KESC – WHAT AILS THE UTILITY!

By
Engr Tahir Basharat Cheema
B.E. (Elect), Dip. Pub. Admn, Dip. Bus.Admn., Cert. Statistical Sciences, M.B.A.
M.I.E. (Pak), F.I.E.E.E. (Pak), M.I.E.E.E. (USA)
House # 282, St. # 8, Cavalry Ground (Ext), Lahore Cantt. Tel # 6653813/ 6650367
Email: cheema_tahir@yahoo.com. Mob # 0333-4218969, 0300-8733808

KESC is the first Utility Company to be registered under the Companies

Act, 1908. Though starting small, it soon attained pre-eminence. So much was
the profitability that its share valued at Rs. 10/- only was being sold at a colossal
Rs. 350/- in 1971. Due to various reasons, mainly administrative and related to
managerial issues, this once very profitable entity became loss making to the
extent that its share plummeted to as low as around Rs. 7/- in the late nineties.
This was the stage when this Company’s management was handed over to the
Army, which remained so between late 1998 till Nov, 2005. During this time
period, the Utility was bleeding to the tune of up to Rs. 20 Billion each year with a
T&D loss figure of as high as 48% and the recovery being a maximum of 40 to
50% of its billing each month. This, according to experts, was solely because of
relegation of the professional and replacement thereof with the generalists. It
seems that the policy makers were unable to understand the complexities and
other inherent requirements of running a Utility, nor could it be understood that
mere discipline does not really matter and the issue in fact was totally different.
Continued intransigence thus led to GoP’s injection of over Rs. 100 billion in the
five years between 2000 to 2005. It, unfortunately, also resulted in quickening of
the governmental resolve to somehow or the other privatize this Utility – all in
order to save upon the continuing losses. That, the situation could be corrected
through induction of a purely professional management and implementation of a
properly choreographed financial improvement plan, which took care of all
aspects of the best practices in utility engineering, was never considered as an
option.
During this period actual build up of the now decaying infrastructure was
put on hold. Thereafter quite late and in order to ready the Utility for privatization,
a five years Financial Improvement Plan (FIP) amounting to about Rs. 14 Billion

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was formulated. This to many seemed to be too little and too late. The plan was
based on trite technical studies and did not reflect the new concepts of Utility
engineering. The Utility engineers would have designed a bigger plan and one
which could have been placed for implementation, at the most, by the year 2000.
As such, the FIP has been considered as belated action and that too when the
existing KESC infrastructure had lost all of its inherent prowess or the capability
to improve
Alongside the above viz a lackluster management of Utility operations and
nearly no investment on the infrastructure, has been the privatization thrust,
which cannot be considered as something worth emulating or copying. It seemed
that some dead-line had to be met with. Moreover, the eventual privatization also
shows a non-understanding of the issues – rather the whole approach ignored
the private entrepreneur’s penchant for making a fast buck and also getting the
highest of the profits without making anything or the least of the investments. The
eventual privatization thus or handing over of 73% of KESC shares was without
any concrete covenants agreed between the GoP and the bidders. As all this
was happening at cross purposes to what was happening in similar situations
across the border in India (a case study of the public-private partnership between
the Delhi Government and the TATA Group resulting in the present most
profitable enterprise viz NDPL would make a very interesting reading), proved
that the Privatization Commission was either bereft of the needed expertise -
both legal and technical or a nexus existed between them and the bidders.
Coming to the privatization fiasco, we see that the lowest of the bidders
M/s Alkanooz did not carry on with the takeover - reasons of which have as yet to
surface. The insiders say that these bidders shied away on account of threats
from a pressure group, while some say that it decided not to be an investor in
Pakistan because of other reasons. The third opinion suggested that local big
guns (having great financial clout) did not want a foreign presence in Karachi and
that too which could deliver. They in fact had to have the pie for itself. The
experts opine that it was because of this line of thinking that after Alkanooz’s exit,
no new bids were called – rather the second highest was pampered to match the
former highest bidder’s price. This eventually materialized in Oct, 2005 and the
Utility was promptly handed over.

