1.

PERFORMANCE INDICATORS AND ANALYSIS:

 Karachi Electric Supply Corporation Limited

KESC is an integrated electric utility supplying power under a monopoly license to a Service area of some
6,000 square kilometers in and around Karachi, Pakistan’s largest city and industrial and commercial center.
With a population of about 16 million the city accounts for about 15% of Pakistan’s gross domestic product.

KESC was incorporated as a private limited company in 1913 and subsequently listed on the Karachi Stock
Exchange. In 1952, the Government of Pakistan nationalized KESC by acquiring a majority shareholding.
Over several decades, KESC has faced many operational and financial challenges primarily due to inefficient
public sector management (including by the military) and lack of investment, and has been the subject of
numerous restructuring efforts, while remaining in public hands.

In 2003, the Government decided to privatize KESC through a transparent, competitive bidding process,
which was supported by the Asian Development Bank (ADB) through the Energy Sector Restructuring
Program.1 The privatization process was successfully concluded in December 2005 when the Government
transferred 73% of KESC’s shares to a consortium of investors led by KES Power Limited (KES Power),
60% owned by Al-Jomaih Holding (Al Jomaih), a Saudi industrial group, and 40% by National Industries
Holding, a subsidiary of one of the largest Kuwaiti industrial and financial conglomerates (together, the
sponsors).

The new management immediately initiated efforts to improve the most critical of KESC’s operations. These
included immediate removal of bottlenecks, resulting in approximately 30 megawatts (MW) of additional
generation capacity harnessed through efficiency gains from existing generation assets. At the same time,
management formulated a long-term strategy to turn KESC into an efficient, reliable, customer-responsive,
and profitable entity. Nevertheless, as a result of the earlier years of neglect and lack of investment in
generation and the transmission & distribution (T&D) network, KESC could not keep pace with growth in
demand (since 2000, electricity units billed have increased 45%, while virtually no investment has been
made in the T&D network). Therefore, during the peak period of summer 2006, when Karachi experienced
particularly extreme climatic conditions, KESC faced a high capacity shortage and was unable to provide
reliable electric supply to the city. For hours (and even days, especially during rains), customers suffered
blackouts, sharp voltage fluctuations, and billing problems. In many cases the load-shedding schedule
notified to customers was not followed. As a result, KESC faced severe media criticism and high customer
dissatisfaction, eventually resulting in civil disturbance and demands that the Government reconsider the
privatization.

However, the Government has stood by its commitments, recognizing the difficulty of turning around a
utility of the size and condition of KESC within such a short time since privatization. By late 2006, KESC’s
new turnaround strategy was finalized, and is now being implemented. It is supported by a program of
investments (the investment plan) of some PRs52 billion ($809 million) for FY2007–FY2009, which
includes the following main components:

(i) Generation capacity additions of 780MW 2 in two new combined-cycle power plants on existing
sites (PRs34 billion/$525 million),
(ii) rehabilitation and improvement of the T&D network (PRs17 billion/$268 million),
(iii) rehabilitation of existing generation facilities (PRs600 million/$10 million), and
 (iv) upgrading of commercial systems (PRs400 million/$6 million);

2. KEY PROBLEMS & THEIR STRATEGIC SOLUTIONS:

 Load-Shedding
 Electricity Tariff

Load Shedding: (Issues & Remedies)

There are four primary causes of Load shedding

a. Demand-Supply Gap
b. Transmission & Distribution bottlenecks
c. Fuel Constraints
d. Cash flow constraints

a. Demand-Supply Gap (MW) has reduced considerably over the past 2 years, as new power units have
come on line, which has helped KESC maintain a Scheduled LS Policy across the system, but there’s
often a difference between Installed Capacity and Available Capacity in any given hour due to a
variety of reasons beyond its control; such as low gas volume and pressure, furnace oil supply
disruption, technical faults, scheduled preventive maintenance, etc. Likewise, 3rd party power
suppliers such KANNUP and DHA COGEN are often unavailable from time to time, nonetheless,
99% of Industrial Customers were provided uninterrupted power supply, and 97% of Residential &
Commercial Customers were load shed as per above Policy – August 2010 statistics

 Average summer 2010 peak load of 2,500 MW (5% increase from last summer)
 New Connections of 276 MW added since March 2009
 Not-so-significant impact of recent energy conservation initiatives

 450 MW added to the system since new management took over in Sept 2008, and
another 560 MW under construction (3x GE/France gas turbines already at site; largest
such project in Pakistan) i.e. in excess of 1000 MW of new capacity over 3 years
 Various indigenous/imported coal based projects in feasibility stage (1000 MW)
 5-year Power Purchase Agreement signed in Jan ‘10 with NTDC (WAPDA) for up to 650MW supply
 Up to 37MW of incremental supply secured from small captive power producers

b. An overloaded, unbalanced and fragile T&D network (transmission lines, transformers, sub stations,
feeders, etc) means that KESC is sometimes unable to supply power to the end consumers, leading to
unscheduled outages; however, capacity addition and system improvements are proactively
addressing these infrastructure bottlenecks

 Historical lack of investment and master planning (haphazard growth)

 System catering to unauthorized load (read: theft) as well
 Actual load greater than sanctioned load in most instances (“tripping” and
“voltage fluctuation”)
 “Rights of Way” issues with municipal authorities leading to delay in execution of projects
 Frequent theft of overhead conductors and bus bars at sub stations (copper)
 HT distribution network mostly underground

