2) 3) 4)

KESC Privatization Report

IFN, Nov, 2012

Page 7

3.

Historical Overview and Reformation of KESC

Key Information about KESC (as of 30th June 2011) Total Installed generation capacity of the country % age share of KESC to total installed capacity in country Total installed generation capacity within KESC area Total available capacity within KESC area Total Thermal generation in KESC area Max energy demand in KESC area Total units purchased by KESC Total units available for distribution Total units sold Total no of consumers in KESC Energy Sale in KESC area Average sale price in KESC area Line losses in KESC 23,412 MW 11.08% 2,594 MW 1787 MW 9,180 GWh 2,565 MW 7606.26 GWh 14840.93 GWh 10071.27GWh 2,109,623 10,072GWh 828.85 paisa/KWh 32.2%

3.1. History 3.1.1. KESC was incorporated in 1913 as a private limited company. Currently it is listed on three stock exchanges i.e. Karachi, Lahore & Islamabad stock exchange. At the time of independence, the installed generation capacity of KESC was 35MW and annual generation was 12000KWh with line losses standing at 21.4%. The unprecedented influx of refugees at the time of partition forced the Federal government to add another steam generator power plant with a capacity of 30MW along with substantial extensions and modifications of the transmission and distribution facilities in city. When GOP took control of KESC in 1952, the generation facilities of the company consisted of a diesel plant and two steam plants. The diesel plant was comprised of old units with only 6MW capacity and the two steam plants, consisted of an old station with installed capacity of 23.5MW and a new station having two units with installed capacity of 30MW each. The transmissions system consisted of about 48miles of 66KV overhead lines and 4.3miles of 66KV underground cables with four step down substations and of about 200 miles of medium voltage grid while the low voltage distribution system was approximately 460miles with a total transformer capacity of about 89,000KVa. In the
IFN, Nov, 2012 Page 8

3.1.2.

KESC Privatization Report

beginning of 1960s the generating facilities of KESC increased and consisted of 247MW of steam plant and approximately 25MW of an aging diesel plant whose generation was degraded to m20MW. The effective total generation capacity at the time was therefore 267MW. 3.1.3. In the ten years 1955 to 1965, the per capita consumption of electricity in the city rose from 72KWh to 229KWh. Although, there was a reduction in the growth rate by 9% in 1965 as a result of the effect on the general economy due to drought and hostilities within India. Provincial government had the authority to formally approve KESCs tariffs; the GOP is empowered under the constitution of Pakistan to give directives to the government of the province which would be binding on this matter. In 1970, the total installed capacity of KESC was 392MW against the peak demand of 254MW. The annual generation was 1386 million units (GWh) for 254225 consumers. 19% system losses were recorded during the year. In 1973 oil crisis, its impact was appeared on the tariff of the KESC. Resultantly, at the beginning of 1974, the average tariff of company was increased around 30%. During the period 1971-78, another 209918 new consumers were added, while addition in generation capacity of 110MW was added in 1977 only. The system losses which were 18% during the 60s rose to 22% in 1977. On the financial front, during the period 1972 to 1978, the net profit margin on sale after interest was reduced to -0.38% and first time the company faced financial loss. In eighties, little attention was paid towards efficiency of plants and upgrading the transmission and distribution network. High technical losses were attributed to a negligent attitude towards the T&D network especially secondary transmission lines and a low recovery ratio.

3.1.4.

3.2. Financial Overview 3.2.1. The energy generated in 1991 was 62,929Wh with 40% of energy sold to industries and 35% to residential consumers. The utilitys transmission system at that comprised of 31 substations with a power transformer capacity of 1653MVA. The distribution system comprised 3,983 substations with a total 11KV distribution capacity of 2103 MVA. According to financial figures of KESC, the company showed a profit of PKR. 594.92 million for 1989-90 but this profit included subsidies worth PKR. 796.82 million, leading to the conclusion that without the benefits of these subsidies, KESC would have shown a loss of PKR. 201.9 million for that year. Figures for 1990-91 indicated that KESCs position deteriorated further since subsidies totaled PKR. 1,399.7 million whilst a profit including those subsidies was only PKR. 472.55 million indicating that, without subsidies, the company would really be operating at a loss of PKR. 927.15 million. In early 1992, GOP had initiated a strategy for power sector reforms, aimed at improving sector performance and long term sustainability through institutional, regulatory and structural changes. In May 1999, management of the company was entrusted to the army with a view the companys operational and financial health. The army in late 1998 for WAPDA & KESC could not bring about the desired results.