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 According to reports emanating in the press in November and December
last, we were told that 73% shares of KESC with management control was
transferred to the Consortium comprising of the Saudi Investors Group Al-Jomiah
and Hassan Associates. At that moment, it was propagated that Siemens, the
German multi-national, would also be a part of the Consortium, but very soon it
transpired that it was nothing but an O&M contractor. So much was the hype that
KESC’s new CEO stated in early Dec, 2005 that his management was destined
to invest US $ 800 million in the very near future and Karachi would be rid of
electricity problems by March, 2006. He further claimed that voltage fluctuation
and other customer problems would also be resolved in three months i.e. by the
end of Feb, 2006. These new operators were so quick on their feet that their
petition for a raise in the power tariff was accepted as promptly as requested.
Besides the above, KESC’s privatization and take over by the Saudi led
Consortium was considered as a deal further strengthening Pak – Saudi
relations.
Another news that has jolted every one now is that the present owners
have since peddled 25% of their shares to the Kuwait Fund (known only to make
profitable deals) for a hefty Rs. 4/50 per share – thus receiving an amount which
is more than half of their total investment of Rs. 16 billion or so (for 73% share at
a cost of Rs. 1/65 per share). Additionally, the new management is to garner a
huge amount through issue of preferential shares. They are also in the process
of arranging for floating of bonds on the lines of WAPDA etc. According to
insiders, it is again a fact that efforts are afoot to recover at least Rs. 4 billion of
the total Rs. 8 billion of confirmed receivables (from a total of Rs. 22 billion),
which the Consortium received as a dowry from the PC. Thus the Consortium will
have recovered all of its original investment in just seven months of ownership
and also without any real investment on the KESC system. On the other hand,
had these wind fall gains been used for infra-structure building, the situation
would have been different.
Thus after the take over and now that more than seven months have
passed, we see that the Saudi investors have practically gone and no where to
be seen. Hassan Associates too have vanished as they were the agents alone –
in fact there was no Consortium ever. M/s Siemens is the O&M contractor having
no experience at all in Utility Operations being just manufacturers of some

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electrical equipment. The last of the assertions is very serious as a novice cannot
ever deliver in Karachi and nor can be allowed to experiment here. It is thus
perturbing to hear MD Siemens Pakistan (which manufacturers a few of utility
requirements) opining on KESC operations and more so when no investment is
evident for us to see. On the other hand, the MD KESC preaches conservation
and patience on part of the beleaguered customers of Karachi, desires un-limited
power from Wapda (which in the end seems to have succumbed and started
providing an extra 200 MW to the earlier figure of 500 MW – surely at a great
cost) and lastly, which is the latest, holds the kunda mafia, no go areas and the
KESC’s employees as the culprits and main inhibiting factors to any improvement
in the situation. As a consequence, the new owner’s slogan of Nov, 2005,
“Karachi Electric – poised for progress through performance” has simply
vanished and the people of Karachi are facing the worst of times in a century.
The situation is further compounded when the PM’s Advisor on Finance offers an
apologia for the new operators and advises the public to be patient. According to
him, the rot of a decade cannot be corrected before three years.
Historically, we see that special efforts were always made before each
summer which this time around, with the new O&M Contractors, was not done.
No worthwhile investment was made leading to the derailment of all socio-
economic activity in Karachi. It can thus be concluded that improper planning and
short sightedness on part of KESC management has deepened the power crises.
Whatever the GoP or others may do, short of actually taking over the KESC
management, nothing is bound to improve the situation on ground – specially
when no investment is forthcoming even in the near future. Actually, the new
management is waiting for the existing set-up to create the required financial
space for it and nothing else. As the existing infrastructure will not deliver until
and unless it is upgraded through a quick and immediate injection of at least Rs.
20 billion on war footing, the situation is likely to remain so. We also need to
appreciate that the O&M contractors are in no position to deliver as their hands
are tide up by the now near phantom owners. It however, seems that the owners
are indeed important people because no one from the Government is accusing
them for reneging on their takeover vows of late 2005.
As such the situation will not improve, rather it will deteriorate even more if
an immediate redrawing of existing policy parameters is not taken up and enough

