KESC can be split into multiple generation, transmission and distribution companies: MD

BR Research:How would you rate the performance of Karachi Electric Supply Corporation (KESC) over the past 3 years?
Tabish Gauhar: When the present management took charge of KESC, we had to transform a public utility that had been ignored for decades. It was a mammoth task; the entire distribution and transmission infrastructure was overloaded and dilapidated.
The generation plants were very old and very inefficient. The workforce was disoriented; employees' morale and involvement were also low. Decades of neglect, mismanagement and plundering had destroyed the ability of KESC to deliver quality service to its 20 million customers. We knew that a holistic and 360-degree value creation effort would be required to transform KESC into a dynamic, economically viable and customer-centric outfit.
While the challenge was big, we firmly believed that the opportunity and resulting macro and micro level economic and social gains were even bigger for the city that is the backbone of economic performance of our country. That belief has really been the greatest motivation for us all this time working at KESC.
BRR: What was your roadmap for this transformation?
TG: While we wanted to fix most pressing issues quickly for the relief of our customers, we wanted to make farsighted decisions that would create sustainable value and make KESC a viable entity for decades to come.
Our main focus initially was to improve the reliability and efficiency of our old generation plants and at the same time add new efficient capacity. Over the last three years we have not only improved the efficiency of our old plants, we have already added a significant 828MW of new generation capacity. During this year this number will cross the 1,000MW mark, and capacity shortfall would no longer be an issue for the next few years at least.
This is a major achievement considering the short time frame in which this has been accomplished. We have simultaneously enhanced our transmission and distribution capacity by adding eight new grid stations, over 200 feeders and more than 1,000 transformers. Rehabilitation of our EHT, HT and LT wire networks and substantial investment in new networks have made our entire system much more reliable and robust.
We have, at the same time, invested heavily on the customer service infrastructure both at the front and back-end because our ultimate aim is to transform KESC into a customer-centric public utility. It is very humbling to be able to achieve all of that in just three years with the help of over USD one billion investment and dedicated efforts of our team.
BRR: If all of that is true, why do we still have load shedding in the city?
TG: You are right; we still do load shedding in parts of the city. However, we have to understand that generation capacity alone cannot guarantee uninterrupted power supply. We need the right fuel mix to run our power plants. We need to improve our cash flow by eradicating electricity theft and increasing our collections.
All of this cannot be accomplished without the political will and active support of the government, political parties, and co-operation of the general public. You must be aware that we now differentiate among various customer segments based on their payment behaviour and distribution loss ratios in various localities.
We also have fixed schedule load shedding regime in force now. Wherever, we have low losses and high recovery rates, we have either completely exempted these areas from load shedding or the duration has been reduced. And you might be interested to know that even as of now, 40% of the over 1,200 feeders supplying power to Karachi are exempted from any and all load shed and this decision is based solely on the above stated factors. Until the right fuel mix, electricity theft and timely payment issues are resolved, a load-shed free Karachi would remain a possible yet elusive dream.
BRR: What specific steps do you expect from the Government and have you approached the right decision makers for help?
TG: It is unfortunate that at the time of finalisation of agreement with us, the government made many promises, many of which remain undelivered to date. For example, the gas allocation for KESC was agreed at 276 million metric cubic feet per day (mmcfd) for our existing plants and another 130mmcfd for our new 560MW Bin Qasim II power plant.
We never got that volume, in effect, with each passing year the gas supply to KESC has gone down. This not only adversely impacts our cash flows but also affects the end user as the electricity tariff goes up because we have to rely more on the 3-4 times costlier furnace oil.
On the other hand, we have delivered on all our promises, such as bringing in USD 361 million over three years, of which USD 300 million has already been invested and the balance would be in within a few months. Capacity addition, reduction in losses despite little help from the government and major improvement in load shedding management in the city are just a few of many accomplishments.
Let me also highlight the fact that KESC has supported the industry, many strategic installation including hospitals and KWSB, and several low loss commercial and residential areas, with a policy of zero load shedding. All of this has definitely brought about a significant positive change in the economic, commercial and social life in Karachi. We are determined to continue this progressive journey.
BRR: What are the future challenges for KESC in your view and what would be your strategy to counter them?
TG: I think the gas supply issue remains the most critical issue that we face. Our investment in KESC was backed by certain government commitments and adequate gas supply was one of them. The government has to deliver on this promise. Indeed some bold steps are needed on part of the government and it's high time that these decisions should be taken.
The real challenge for the power sector is the rising cost of generation. This is the root cause of all problems including circular debt. The only short-term solution is allocation of more gas for the power sector.
We are determined to continue our struggle for our legitimate right of adequate gas supply in line with commitments made by the government. Government needs to reconsider its gas allocation policy and cancel all allocations that are made in violation of the gas allocation policy for captive power plants.
It is very unfair that a handful of big industrialists are getting more gas than a public utility that serves 20 million people. It's unfortunate that some of our most efficient gas-fired plants are lying idle while poor efficiency privately owned plants are wasting a precious national resource.
BRR: You mentioned that you still have to go a long way. Are you willing to bring in more investment into KESC?
