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Old Thursday, November 03, 2016
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Default K-Electric’s turnaround

K-Electric’s turnaround


I STILL remember back in the fall of 2008 when I was with DawnNews, this paper’s sister TV channel which broadcast in English back then, and in the studio with me was Naveed Ismael, the new CEO of what was then the Karachi Electric Supply Company (KESC), later renamed K-Electric. He had taken over only days earlier as the new management team under the Abraaj Group moved in.

In the studio, news broke out of a press conference by the new water and power minister, Raja Pervez Ashraf, who came on air and announced that the government had changed its mind about notifying the new power tariff and, on live TV, instructed all power distribution companies to use the old tariff when sending out the current month’s bills.

I told Ismael this and he slapped his forehead hard. “Those bills have already gone out!” he exclaimed. Considering millions of bills are sent out every month, it was going to be quite an exercise to recall them all, recalculate the amounts as per the old tariff, then resend the bills, he explained.

If the turnaround is all that it is made out to be by the company’s management, then it shows that privatisation can work.
It was probably the new management’s first experience with the turbulence of Pakistan’s business environment, and over the years they came to see much more.

The new management had submitted a tariff petition in July 2008, only a few months before they moved in. They began their diligence early in 2008, with the turbulent election and the aftershocks of the assassination of Benazir Bhutto in the backdrop. It was a bold move to undertake this acquisition at the time, and many were left puzzled.

In July 2008, they filed their first tariff petition but, by April 2009, came back with a revised petition asking for a hike in the base tariff of Rs1 per unit, as well as deferral or suspension of the claw-back mechanism for the seven years for which the tariff would be applicable. The tariff regime they were trying to modify was set in 2002, when the privatisation of the utility began.

“Under the current tariff regime, KESC has accumulated losses of approximately Rs61.5 billion since 2002-2003” they wrote in the petition. “The company continues to lose Rs1bn per month and its financial position has come to a point where KESC’s long-term viability is under threat. KESC is in need of immediate and significant cash injection to cover its operational losses, invest in rehabilitation or its T&D network, and increase its power-generation capacity … The new investors/shareholders have agreed to inject $361 million over the next three years; however, it is imperative that changes be made to the current tariff structure immediately, including an increase of Rs1/kWh in the average sale rate, to make this investment effective and sustainable.”

These were the words written shortly before the implementation agreement with the government was signed. The accumulated losses mentioned as Rs61bn largely remained on their balance sheet until the middle of 2014 and then fell steeply, landing at Rs3.6bn by March of this year.

Other financials show a similar trend, though not quite as striking. Half-yearly revenues in 2011 were Rs73bn. By December 2015, these had climbed to Rs97bn, an increase of 32pc.

On the operational side too, they generated 3,700 GWh of electricity in 2011 and purchased an equal amount from the grid at a cost of Rs35bn. By December 2015, half-yearly own generation was up to 4,900 GWh and purchases from the grid were constant at 3,600 GWh, with cost of purchase down to Rs29bn. Units billed went from 5,157 GWh in 2011 to 6,600 GWh in 2015 while T&D losses went down from 30.6pc to 22.2pc in the same period.

I’m using half-yearly data from 2011 and 2015 because that is the earliest I can find on their website. For a quick comparison to get a handle on the overall story, the data is sufficient.

So revenues climbed, losses fell, generations rose while purchases remained constant. Net result was a wiping off of the accumulated loss on the company’s balance sheet, and its preparation for onward sale to an investor for $1.77bn when Abraaj had placed a total of $361m of its own money into the company. Not a bad return at all.

But is the story really what it is cut out to be? For one, the tariff they requested at the start of their venture was not granted to them. Nepra allowed an increase of Rs0.15 when they had asked for Rs1, and the management had claimed that the company cannot be turned around without the full tariff increase requested.

Second, the units billed have increased quite rapidly, due in part to the policy of recovery-based load-shedding, but more transparency is needed in how much overbilling may have played a role. The latter cannot be the sole cause behind the turnaround in the company’s operational and financial health, but it can make a contribution. An investigation by Nepra in 2014 yielded evidence of the practice, but nothing further came of the whole affair due to a stay order obtained by the company from the Sindh High Court.

The K-Electric example is a highly instructive one for us to learn from. If the turnaround is all that it is made out to be by the company’s management, then it shows that privatisation can work. But if further investigations reveal that some sleight of hand has been involved, then it will be proof that privatisation can open the door to nefarious practices and needs to be supplemented with proper disclosure regimes, empowered regulators, as well as an overhaul of corporate governance codes.

Unfortunately, it is unlikely that any of these will happen. Instead, the usual litany of conspiracy theories, hand-wringing over the money, and the usual hostility to anything Karachi from a Punjab-dominated power bureaucracy will dominate the narrative.

The writer is a member of staff.

Published in Dawn, November 3rd, 2016
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