KESC Privatization Report

IFN, Nov, 2012

Page 9

Figure: 2 KESCs Financial Performance (from FY 09 12)

KESC Privatization Report

IFN, Nov, 2012

Page 10

3.3. KESC Structural Reformation 3.3.1. The structural part of the reforms was primarily focused on WAPDA as the dominant utility, whereas the strategy for KESC was simply to privatize it as a vertically integrity utility. The process took almost 11years with the GOP, having consulted with various international donor agencies, finally deciding in 2003 to go ahead with privatizing KESC. The process was finalized on November 29, 2005 with the GOP transferring 73% shares at a total sale price of PKR 15.86 Billion (USD 264.9 Million) with management control to a consortium of the Hassan Associates, Saudi Al-Jomaih group of companies and Kuwaits National Industries group (NIG), while retaining 26% shares for itself. Following the failure of the consortium to pull the KESC out of its financial and operational crisis, Saudi Al-Jomaih, approached a Dubai based private equity firm Abraaj Capital with a proposal for a potential stake in KESC. The deal was eventually finalized in October 2008 at a ticket price of $361 million for a significant equity stake in the company, which grants Abraaj full management control.

3.3.2.

3.4. Foreign Investment Shareholder Base

Figure: 3 Overview of KESC Shareholding

KESC Privatization Report

IFN, Nov, 2012

Page 11

4.

Factors Leading to Privatization of KESC

4.1. KESC performance started deteriorating significantly since 1990s due to inability to generate sufficient cash flow to meet its capital expenditure requirement, debt service obligation and part of operational expenses. This worsening financial health was threatening its operation and adversely affecting the viability of energy sector. The city of Karachi was facing frequent power tripping and breakdown ascribed to failure of the company to follow the increase in electricity demand which was growing at an average rate of 8% every year in late 1990s. The transmission system of KESC was quite old and unmaintained and thus became very tripping prone for the normal power supply. The financial instability owing to technical & non-technical losses increased subsidies granted by GOP by 6% in 1990-91 as compared to 1989-90. The figures of subsidies touched the value of PKR. 1399.7million and without this the company would suffer a net loss of PKR.927.15million. The line losses on the other hand went on increasing due to lack of investment owing to the reluctance of donor agencies in pursuance of the financial health of company. 4.2. In 1996, the power from IPPs accounted for 10.4% of operating revenues and reached to 46.4% of operating revenues in 2000. Furthermore, KESCs average IPP costs increased from PKR.128.26/KWh in FY1996 to PKR.329.78/KWh in FY2000. It was also asserted that a decline in quality and performance of KESC service was largely due to overstaffing, over paying and politicization. It was therefore proposed that all this could be put to an end by involving the private sector in the provision of public services. Privatization was seen as penance for these ills by not only improving the quality of goods and services but also making the market more responsive to consumer needs and demand. 4.3. The Table 1, below depicts the core issues encountered by KESC prior to the privatization / Abraaj takeover:
Financial Cash Loss: USD 14 -15 million per month, cash requirement of over USD 520 million for next 3 years Sovereign issues resulting in adverse material impact on financial viability including accumulated losses of c. USD 700 mln, contingent liability of c. USD 600 mln, circular debt of USD 250 mln Operational Poorly maintained power plants with low efficiency; Adverse fuel mix Inability to purchase sufficient FO System reliability of 55% Availability of 89% Capacity de-rated by 400MW resulting in lost revenue of c. USD 400 million T&D losses of over 38% Inadequate maintenance Poor project management and execution Management & Stakeholders Lack of good leadership Misaligned management objectives -absence of accountability and supervision Demoralized workforce Key stakeholder relationships disrupted, reputational damage Negative public image and low consumer confidence

Table: 1 Issues Faced by KESC Prior to Privatization

KESC Privatization Report IFN, Nov, 2012 Page 12

5.

