Ikram Sehgal |
Karachi Electric (KE), incorporated in 1913, is Pakistan’s only vertically integrated power utility with the license to provide electricity in Karachi, Pakistan’s commercial hub and largest city. Its network spans 6500 sq. km, serving a 2.5 m strong customer base in a city of 20 million people, which makes about 10% of Pakistan’s total population. It was privatized in 2005, first acquired by KES Power and later in 2009, Abraaj acquired a controlling stake in KES Power from Al Jomaih and NIG. Abraaj currently has 66.4% shareholding in KE.
My company’s services were hired by KESC on privatization. Lt Gen (Retd) Mohammad Amjad, the Chief Executive, required us to target those robbing KESC blind, both from the inside and the outside, e.g. those stealing electricity, not paying the bills, etc. When Arif Naqvi, Founder, and CEO of Abraaj, asked for my advice about investing in KESC, I told him “KESC can be turned around and you can make it the asset it was meant to be”.
How KE was resurrected!
Rebranding signified a break from the past as an inefficient public sector company. Reflecting on the situation in 2008, Arif Naqvi stated:
“Almost nothing about the company worked. You could not have designed a more troubled company if you had set your mind to it. We were the only people willing to look at the company.”
Abraaj led a KE-turnaround by focusing on three core aspects: (1) improving generation efficiency, (2) reducing Transmission and Distribution (T&D) losses, and (3) compared to a negative EBITDA (earnings before interest, taxes, depreciation and amortization) of USD 87m at the time of acquisition, EBITDA improvement to USD 339m in FY 2015. Revenues jumped from $1,084m to $1,778m; growth in EBITDA from $87m to $372; customers grew from 2.0m in 2009 to 2.5m today; grid stations increased from 52 to 64; and decrease in T&D losses from 35.9% to 23.3%.
A cash loss of USD 15 million per month (approx.) caused shortages in purchasing sufficient furnace oil, consequently a reduction in overall electricity output. CAPEX (capital expenditure) requirement of old and dilapidated plants’ poor system reliability and de-rated capacity of 400MW were USD 1 billion. An adverse fuel mix, expensive furnace oil versus cheaper gas, high T&D energy losses of nearly 40%, and with an unreliable network having inadequate and unreactive maintenance, the leadership’s failure got both elevated and complicated.
Voluntary separation scheme cost the company PKR 6 billion for 4459 non-core staff. 1372 employees were dismissed/terminated across all cadres due to corruption, theft, and misconduct.
Over-staffing was rampant, with excessive non-core workers, a demoralized workforce, misaligned management objectives, and a politically motivated Labour Union, all hindering effectively manage over 17,500 employees. Red-tape led to inefficient operations. Severe reputational damage, extremely negative public image, and loss of confidence among consumers were aggravated. Law and order problems and no-go areas within the city hampered recovery efforts in 11 difficult areas; the combined distribution loss was close to 44%.
One continues to admire Arif as not only one of Pakistan’s outstanding entrepreneurs but someone who selflessly promotes Pakistan, constantly. The KE turnaround is symbolized by an effective management team headed by dynamic but self-effacing Tayyab Tareen.
NEPRA issued a base tariff of Rs 12.07 per kilowatt-hour (kWh) against the KE’s request of Rs 16.23 for the existing tariff of Rs 15.57 – a decrease of Rs 3.50 per kWh instead of the requested increase of 0.66 per kWh.
Strategic initiatives taken by new KE management included enhancing fleet efficiency, reducing T&D losses, and improving operational processes to unlock value. Introduction of modern and more efficient plants achieved generation efficiency through investment of over USD 850m since 2009, increasing generation by more than 1037MW through completion of four major projects: (1) 247 MW CCPP Korangi, (2) 180 MW GEJB Korangi, and SITE (3) 50 MW BQPS-1 rehabilitation and (4) 560 MW BQPS-2. Transmission network reliability and distribution platform were improved.
Reducing operational losses was done by reductions in actual O&M costs incurred, optimized sales mix and implementation of new and re-engineered processes (billing, CRM, energy measurement, customer feedback, etc.). Workforce effectiveness was enhanced through resource optimization and the introduction of performance-focused culture. 3500 non-management were promoted to management level followed by regularization of 5700 contractual staff.
The DISCOs continue operating because of operational subsidies from the government. With such a cost not accounted for KE, it is likely to revert to its pre-privatization days with significant losses.
Voluntary separation scheme cost the company PKR 6 billion for 4459 non-core staff. 1372 employees were dismissed/terminated across all cadres due to corruption, theft, and misconduct. Excess overtime payments were halted. Successful outsourcing of non-core positions was implemented despite the resistance and violence faced.
NEPRA’s knock-out punch to KESC
On Oct 28, 2016, Abraaj-controlled KES Power (“KESP”), entered into a definitive agreement to divest its 66.4% shareholding in K-Electric to Shanghai Electric Power Company Limited (“SEP”) for USD 1.77bn. Thereafter, NEPRA issued a base tariff of Rs 12.07 per kilowatt-hour (kWh) against the KE’s request of Rs 16.23 for the existing tariff of Rs 15.57 – a decrease of Rs 3.50 per kWh instead of the requested increase of 0.66 per kWh. Reducing by Rs. 3.5 per kWh for KE by NEPRA will not benefit the end consumers but the reduction of 25% will severely impact K-Electric’s revenues, a profitable company will turn into a loss making entity overnight.
Due to NEPRA’s stupid decision, this single largest investment ever in Pakistan is likely to walk away.
Despite the need of improvements in KE’s infrastructure, heavy investments cannot be made because it is detrimental to the end consumers. Neither the consumers nor K-Electric is satisfied with this tariff. The new tariff is based on assumptions that are unrealistic and not based on ground realities; 100% recovery is not possible in any emerging market. This controversy has far-reaching implications for future investment in Pakistan. An economically lucrative entity has made KE unattractive to the potential investor.
The DISCOs continue operating because of operational subsidies from the government. With such a cost not accounted for KE, it is likely to revert to its pre-privatization days with significant losses. All the good work done before might well go down the drain; the consumers being the ultimate sufferers.
Wang Yudan, Chairman of SEP, commented that:
“SEP appreciates what Abraaj has achieved at K-Electric over the past seven years and recognizes the performance and capability of K-Electric’s management team”.
Committed to achieving KE’s next phase of operational and financial excellence to benefit Karachi and KE’s consumers, the injecting of USD 9 billion, planned by SEP, will be the single largest investment in Pakistan ever.
Due to NEPRA’s stupid (and what seems to be prima-facie personally motivated) decision, this single largest investment ever in Pakistan is likely to walk away. A lot of people claim that for them Pakistan comes “first”, how many times have we seen that this is just rhetoric, that their greed and/or prejudice comes first at the cost of Pakistan?
Ikram Sehgal, author of “Escape from Oblivion”, is Pakistani defense analyst and security expert. He is a regular contributor of articles in newspapers that include: The News and the Urdu daily Jang. The views expressed in this article are the author’s own and do not necessarily reflect Global Village Space’s editorial policy.