 6 new grid stations energized (plus 4 under construction)

 25 km new transmission lines laid & 76 km of existing lines rehabilitated
 Rs. 2.5 billion “Model Towns” project substantially completed
 200 new Feeders laid
 700 new PMTs installed
 Load Balancing across the T&D network

c. KESC burns two types of fuel: natural gas from SSGC and furnace oil from PSO. Any shortage of
fuel (especially volume/pressure of natural gas) means that KESC is often unable to run our
generating plants at full capacity, leading to scheduled & unscheduled outages

 No Gas Supply Agreement with SSGC yet, hence, ad hoc daily supply against our need to
maintain consistent power supply to Karachi
 Gas quota & pricing allocation (amongst power, fertilizer, CNG. Industrial, and domestic
sectors) needs to be reviewed by GOP
 Unable to run our gas-fired plants at full capacity leading to load shed
 Every 25MMCFD reduction in gas supply increases consumer end tariff by 50 Paisas per Unit
(because replacement furnace oil 2.5x more expensive than gas)

 LNG & Coal are the two best fuel alternatives available to KESC.

•        LNG is the only fuel fit for Baseline demand

 •        For fuel replacement part

–        Coal is Cheaper than LNG. System cost saving xxxx million dollars per annum

–        LNG is operationally more convenient than coal / CWS

–        Coal is free market based – LNG is linked to indices

–        Coal is always the cheapest, LNG has infra-structure constraints

–        Coal requires assets modification and addition. LNG does not change our assets at all.

–        LNG is the choice for risk averse while Coal is the only choice applied by world

–        Coal and CWS are only different with respect to space, efficiency and environmental
implications

d. Circular Debt” is choking KESC’s liquidity and working capital, adversely affecting its ability to
procure fuel and power from external sources on time, leading to load shedding for its customers…
nonetheless, KESC strives hard to abide by its payment obligations even though over Rs. 81.3 billion
is currently outstanding in GOP and public receivables.
Public sector consumers have the lowest collection rate of bills 68.6%

Electricity Tariff:

KESC tariff is high because of T&D losses- we recover the cost of theft
from honest customers...

4. We over charge our customers through “average” billing, “fast

meters”, etc…

As a utility company, it is in KESC’s own interest to keep the electricity tariff as affordable as possible. The
reality, however, is that the current tariff formula does not compensate it for the actual cost of operating and
maintaining the utility, nor does it incentivize the shareholders/lenders to inject more capital to finance new
power plants, grid stations, etc to meet long term demand. These structural flaws in the tariff formula ought
to be addressed now to take care of the future. In the meanwhile, and simultaneously, to keep the tariff
affordable (and reduce load shed), KESC needs 300 MMCFD of gas now (+ 130 MMCFD for the upcoming
560MW plant next year), or equivalent furnace oil @ gas price, or consumer tariff subsidy regime to
continue. Long term solution lies in setting up coal plants (indigenous or imported).

3. CONCLUSION:
The turnaround strategy is based on three core initiatives:

(i) Organizational restructuring and development, to make the operations more customer-focused while
improving collections and administrative losses, will lead to better revenue protection and cash-flow
generation, while enhancing KESC’s management capabilities and increasing customer satisfaction.

(ii) Balancing, modernizing, and replacing the T&D network will allow KESC to be able to cater for peak
capacity demand in the future, and reduce technical losses, which will lead to lower energy losses and higher
billing per units dispatched.

(iii) Increasing and improving KESC’s generation capacity will increase the revenue base, diversify sources
of power for KESC, lower the blended cost of generation, and enhance the Karachi area’s overall generation
capacity, to cater for increasing demand.

These strategic initiatives range from obtaining commitments on multi-million dollar investments from new
shareholders as well as the negotiation of a 180 MW plant deal with GE Jenbacher in recent weeks. Efforts
are also underway to bridge the demand and supply gap in the city by commissioning new projects of 220
MWs, as well as inaugurating the 560 MWs Bin Qasim II Project.

The KESC has also started commercial operations of a 50 MW rental power project with Aggreko. The
engineers working with the company have successfully increased dependable capacity of the units after
major overhauls of Bin Qasim and Korangi plants. This has resulted in 80 per cent reduction in plant trips
during the last six months.

On the distribution side, KESC has successfully commissioned three new 132 KV grid stations at Korangi
South, PRL and Gulshan-e-Maymar, in line with its commitment to modernise transmission network,
strengthen the power grid and ensure uniform power supply to consumers. Preventive maintenance
management programmes and standard operating procedures systems have reduced tripping through a 24/7
network monitoring system. Five additional 132 KV grid stations and 98 feeders are also on schedule for
commissioning this year.

The KESC Management has also improved transmission and distribution which the decreased the losses by
6.5 per cent while four deputy COOs have been appointed to reorganise the entire distribution set-up into
four integrated operating divisions. New power transformers at Korangi Town, RECP, Queens Road, Valika
and Haroonabad grid stations have been commissioned. The autotransformer at KDA grid station has been
tested and energised by 250 MVA. The utility also aims to revolutionize the power sector in the country with
the introduction of automatic metering in 2009.

CEO Tabish Gohar told The Nation that KESC was planning to implement a focused plan and make it
successful.

“Given the depth of decay we have inherited, the challenges are substantial. However, with yet more hard
work and full public support, the gains will become visible to the public and this utility will earn its rightful
place as a company at the centre of a vibrant and prosperous Karachi”, he said.