Business Research Short Falls & Remedies Business Research For KESC Short Falls &
Short Falls & Prepared Remedies For: Miss Shahnaz Baloch For KESC November 25, 2011
Prepared For: Miss Shahnaz Baloch November 25, 2011 Prepared By:
ASRA JAVED……..….………………08 DARAIN RIZVI..….………………….09 QUDRATULLAH.…..…….…….……...48 SYEDA HINA MIR...….………………58 UBAID AHMED………………………60
KARACHI UNIVERSITY BUSINESS SCHOOL
SHORT FALLS & REMEDIES FOR KESC
Prepared For: Miss Shahnaz Baloch November 25, 2011
AISHA SIDDIQUI ……………….…03 ASRA JAVED……….………………08 DARAIN RIZVI………….………….09 QUDRATULLAH…………………...48 SYEDA HINA MIR…………………58 UBAID AHMED……………………60
To: From: Subject: Date: Miss Shahnaz Baloch, Assistant Professor, at KUBS Group of MBA Students Problems of KESC and their Remedies. September 14, 2011
On September 14, 2011, Miss Shahnaz Baloch assigned a term report to submit concerning to the Problems and remedies for the KESC, that report is now finished and attached to this cover memorandum. Our major recommendation is that the KESC should increase the generating capacity by installing new plant and up gradation of the exiting plants as well. As per our analysis, firms should bring the employees in their decision-making models and try to communicate efficiently so that employees may understand the goals of firm and may work effectively for the attainment of the vision of the firm. If you have any additional questions, we would be pleased to answer you at your convenience. Thank you for the opportunity for letting us contributes to the value addition.
CONTENTS EXECUTIVE SUMMARY
SHORT • • • • • FALLS & REMEDIES FOR KESC Authorization Problems/Case Methodology Data Analysis Recommendations
7 7 7 7 7 7 7 8 8 8 9 11 11 11 11 12 12 15 15 16 16 16 17 18
PROBLEM STATEMENT RESEARCH OBJECTIVE BACKGROUND
SAMPLING DESIGN RESEARCH DESIGN DATA COLLECTION
TREND ANALYSIS LIABILITIES ELECTRICITY PURCHASING LONG TERM LIABILITIES OTHER - SECURED UNSECURED LOAN KESC POWER GENERATION CAPACITY ELECTRICITY STEALING
LOW PROFITABILITY REASONS BEHIND LOW PROFITABILITY • INCREASING COST OF FUEL AND GAS • PURCHASING ELECTRICITY FROM EXTERNAL SOURCES • REPAYING OF DEBTS • NON COLLECTION OF ELECTRICITY DUES LOW PRODUCTIVITY LABOR MANAGEMENT ISSUES
18 18 19 19 19 19 19 19 20 21 25
IMPORTANT QUESTIONS WHICH ARE ANSWERED BY THE LABORS AND THE MANAGEMENT SUMMARY AND CONCLUSION
Profitability Reasons behind Low Profitability • Increasing cost of Fuel and Gas • Purchasing electricity from External Sources • Repaying of debts • Non collection of Electricity Dues • Electricity Stealing • Labor management problems
25 26 26 26 26 26 26 26 27
30 30 31 32 34
Article 1: KESC POSTS LOSS OF RS. 2.2BN FOR 1Q Article 2 : THE END OF KARACHI ELECTRICITY SUPPLY (KESC) Article 3 : ELECTRICITY DISTRIBUTION IN THE PRIVATE SECTOR: Prospects and Pitfalls Article 4 : DOWNSIZING WILL NOT HAVE A NEGATIVE IMPACT__(INTERVIEW OF TAYYAB TAREEN)
Labor Management Questionnaire Management Questionnaire
36 36 37 38
GLOSSARY OF TERMS
SHORT FALLS & REMEDIES FOR KESC
This Report responds to the request of the Professor, Miss Shahnaz Baloch that she requires a technical term report by us which not only covers the case of management dilemma but also recommends the solution for the up gradation of KESC.
The main and the core issues of the KESC Management are related to the Production, Electricity Thefting, Low Profitability and labor management disputes. The Rising demands of the electricity in the city causing the inefficiencies in the corporation and KESC is trying to its utmost level to cop up itself from such problems but the target is still unachievable.
The report data is gathered by the literature reviews, Annual Report by the Management itself, websites, articles, news columns. Further more interviews and questionnaires fulfillment helped in the data gathering.
The data is analyzed with the help of Trend Analysis (A technique to analyze the past and the current approaches of the institution) in which KESC’s past performance and current performance is evaluated and resulted in the section that where KESC is actually lacking.
Through the deep analysis of all the aspects of the KESC weakness we would recommend that; • KESC should involve the Labor in their Decision making because these Labors are actually the backbone of this corporation further more the organization must review their compensation plan because labor are not satisfied with their remunerations. • KESC should increase the generating capacity of the production houses and electricity generating plants by their up gradation and further installing the new plants. • KESC should make an inspection committee which is supposed to investigate the areas that where the electricity is stealing and sued them along with the heavy charges.