TG: More investment would be needed for KESC's turnaround story to be completed. Let me also say here that during last three years, KESC has attracted foreign and local debt solely on its own without any sovereign guarantee and purely on the strength of its fresh equity, its business plan, its management capability, and tangible delivery against verifiable performance improvements.
While signs of financial turnaround are clearly evident, the fact remains that KESC is still a loss making company and both our foreign investors and lenders (IFC, ADB, and OeKB) are concerned on the government's inability to fulfil its commitments.
BRR: Does this mean that you will not invest more in KESC even though you think it's needed?
TG: No, all I am saying is that for more investment to come in, we need to build a strong business case and the government has to satisfy our international investors that all promises are made good. Don't forget that the investment climate in the country is not very conducive at present, and it really depends on the government to build its credibility by honouring past commitments to the existing investors.
BRR: What specific guarantees or commitments do you need from the government?
TG: The foremost issue is gas supply as per past commitments. We would definitely need 276mmcfd gas for our existing plants and another 130mmcfd for the almost completed 560MW plant. These commitments were given to us in the past and later agreed and approved by the highest decision making forums on multiple occasions.
We also have some long outstanding tariff structure issues. We have always maintained that the investment in transmission and distribution infrastructure has to reflect in the tariff structure. KESC is the only privatised integrated utility company in the country, and the government and NEPRA will have to understand that a reasonable return is a pre-requisite for investors to feel encouraged to further invest.
We did not ask NEPRA for much. All we want is an adjustment of merely Re.0.57/kWh that would address the structural issues that we have been trying to get resolved. However, nothing has happened on this front despite our efforts.
The T&D loss curve also needs to be readjusted to address the ground reality. There are areas in Karachi where distribution losses are as high as 50-70 percent. These losses will not come down overnight and without the support of law enforcement agencies. We also need some changes in the Electricity Act of 1910 that is obviously outdated now. We have been pushing the government for legislation on this front.
However, so far our efforts have not been successful. Effective laws and indiscriminate application is a must for electricity theft to come down. Even if legislation is in place, it will take some time to get the desired results and in the interim an adjustment in T&D loss curve is imperative.
BRR: In your opinion, should KESC be split into multiple organisations?
TG: KESC is perhaps the largest integrated privately-owned power utility in the world. There is no reason why KESC shouldn't be split into multiple generation, transmission and distribution companies. We have already witnessed this phenomenon with WAPDA and elsewhere in the emerging markets such as India.
We see great value in this as separate GENCOs, TRANSCOs and DISCOs bring greater focus and efficiency. This is in our plans and we require support of a meaningful regulatory framework and facilitation for this task. That's an important consideration for us and a key deliverable in our business plan.
BRR: You have been mentioning adjustment of SSGC/PSO payables against outstanding electricity bills of government entities, is that also an important consideration for you and your investors?
TG: Absolutely. We have been trying hard for this netting-off mechanism and in fact it has been agreed in principle. This, however, needs to be formalised in black and white. Ideally we would want the federal adjustor's office to play its role, as it used to in the past, in clearing electricity dues of government entities against their allocated budgets.
However, for a few big consumers of power, such as KWSB, CDGK and other government institutions, this netting-off mechanism needs to be agreed and inked to get this issue resolved once and for all. Government has to realise that non-payment of bills by state owned entities is a major issue and a drag on KESC's resources. A permanent solution is required to put an end to this.
A similar point is related to general government support on a number of issues related to KESC management's ability to run the Company independently without any undue or coercive pressure. Elements within the government need to reconcile with the fact that KESC is a privatised entity and they would be serving the country's cause better by letting the management run this Company independently.
We would surely expect the government to play a supportive role in helping us do our job better and guide us rather than try to interfere directly or indirectly in our internal affairs.
BRR: What do you have to offer in return if government commits to deliver all of this?
TG: If the government shows seriousness towards these points, we are willing to commit substantial new FDI. This investment would primarily be utilised in enhancing the transmission and distribution infrastructure and capacity.
This would further improve quality of power supply and technical faults and breakdown issues would be minimised. We are willing to invest in coal-fired power plants (both new as well as converting our existing oil-fired units to coal) in order to arrest the increasing cost of generation, and also build our capacity to meet future demand of this growing city.
If the netting off mechanism is agreed, along with increase in gas supply then we can give a definitive and firm payment plan to SSGC. This will surely help resolve the circular debt issue to some extent. Increased gas supply will not only arrest the rising consumer tariff, but also minimise the quantum of the "tariff differential claim" payable by the Finance Ministry on behalf of consumers. All in all this will be a win-win for everyone.
BRR: You didn't say anything about load shedding elimination? Is there any hope for that?
TG: If the government agrees to these proposals, we could most certainly eliminate load shedding in Karachi. We may even release around 200MW of power to NTDC/WAPDA from our allocated 650MW under the power purchase agreement. These are all realistic possibilities. I am confident that if we go back to our investors with a solid business proposal, there is no reason why we can't convince them.
I sincerely hope and desire that the government responds to such a proposal positively. With full government support and resultant backing of our investors, we can definitely realise our vision to provide uninterrupted, reliable and affordable power to our 20 million customers.
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