Implementation of Privatization / Post Privatization Scenario Up to Date

5.1. KESC is now an integrated power utility with exclusive franchise rights to serve Karachi and its surrounding areas, with a licensed network area spanning 6,000 square kilo-meters. 5.2. Abraaj acquired a controlling stake in KESC, the integrated power utility serving Karachi, in May 2009 through KES Power (holding company), the KESC was privatized through following steps/phases found suitable according to the restructuring plan: 5.3. Transaction Phase 5.3.1. The transaction officially closed on May 5, 2009: Abraaj through KES Power has already injected US$ 193 million in KESC to fund capital expenditure and working capital since October 2008; First rights issue of US$ 176 million completed on October 5, 2009: KES Power fully subscribed to shares along with minorities shares, which led to an increase in its shareholding from 71.50% to 72.17%; Government of Pakistan (GoP) fully subscribed to shares retaining 25.66% ownership; Second rights issue of US$ 107 million announced October 27, 2009 and expected to be completed by February 2010 (subject to SECP approval).

5.3.2. 5.3.3. 5.3.4.

5.4. Restructuring Strategy 5.4.1. The restructuring plan is being spearheaded by a strong, experienced and highly motivated senior management team assembled by Abraaj, which took over operational control of KESC on September 16, 2008. A diagnostic analysis through a comprehensive due diligence process has evolved the business strategy for Restructuring KESC into five distinct work streams that are being worked at and managed contemporaneously: 1. Generation:
Due Diligence Findings:

Old, dilapidated plants with significant capacity de-rating Deteriorating fuel mix Adverse relations with suppliers

Initiatives:

Capacity Addition: 405 MW added to the system Existing Capacity Improvement: 55 MW recovered from existing plants through major overhauling and maintenance of units 220 MW and 560 MW Projects: 220 MW project fast-tracked and commissioned. Contract for 560 MW renegotiated with COD expected in April 2012 Mix Optimization: Increased reliance on self-generation and diversified fuel mix Enhanced Efficiency: Overall efficiency improved to 32.3% and plans to increase average efficiency to over 34% by 2010.
IFN, Nov, 2012 Page 13

KESC Privatization Report

2. Transmission & Distribution (T&D):

Due Diligence Findings:

Overloaded network due to delays in commissioning of grid stations and manual operation of system load High T&D losses due to significant theft and high technical losses Billing mismanagement, poor customer service, and inefficient IT infrastructure 15% increase in grid stations leading to 650 MVA increase in transformation capacity Proactive maintenance has led to significant reduction in network trippings and faults Pilot project (IBC) launched for the overall rehabilitation of the T&D network Focused disconnection and reconnection drive launched.

Initiatives:

3. Human Resource:
Due Diligence Findings:

Lack of a cohesive senior management team and an inefficient infrastructure Demoralized workforce No CBA (Collective Bargaining Agent) in place

Initiatives:

Hiring of top management to lead the turnaround strategy and strengthening of middle management Incentive schemes being created to enhance motivation levels A team has been identified for CBA negotiations. 4. Stakeholder Alignment:
Due Diligence Findings:

Failure to engage various stakeholders in any form of dialogue - broken relationships Extremely negative media perception - loss of credibility with opinion leaders and key civic associations

Initiatives:

Communications strategy envisioned to align KESCs stakeholders to the Companys interests Marketing campaigns to communicate milestones and drive transparency in public messaging Focused CSR and internal campaigns launched to enhance public image and motivate employees. 5. Value Added Initiatives: Leverage of KESCs infrastructure, rights of way, and capitalizing on its two million strong customer base through collaborations with telecom, consumer and marketing companies Value creation through an unbundling strategy.
KESC Privatization Report IFN, Nov, 2012 Page 14

6.

Analysis of KESC Reformation, Decision Making & Benchmarking Process

6.1. KESC was the first utility company in Pakistan to take two very important strategic decisions.

First one was to exempt the industrial zones of Karachi from scheduled load-shedding. This is the difference between us and any state owned distribution company. KESC has 1300 feeders in the system and it has divided them in four categories namely, low-loss, medium-loss, high-loss and very-high loss. At present, almost 25 percent of Karachi's residential areas are facing zero load-shedding which is a just reward for their good behavior. But a large numbers of areas still face extended load-shedding as they either don't pay their bills or are indulged in electricity theft Secondly, KESC has been able to improve its financial performance significantly from previous years, though KESC confess, it still remains way below what it wants to achieve.