Profitability can be raised if the internal corruption get decreased and absolute use of funds is done.
“Why Karachi Electric Supply Corporation is unable to meet the current electricity demand of the city Karachi” K.E.S.C is an electric supply corporation providing electricity to inhabitants of Karachi. K.E.S.C is currently experiencing several challenges. It is facing low production of electricity. Sui Southern Gas Co. contracted to provide gas to K.E.S.C has recently stopped to provide further gas due to default in payments which ultimately causes another problem of load shedding. K.E.S.C is also facing problem of low trained technical workers. Another most important is labor management dispute. It is still to be known the importance of these problems for meeting the above mention challenges. There are several issues with the KESC which are as follows; • • • • • • • Inefficient Management. Electricity Thefting. Non Paying of the Bills Dependency on other electric corporations Corruptions. Political Influences Low productivity
The objective of this Research is to refine all the hidden problems of K.E.S.C. and to give an authentic, full fledge detailed report which will cover all the details of the problem statement. Remedies will be given for dealing with these core issues that how these issues can be resolved. At the end, the research will attempt to answer the following points; • • • • • To determine the most suitable modes of providing electricity to the people of Karachi, keeping in view the characteristics of a common and industrial consumer and availability of resources. To determine the ways to prevent from electricity Thefting. To determine and analyze what factors actually disturbs the production of electricity. To propose institutional changes for sustainable development and integrated policy making. Therefore the fundamental objective of this research is to highlight the issues which are being faced by the KESC and giving the solutions to these problems
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 18 million the city accounts for about 20% 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. The electricity supply business in Pakistan is under two companies. For Karachi city and adjoining areas of Sind and Baluchistan, it is under Karachi Electric Supply Corporation (KESC). For rest of the Pakistan it falls under Water and Power Development Authority (WAPDA). Both companies operate their own networks and they are also interconnected to each other at two points. One is the Jamshoro – Bin Qasim link in East of Karachi and other is
HUBCO-KESC link in West of Karachi. Both companies can provide power to each other through these links. KESC is an integrated power utility with exclusive franchise rights to serve Karachi and its surrounding areas, with a licensed network area spanning 6,000 square kilometers
GENERATION Capacity: Available Capacity: 1,400 MW (Rental Inclusive) Fuel types: Gas, HFO External WAPDA & IPPs - About 45 % of the electricity is purchased from WAPDA & IPPs Internal KESC - Nearly 55% of the electricity is generated through our own system TRANSMISSION Capacity: 59 grid stations & 123 power transformers Network of 220, 132, and 66 KV circuits The purchased and own generated electricity is being transmitted through transmission network. The current transmission losses are less than 3% DISTRIBUTION Capacity: Capacity: 11 KV Feeders 1107 Nos Substations 2571 Nos PMT,S 11562 Nos Dist Transformers 13992 Nos HT Underground Cable 4940 KM HT Overhead Mains 2445 KM LT Underground Cable 1186 KM LT Overhead Mains 10665 KM Dist Capacity 4328 MVA
Operations: Fully integrated power utility involved in generation, transmission, and distribution. KESC is a public limited company listed on all stock exchanges. Total Capacity:2,350 MW (1350 MW Own capacity; 379 MW IPPs; 620 MW WAPDA/NDTC; Aggreko Rental 50 MW) Employees: Around 17,000(52% permanent, 48% contract, 89% staff, 11% officers)
The data collection instrument was Questionnaires that is attached with this term report besides this, various interviews were conducted in this regard and there notes are also affixed along with the report. The data was collected on the basis of client interviews and questionnaires completion. Two types of questionnaires were developed one was for Labor Union and the other one was for the Management of the KESC. Fifty questionnaires were filled by the Labor and five questionnaires were filled by the Management of the KESC. The response rate was 45% by the KESC’s labor and Management, overall the data was sufficient to conduct the analysis and drawing the conclusion because secondary data was in the bulk quantity in which Annual report and Reviews were collected and analyzed.
The sample size was fifty five in which five questionnaires was filled by the Management and fifty questionnaires were from the labors.
It included an outline of what we had to do from writing the hypothesis and their operational implications to the final analysis of the data. It was a two month based research program in which the data collection and quantifying of the data was done.
The data was collected in the following ways,
• Client Interview.
• Exploratory Interviews from the officials of K.E.S.C. • Field interviews from the labor management of the K.E.S.C. • Questionnaires Completion by the K.E.S.C. management and Labor.
In this Analysis the main focus was on the trends of production and the persistency of the corporation so that the whole picture can get a clear vision for its devaluation. Graphical charts and other visuals aids are as under which are covering the following aspects;
• Revenue. • EBITDA. • Fuel Consumption.
• General Fleet Efficiency. • Gas Consumption.