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investment is not made to improve upon the existing T&D infrastructure of KESC.
This will consist of immediate induction of 5 to10 26 MVA power transformers on
temporary moorings and the placement of an auto-transformer for the Hub-KESC
link. Similar upgrading would have to be undertaken for the transmission lines
and the distribution system. According to experts, the later part of this plan can
easily be completed in 2-3 months through air-lifting of the needed equipment
from China and Europe. On the mid term basis, power shortages can be
surmounted through induction of barge mounted generating plants available and
berthed at Singapore and Hong Kong. These, according to those in the know of
things, can be brought on bar in less than 90 days. This activity has to move side
by side the actual induction of already licensed generation by KESC. Fourthly,
both the Regulator viz NEPRA and the Ministry of Water & Power would have to
over-see the implementation of the road map in a very serious manner. In this
regards, punitive action for non-investment and for selling 25% of the stock
without using the proceeds for buffeting the Utility during the last six to seven
months of operations too would have to be taken up. This can be through the
unilateral withdrawal of shares etc. by the GoP or NEPRA taking over of the
KESC operations by invoking the jurisdiction under NEPRA Act. The change in
existing policy can be set rolling through immediate sacking of the O&M
contractors, as they do not posses the expertise or the wherewithal to operate
KESC. They can be replaced by a professional team from amongst the KESC
and WAPDA professionals (but basically from the KESC itself). As all the above
needs 90 days to be put in place, till then conservation and making the best of
the things remains the answer to the problem.
What are the lessons learnt out of the KESC’s sell-off and the present
fiasco. The first of the lessons is that non-professional management has to be
scrapped come what may and only the professional be given the job of running
utilities and such like organizations. As the wheel was invented nearly three and
half thousand years go, there should be no occasion for its re-invention now.
Secondly, we come to the sad conclusion that the whole activity of privatization
needs to be re-visited while taking a cue from what is happening in India. The
most important of the changes in the privatization modules would be in the pre-
qualification processes so that credibility of the bidders could be ensured. As a
consequence, public private partnerships should replace out-right sale of public

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assets to the private sector. This should be the rule and not an exception till
regulatory bodies in Pakistan come of age. Thirdly, these bodies need to be re-
done altogether with the professional taking over from the present generalists.
Fourthly, very strict covenants have to be agreed upon while handing anything
over to the private sector and in no case assets are to be allowed to be used for
any purpose other than stipulated at the time of setting-up of that state
enterprise. Lastly, a strict accountability structure has to be created which should
have the ability of ensuring honesty and transparency in all deals. In fact, only
policies based on a clear vision of the future can ever deliver. Probably, this is
the duty of any government worth its’ salt.

BIBLIOGRAPHY

1. KESC Privatization Report.

2. Daily Business Recorder 17 July 2006

3. DAWN editorial 6 September, 2006

4. Daily Business Recorder “KESC adrift on high seas” by Majyd Aziz

5. DAWN Economic and Business Review July 10-16 2006 “WHO IS

RESPONSIBLE FOR KARACHI POWER CRISIS” by Engr Hussain Ahmad
Siddiqi

6. The NEWS 24 August, 2006

7. Daily Business Record Editorial 13 August, 2006

DAWN 25 June, 2006

DAWN 17 May 2006 “Power Crisis in Karachi to get worse” by Arman Sabir

DAWN 24 July 2006 “ POWER CRISIS IN KARACHI” by Mahnaz Fatima

The NEWS 25 July 2006 “ENOUGH OF HIDE AND SEEK” by Gul Nasreen

DAWN E&B Review November 28 – December 4, 2005

“KESC’S TURNAROUND” by Dr. Mahnaz Fatima

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