In a strong worded letter, Asian Development Bank (ADB) and International Finance Corporation (IFC) have expressed serious concern over what they term the failure of National Electric Power Regulatory Authority (Nepra) to address the tariff determination issues of Karachi Electric Supply Company (KESC).
"This letter concerns the International Finance Corporation (IFC), the Asian Development Bank (ADB), and our respective loan investments in Karachi Electric Supply Company (KESC)," Gulrez Hoda, Associated Director Infrastructure and Natural Resources Europe, Central Asia, Middle East and North Africa said in a letter sent to Chairman NEPRA.
"IFC and ADB are concerned that, unless addressed satisfactorily, the issues could jeopardise KESC's ability to become a sustainable distribution company," says a letter, copy of which is available with Business Recorder.
In 2007, IFC and ADB committed loans to KESC of up to US $125 million and US $150 million respectively, to fund the construction and the commissioning of new power generation, and the rehabilitation of the transmission and distribution system for Karachi.
In doing so, IFC and ADB supported the first privatised utility in Pakistan, and in co-ordination with additional local and foreign lenders, helped finance KESC's investment programme. Recently, IFC and ADB restructured their loans to support the Abraaj Group (Abraaj) who, in mid-2009, became majority investors in the utility took over the management of KESC. "Given its significance for poverty reduction in Pakistan, KESC is an important investment for IFC and ADB," Hoda says in letter, adding that a failure of this privatisation would have a huge economic and human impact, and would be detrimental to the strategy of the Government of Pakistan to improve the country's electricity sector through privatisation.
IFC and ADB are supportive of the recent involvement of Abraaj, which has brought new equity funds, competent management and expertise to KESC. "Over the past 18 months, we have witnessed qualitative and quantitative improvements in operations and financial performance, including the construction and commissioning of over 500MW in new generation, improvement in bill collection and the reduction of losses," the letter adds. Although, challenges are significant, IFC and ADB believe in the ability of KESC's new management to further improve all aspects of its operations which are under its control.
ADB and IFC also said: "you may be aware that the lenders' group is concerned about issues that are beyond the control of KESC. With regard to tariff determination, KESC has raised, on several occasions, four tariff issues thru petitions, a recognised process through which these issues can be addressed and tariff formulas adjusted. The issues relate to: (i) the current shortfall in the fuel and the O&M components; (ii) the untimely application of a claw-back mechanism; (iii) the need for an investment component in the tariff determination formula to stimulate investments; and (iv) the T&D loss curve, which has not been adjusted to take into account the failure of the previous investors to make any progress on electricity losses.
Fundamentally, the tariff determination formula should ensure that the distribution company generates enough cash to reinvest in the much needed capital investment, and that returns are reasonable and sufficient to ensure that both lenders and equity investors continue to invest in the distribution company. "IFC and ADB understand the complexity of the issues at hand and the hard choices to be made and addressing these issues satisfactorily will be essential to the success of KESC going forward," the letter says.