6.2. Sixteen out of 28 business centers of KESC are now under 20 percent T&D loss. Just three years ago, the T&D losses were as high as 40 percent in most of the areas. The real problem lies with the remaining 12 centers, which give KESC the real headache as the losses range between 40 and 50 percent high and the collection ratio is dismal at 60-70 percent. This is why they end up being on the receiving end of load shedding. Nearly all industries are good payers; KESC collection ratio for industries is above 98 % with 8-9% losses. 6.3. KESC only has two fuel sources - gas and furnace oil. It used to get 250 mmcfd of natural gas three years back, which was reduced to 190 mmcfd the very next year, further reduced to 150 mmcfd last year and today KESC is only getting around 120 mmcfd. Previous year, KESC burnt almost 1 million ton of furnace oil which is equivalent to Rs 50 billion. Two years back, it had burnt furnace oil of Rs 25 billion. The price of furnace oil in the last two years has doubled and that of gas has also increased. The more expensive the input, higher will be the power tariffs. The dilemma is that the captive power producers in Karachi are getting 180 mmcfd currently, whereas KESC being the utility company of the city is receiving only 120 mmcfd. There is efficiency loss in this distribution of gas, as KESC could have generated 800 MW from the same amount of gas, whereas the captive power producers are not generating more than 600 MW. 6.4. KESC guarantees uninterrupted power supply, if given this gas which is going to the captive power plants and being burnt inefficiently. The gas allocation policy of 2005 is being blatantly violated to facilitate the captive power plants. The policy clearly states that gas will only be supplied to captive power plants only when the needs of WAPDA and KESC have been served, the government provides KESC the promised 276 mmcfd gas, KESC tariff differential claims would be negligible -which would benefit the entire chain and circular debt will ease off. This will bring in efficiency to the overall system and KESC would even be able to reduce the load-shedding in the high loss areas, when KESC has the liquidity which is possible only when the overall generation cost comes down.
KESC Privatization Report IFN, Nov, 2012 Page 15

6.5. KESC, under its present management, has injected around USD 1.5 billion in shape of equity and debt. This includes USD 300 million of fresh equity that is part of the total USD 361 million investments, agreed and committed by the KESC management. 6.6. Figure 4, below illustrates the post privatization overview of the KESC;

Figure: 4 KESC Post Privatization Scenario

KESC Privatization Report

IFN, Nov, 2012

Page 16

7.

Technical Innovation in KESC through Privatization

7.1. Through this financing, KESC have added almost 813 MW of incremental capacity over three years. Another 2000 MW will be fully commissioned by May 2012, formalities are being finalized for a combined cycle power plant at Bin Qasim. If you look it in the context of KESC summer peak load, which is 2500-2700MW, the addition of nearly 1000 MW is a significant achievement. 7.2. KESC have also launched a state-of-the art call centre as customer service sits top on our priority list. It has increased our call centre strength from 70 to 350 people serving our customers. 7.3. KESC has undertaken a number of steps to reduce dependence on gas and achieve fuel diversification. Below are the project highlights: 7.4. KESC signed a USD 200 Million JDA with a Hong Kong based firm, BEEGL for converting FO based units at BQPS-1 to coal. Starting with Phase I (2 units of 210 MW). And has recently also signed an MoU with the same firm for setting up fast track coal projects of upto 1000 MW in Karachi. The Company is also working to develop bio-waste to energy project which will convert cattle manure from Landhi Cattle Colony and organic food waste to produce electricity and bio-fertilizer. 7.5. KESC also plans to set up 300 MW coal fired power plant at Thar. For this purpose, a Joint Development Agreement between KESC and Oracle Coalfields has been signed. 7.6. Following significant technical innovations has been introduced in KESC system following its privatization plan: 1) Generation & Transmission all power units and grid stations monitored by a centralized Load Dispatch Centre using state of the art SCADA system 2) Distribution - a Rapid Response nerve Centre in place that coordinates with 118 Call Centre and various Operations Centers to address HT/LT faults 3) Number of owned MTL vehicles increased to 1,010 with trakker system in 500 vehicles+ another 815 from third parties 4) Training of technical staff at our Gulshan Training Center recently started providing cross functional training to LT employees for HT work 5) Procurement of key items (PMTs, Cables, Joints, VCBs etc) streamlined/fast tracked 6) EOQ concept introduced in Inventory Management 7) Decentralization process partially completed to bring HT & LT departments under one head. 7.7. New management of KESC aims to increase its plants efficiency to over 34 % by year 2010. The figure 5, below depicts the periodic efficiency improvements through technical innovation in KESC units.

