Short-circuiting investment

During the 1980s the shortfall between electricity generated and consumers' demand in Karachi widened to unmanageable proportions. Rampant over-staffing compounded by excessive non-core workers, a demoralized workforce and misaligned management objectives all combined to create hurdles in the utility company's functioning.
For a short time KESC was stabilized by the senior management brought in by the Army after General Musharraf's 1999 coup. Detachments deployed in the field uncovering illegal connections, recovering unpaid bills, etc were rightly given cash incentives. However why (and who) in the senior management were given a major part of these "incentives" and why was no record about these cash transactions kept? Given this huge cash windfall, did they pay taxes on it? With the management thus dipping their hands into the revenues, KESC went back to the bad old days.
Things became ugly with privatisation in 2005 when politically-connected labour unions with vested interests who were a law unto themselves, protested violently and attacked senior staffers while vandalizing KESC property. Handing over operations to a third party by the new owners not being management-oriented themselves proved disastrous. With the system overloaded, the infra-structure started to crumble, pilferages multiplied and revenues dried up, mainly because of incompetent, inefficient and corrupt management only interested in lining their own pockets through all-pervasive corrupt practices.
By 2009, Karachi was close to crossing the fail-safe line into chaos and anarchy with continuous and unannounced rampant load-shedding. Acute law and order problems and no-go areas within the city hampered recovery efforts in many areas; the combined distribution loss was exceedingly high. Rising population in the mega city and mushroom growth with multistory buildings made meeting of the consumer demand uncertain. However, a Dubai-based multinational thought that the KESC "black hole" could be turned around into a profit centre. Subsequently the new owners re-named KESC K-Electric (KE).
Without the new owners taking out a single paisa in dividends or fees or charges, KE executed a landmark turnaround whereby PKR 130 billion was invested in Karachi's power infrastructure to add over 1,000MW of new generation capacity, reduce T&D losses by over 14%, as a result 62% of Karachi today is exempt from load-shed. Exempted from load-shedding there are signs Karachi's huge industry sector is becoming competitive again. Instrumental in the government attracting Foreign Direct Investment (FDI) to Pakistan, KE's turnaround has been show-cased by the World Bank in a joint case study between the Harvard Business School and Harvard Kennedy School.
KE's success encouraged Shanghai Electric Power (SEP) signing a definitive agreement to acquire a stake in KE in October 2016, subject to regulatory and other government approvals. One of the largest power generation companies in China with a total installed capacity of 9.4GW, SEP is a subsidiary of State Power Investment Corporation of China (SPIC), a Fortune 500 company and one of China's big five state-owned power generation groups with an overall installed capacity of 107GW. SEP has presented a US$ 9 billion investment plan to both the regulator and the government to resolve Karachi's power issues and assist in economic development. The transaction has yet to be completed despite passage of 14 months.
The National Electric Power Regulating Authority (Nepra) has determined a tariff (for the next 7 years) reducing base tariff by 22.5% and also changing the tariff structure. KE contends the new tariff is unrealistic and will result in cumulative losses of over PKR 140 billion over the next 7 years - setting it back by decades. KE's impaired ability to invest in the power infrastructure will affect consumers, with: (1) escalation of load shedding-impacting on the law and order situation as well as national security given Karachi status as Pakistan's only port city and (2) drastic reduction in quality, reliability and availability of power supply. As a long-term strategic investor SEP has potential to change the outlook of Pakistan's power sector. Abandoning of the potential investment to SEP will also severely impact investor confidence and future FDI in Pakistan. A review of the MYT must be undertaken and if viable, replaced by a performance-based tariff regime that maintains a similar level and structure as the company's previous Multi-Year Tariff (MYT). To avoid controversy, why not an independent evaluation by an international consultant with known expertise in determining tariffs?
SEP plans to achieve operational and financial excellence is the single largest investment in Pakistan ever. NEPRA's unflinching decision may prevent that from happening. SEP is committed to introducing technologies and equipment that will help reduce transmission and distribution losses, much like what it had done in Estonia - cutting system losses from 14% to 9% within one year. At a meeting of the Council of Pakistan Newspaper Editors (CPNE) with Prime Minister (PM) of Pakistan in Islamabad on Monday last, the role of the power utility in improving law and order situation was discussed. CPNE members voiced their concern about K-Electric's tariff being significantly reduced which would frustrate its ability to sustain its operation or invest in power infrastructure in future.
According to CPNE press release, "the PM said the government understands the need for Investment in Power Infrastructure of Karachi and its implications on everyday life of Karachi and the economy of Pakistan. Fully aware of K-Electric's issue he assured the group that GOP supports a right tariff regime for KE, which ensures continuity of government policies, provides incentives for performance improvement and offers reasonable return. The acquisition by SEP, the largest investment by a single company in Pakistan, will encourage foreign investment in the country and will be a game changer in the power sector of the country. A strategic power utility operator SEP will benefit Karachi by an improved and reliable supply of power. He also highlighted that GOP owns 24% share in KE and hence has vested interest in KE as a shareholder. Above all, smooth and reliable supply of power is of utmost importance to GoP."
Those dealing with national security know very well the old concept of defending one's frontiers only is now no more valid, national security must include countering the country's enemies waging an undeclared "hybrid" war attempting to subvert the ideology, destroy socio-economic facilities, derail the economy, compromise the media and media personnel, foment the attacking of institutions like the judiciary and the Army that form the pillars of the state, etc. Why indeed the short-circuiting of investment that is badly needed for preventing Karachi descending again into anarchy by the deliberate fudging of figures, and by whom?
(The writer is a defence and security analyst)