Prepared by: Nasrullah Khan (MS Energy Management) - FA11 REM 002 Fahad Khalil (MS Energy Management) - FA11 REM 001 Irafn Ahmed (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 ANALYSIS OF KARACHI ELECTRIC SUPPLY COMPANY (KESC) PRIVATIZATION IN ENERGY SECTOR REFORMATION & RESTRUCTURING CONTEXT
This report tells that wheher privatization of Gov owned company KESC was a success or failure.
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Prepared by:
Nasrullah Khan (MS Energy Management) - FA11 REM 002
Fahad Khalil (MS Energy Management) - FA11 REM 001
Irafn Ahmed (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
ANALYSIS OF KARACHI ELECTRIC SUPPLY COMPANY (KESC)
Figure: 5 – Overview of Efficiency Improvement through Technical Innovation
Figure: 6 – KESC Plan - as a Public Service Entity
KESC Privatization Report IFN, Nov, 2012 Page 3
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, multi-
dimensioning, 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
company‟s 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 4
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 – KESC’s 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.
KESC Privatization Report IFN, Nov, 2012 Page 5
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 6
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, Pakistan‟s largest city and the country‟s
commercial, industrial, and financial capital. KESC‟s 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. KESC‟s 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. Government‟s 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 7
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 company‟s 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
2) Ensure the long term financial stability of the corporation
3) Ensure reasonable dividends to its shareholders and
4) Ensure the welfare of its employees
KESC Privatization Report IFN, Nov, 2012 Page 8
3. Historical Overview and Reformation of KESC
Key Information about KESC (as of 30th June 2011)
Total Installed generation capacity of the country 23,412 MW
% age share of KESC to total installed capacity in country 11.08%
Total installed generation capacity within KESC area 2,594 MW
Total available capacity within KESC area 1787 MW
Total Thermal generation in KESC area 9,180 GWh
Max energy demand in KESC area 2,565 MW
Total units purchased by KESC 7606.26 GWh
Total units available for distribution 14840.93 GWh
Total units sold 10071.27GWh
Total no of consumers in KESC 2,109,623
Energy Sale in KESC area 10,072GWh
Average sale price in KESC area 828.85 paisa/KWh
Line losses in KESC 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.
3.1.2. 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
KESC Privatization Report IFN, Nov, 2012 Page 9
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 KESC‟s 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.
3.1.4. 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.
3.2. 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 utility‟s 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 KESC‟s
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 company‟s operational and financial health. The army in late 1998 for WAPDA &