KESC Privatization Report

IFN, Nov, 2012

Page 17

Figure: 5 Overview of Efficiency Improvement through Technical Innovation

KESC Privatization Report

IFN, Nov, 2012

Page 18

8.

Analysis of KESC Privatization in Energy Management - Academic Context

8.1. The problem in the energy sector is that an integrated energy plan has never been put in place. The basic reason for the failure of restructuring regime. The common ground is missing, as the number of ministries is a lot more than what is desirable. Every country has a ministry of energy which will bring synergies and efficiencies in the system. The regulators should be independent and not under the political administrative influence - merging them in one entity will make them competent. 8.2. Political interference from the energy sector has to end. This is why KESC is not in the good books of many a people because its job is to focus on our core business and not to entertain political hiring. 8.3. Similarly, the privatization process and restructuring of KESC still ignores the vital demand and supply projections, the capacity enhancement and other initiatives are largely focused on recovering from historical losses however increasing future demand is far above the projected demand analysis carried out, there is a need to conduct a detailed demand and supply analysis to ensure the adequacy of performance improvement plans. 8.4. KESC has introduced several technical innovative plans to enhance the system performance however a segregated and dis-integrated component focused plan is required to introduce cost effective and energy efficient retrofitting for enhanced reliability of the entire system.

8.5. There is a need to introduce and add alternative technologies in KESC system, which in turn will contribute in reducing the system expenses, losses and dependency on expensive conventional fuels. Additional projects such as Karachi Bio Waste Landhi, should be initiated on priority basis to obtain social, environmental and economic benefits. 8.6. Training and recruiting of technical staff should also focus on the Energy Management aspects of the reformation, a well qualified team of energy management experts can contribute and can be beneficial for the entire system and will result in increased performance. 8.7. Component based regular energy audits must be scheduled and may be conducted through subject matter experts in order to ensure the adequacy of the audits, the recommendations of energy audits must be adhered on priority basis to ensure timely outcome. 8.8. Regular and comprehensive awareness campaigns through print and electronic media may be maintained to ensure that general public is aware of their role and responsibilities of sensible consumption along with an emphasis of load management and loss reduction. 8.9. Manufacturers and retailers of electronic appliances may be encouraged to adopt internationally acceptable energy efficiency standards for their appliances, as energy efficient appliances can contribute significantly in reducing the load on the system. 8.10. Comprehensive and target oriented energy policies can also streamline the long term performance goals of KESC.
KESC Privatization Report IFN, Nov, 2012 Page 19

9.

Issues, Challenges and Discrepancies Identified

9.1. In almost 95 percent of the cases around the world, the privatization of power distribution companies has failed to deliver the purpose and the governments had to take back the management control. The main reason for the failure of the process is that the new managements take measures, including retrenchment of the staff and raise in power tariffs at short intervals, to earn huge profits. 9.2. It is asserted that the decline in the quality and performance of public sector services is largely due to politicization. These departments also suffer from bureaucratic irregularities, official arrogance, and corrupt and socially irresponsible practices which cause major obstacles to efficient provision of services. 9.3. It is also observed that the privatization process of KESC was not desirably transparent as on February 4, 2005 a Saudi Base Company Kanuz Al Watan offered the highest bid and was announced successful bidder, but later on the company refused to buy KESC without giving any reason and suffered a loss of Rs10 billion paid as guarantee money. 9.4. After refusal from Kanuz Al Watan, the government started negotiations with the second highest bidder, a broker company Hassan Associates, rather than conducting re-bidding for the same, because it has decided to sell the utility, as the then privatization minister Hafeez Sheikh had said that the company will be privatized what come may. 9.5. Hassan Associates was asked to form a consortium, which included Premier Mercantile and AKD. After negotiations, KESC was sold to the consortium at a throw away price of Rs15.86 billion, whereas at that time the assets of KESC was worth Rs300 billion. 9.6. On the one hand, KESC was sold to a broker who has no experience of running a power utility, rather it was involved in the construction business, and on the other, the power utility was sold for half the amount it worth at that time. Not only this, but the government also paid Rs14.5 billion under the FIP plan, whereas Rs4 billion were already there in the account. Other than this, the power consumers, including residential, commercial, and industrial units, owed around Rs25 billion to the utility. 9.7. The KESC system needs huge investment as it is over-loaded and outdated. A large number of substations switch boards PMTs, feeders, cables and wires need to be replaced on an immediate basis.

KESC Privatization Report

IFN, Nov, 2012

Page 20

10. Lessons Learnt / Outcome of Analysis

10.1. Outcomes of Analysis 10.1.1. The analysis reveal that, the privatization is a form of restructuring which aim for the following desirable outcome: (i) (ii) (iii) (iv) (v) (vi) (vii) Overall improvements in the sector; Better management and service quality improvement; Decrease in the technical & other losses; Better and increased availability of the product/electricity; Job creation; Economic growth; Environmental benefits.

10.2. Lessons Learnt 10.2.1. In addition to the lessons learnt throughout KESC privatization analysis which included need for restructuring, steps taken for privatization and initiatives to ensure the success of envisaged plan, an important lesson learnt is about giving preference to the customers and categorizing the good and bad customers in utility context. 10.2.2. Analysis reveal that, historically, being a public sector monopoly, KESC never took Customer Service as a core value, which resulted in performance deterioration due to customer mistrust, lack of awareness, lack of involvement in decision making and lack of interest. Theres now a renewed focus on this but differentiating between the good and the bad customer. 10.2.3. Figure 6, below illustrates the KESCs customer services strategic plan;

Figure: 6 KESC Plan - as a Public Service Entity

KESC Privatization Report

IFN, Nov, 2012

Page 21

11. Key Results obtained through KESC Privatization Analysis

11.1. Financial Position of KESC: 11.1.1. New management has taken measures to improve its recoveries from private sector in FY2010-11, the recovery ratio of the company has increased. However, public organizations, city district government Karachi, Karachi Water & sewerage board are continuously creating problems in recoveries. The amount billed in 2011 was PKR 107Billion, an increase of 23.7% as compared to the previous year. This increase is driven by reduction of T&D losses by 2.7% as compared to the previous year, which has been achieved through greater accountability. 11.2. Safety Management: 11.2.1. KESC has improved the safety standards by integrating the safety standards, including training of staff which resulted in 33% reduction in industrial accidents. 11.3. Energy Conservation Initiatives: 11.3.1. Setting up of energy conservation department established in 2009, the conservation department has launched various campaigns to save energy including seminars for awareness of sustainable energy technology, building alliances. 11.4. Distribution: 11.4.1. The KESC distribution system consists of 1107 (11KV) feeders with 2571 substations. There are 13992 district transformers with 4328MVA capacity. The KESC distribution system consists of 4940KM of HT underground cable, 2445KM of HT overhead mains, 1186KM of LT underground cables and 10665KM of LT overhead mains. Establishment of a computerized system for management of generation, transmission and distribution known as SCADA is being executed as one of the priority projects. 11.5. Transmission: 11.5.1. The transmission network has been upgraded by addition of two 132KV grid stations near Jail Road and Gulstan-e-Jauhar. Consequently, the transformer overloading has been reduced in various locations including Gulstan-e-Jauher, Baloch colony and Gushan-e-Iqbal. 11.6. Generation: 11.6.1. KESC system has in total generation capacity of 2594MW as per 2011 to cater the city load requirement, with 1821MW from KESCs own generation plants, 262MW from IPPs and 50MW from rental power plants. 11.6.2. The generation fleet efficiency has been improved from 33.07% to 33.5% over the year. KESC is replacing old Korangi and site gas turbines by new gas engines to increase operational capacity and efficiency. The availability factor of Korangi CCPP-220MW is enhanced through modification and expansion of fuel gas compressor infrastructure. Another CCPP of 560MW is added in generation fleet at Bin Qasim site.
KESC Privatization Report IFN, Nov, 2012 Page 22

12. Conclusion/ Recommendations

12.1. Conclusion 12.1.1. It hardly needs to be emphasized that electricity is the lifeline of national economy and the people at large. The Economy and public life practically come to a halt because of the load shedding. The existing crisis can be addressed by the government by taking prompt measures. There is hardly any room for neglect or delay. 12.1.2. Following measures are found helpful in fighting the menace of energy crisis: a) Reducing unnecessary energy use; b) Usage of electricity saving devices; c) Awareness campaign for energy saving; d) Reduction in unnecessary transportations by developing good public transport systems and strengthening Pakistan railways; e) Reduction in industrial uses with installation of effective equipment/energy efficient and with increasing efficiency of workforce (cost effective); f) Decreasing reliance on rental power projects, because instead of doing any good, they are increasing prices of electricity; g) Decreasing line losses by using efficient power transmission cables; h) Developing new energy resources; i) j) Tapping indigenous resources (i.e. Thar coal); Using renewable resources (i.e. water) by constructing new dams and hydro power plants.

12.2. Global Trends Observed: 12.2.1. Ever increasing energy demands creating shortfalls in developed and emerging economies resulting in increased competition between strategic players for energy. The volatility in furnace oil prices is directing the development on alternative energy sources also, increasing correlation between energy use and environmental impact such as carbon emissions, conservation and protection is observed in countries which are heavily dependent on natural resources to meet their energy requirements. 12.3. Pillars of the Power Sector Reform Plan 12.3.1. It has been observed through the reformation analysis of KESC that following fundamentals of Power Sectors Reforms must be adhered to, in order to ensure the success of the plan. a) Strengthen Energy Sector Governance & Regulation;
KESC Privatization Report IFN, Nov, 2012 Page 23

b) Rationalize Pricing & Energy Subsidies; c) Develop Energy Finance Capability; d) Energy Efficiency be the Corner Stone of new Energy Policy; e) Maximize use of Indigenous resources for generation; f) Fast Track Investment Projects for Energy Security. 12.4. Recommendations 12.4.1. Considering the existing reformation strategy and the way forward plans of KESC, following recommendations are made to be considered for further performance enhancement of a privatized power sector. 1) 2) Open door environment should be introduced. Each & every employee should have right to speak against or in favor of any policy. A separate monitoring team should be formed for speak up campaign and after rectification of grievances, an effective and efficient feedback system should also be introduced for consumer satisfaction and for avoiding corruption. Employees must be satisfied by providing them fair and equal medical facility, residential and transport facility. All overhead system should be converted into underground cabling system. This will not only help reducing theft but will also help minimizing faults. A long term plan should be made for the conversion of 220V system into 110V so the extra consumption of electricity should be reduced. Legislation should be approved from parliament about the theft of electricity so that punishment may be given to the electricity thieves and FIR be lodged against them. A fair and transparent recruitment system may be introduced for better performance of the organization. Prepaid meter should be installed instead of postpaid this may help in reducing theft of electricity. Length of new connection procedure should be reduced and the procedure should be posted at notice board of every KESC center so consumers may submit their application and get the estimate via post to avoid corruption. E-billing system should be launched at KESCs official website so consumers may pay their bills online. Long term planning is required for electricity self generation resources like wind, coal, garbage etc, and the purchase of expensive electricity from other companies must be avoided.

3) 4) 5) 6) 7) 8) 9)

10) 11)

KESC Privatization Report

IFN, Nov, 2012

Page 24

12) 13)

Effective coordination is required with local political representatives to avoid the illegal pressure from various sectarian/political groups. Savings can be generated by integrating waste heat recovery units to the existing thermal power plants whereby the sensitive heat of the flue gases can be recovered by installing standard heat exchangers for pre heating the air & the fuel for waste heat recovery boilers for auxiliary power generation. KESC should develop a plan to replace and rehabilitate its old and below specification distribution network, including replacing cable joints to reduce abnormally high T&D losses. The increased dependency on fossil fuel is the fundamental cause of present energy crisis and the best options available are to skew the generation mix with the renewable energy resources. It is recommended that KESC should introduce smart grid with advanced metering system. This may include construction of shielded networks for electricity supply and application of remote metering at each customer connection and also at the transformer point. The company should expedite its plan to start the pilot project aimed at energy loss reduction by introducing Aerial Bundle Cabling (ABC), High Voltage Distribution System (HVDS), and Automatic meter reading (AMR). Ministry of Water and Power ought to set a monitoring system to overview this project.

14)

15)

16)

17)

13. References
1. 2. 3. 4. http://www.kesc.com.pk/en/media/get/20110311_kesc-analyst-briefing.pdf http://www.kesc.com.pk/en/media/get/20091117_executing-the-transformation-1.pdf http://www.pc.gov.pk/hot%20links/PSR/5th%20OCT/2-KESC%20Presentation.pdf Energy Sector Restructuring and Reform Course Material by Mr. Shahzad Anwar, Faculty MSEM (ESR&R) COMSATS, Islamabad.

KESC Privatization Report

IFN, Nov, 2012

Page 25