20082009 20092010 20102011
REVENUE 87709 108600 135602
As per the data gathering it is very clear that KESC is increasing its revenue generation the trend line is indicating the sign of progress but the rate through which this organization should generates its revenue is low.
20072008 20082009 20092010 20102011
EBITDA IN BILLON -10.3 -6.9 -3.8 3.5
The Earning Before interest, Taxes, Depreciation and Amortization was low but gradually it is increasing which is a good sign.
20072008 20082009 20092010 20102011 FUEL CONSUMPTION 41.3 43.1 43.5 60
Fuel Consumption trend is increasing from the prceeding years due to the rising demand of the city. The furnace oil and thermal consumption requirment is increasing which is increasing the per unit cost of the production and also the depandency on these fuel is increasing.
GENERATION FLEET EFFICIENCY 30.60% 13
20082009 20092010 20102011
30.40% 33.70% 33.50%
Fleet Generation capacity trend is not upto the mark it is not increasing sharply with respect to the rising demands of the city.
GAS CONSUMPTION 211 239 188 153
20072008 20082009 20092010 20102011
Gas consumption is in declining trend which due to the reason of the gas shortage in the Pakistan and KESC has to find out the way to find out another way of production rather then depending on the gas consumption.
Deferred 2011-------------------------------2010 upees in 000) Gratuity 3752606 Post Retirement medical benefits 1536619 Post Retirement electricity benefits 477899 4010930 1183939 410921 Liabilities (R
• • • •
National Transmission and Dispatch Company 35951670 Independent Power Producers (IPPs) 20391644 Karachi Nuclear Power Plant 3001028 Pakistan Still Mills Corporation (Private) LTD 537135
38862872 24526966 1404041 502413
LONG TERM LIABILITIES
• • • • •
From banking Companies and Financial Institutions – Secured International Finance Corporation (IFC) Syndicated Term Loans Asian Development Bank (ADB) Term Loan from Banking Company Foreign Currency Term Loan Syndicated structured term finance facility Syndicated Commercial Facility Structured Islamic Term Financing –Musharka
OTHER - SECURED
• Due to Oil and Gas Companies
GoP Loan For the electrification of Hub Area Gul Ahmed Energy Limited Tapal Energy (Private) LTD
Accrued Mark Up Short Term Borrowings – Secured Short Term Deposits
Taxation These are the Status of Liabilities and Debts which is a measure reasons for its low capacity.
KESC POWER GENERATION CAPACITY
• • • • • • • • •
TPS Korangi GTPS Korangi GTPS SITE TPS Bin Qasim RPPs CPPs IPP Gul Ahmad IPP Tapal KANUP
60 MW 196 MW 88 MW 1080 MW 138 MW 20 MW 125 MW 125 MW 80 MW
KESC’s Total generation capacity is 1812 MW. (Both TPS Korangi and the GTPS SITE are programmed to be mothballed). KESC has just last month requested NEPRA for allowing it to do so. Consequently, the power generating capacity of Pakistan, inclusive of all categories is 17,606 MW, and not 19, 855 MW. Additionally, it is seen that utility practices cater for scheduled and forced outages of up to 16% of the capacity for IPPs (also substantiated in the relevant PPAs) and 20% for older Public Sector GENCOs. After catering for these outages, definitely required for maintenance purpose as no machine in the world can work day in and day out, we see that the maximum available power generation capacity in Pakistan is around 15,000 MW to 15,500 MW, which is far less in comparison to the current demand. And that too is dependent upon the vagaries of nature, because hydel generation can be as low as 683 MW, as was the case early
this year, and an average of 5,600 MW during the high water months. It is because of this, that a very ambitious programmed of adding nearly 4,000 MW of new generation was prepared in late 2008 comprising of 9 IPPs totaling 1675 MW, 14 RPPs of 2250 MWs and GENCO rehab of 300 MW – all scheduled to be available within 2009. The conservation campaign is going strong through the help received from the Provincial Governments and the people and which has led to the chipping of the peak demands by a hefty 1100 MW or so. The great discipline seen in load management after the Energy Summit of late April 2010 is ample testimony to the same. The near continuous availability of supply during the great floods being seen at the moment, although due to the clamity two big power generating complexes have been shut down as precautionary measures, also proves the above point. Actually, we are using all possible generation and not even one MW is idle. KESC, on the other hand, does save on fuel sometimes and then places undue pressure on PEPCO supplies. In addition to the above numbers to be added by late this year, a huge short term, medium and long term power generation plan is under implementation and Inshallah the Country will come out of the energy crisis being faced. This will be a great feat, because our neighboring India facing 40,000 MW deficits, probably, is destined to remain in the negative for at least the next 10 years. We must also remember that the days of cheap energy are long gone and nor do anyone, including our Chinese friends who themselves are facing an energy crunch, can offer to supply us power at Rs.300/- per month. It is all rumor mongering and nothing else.
Around one million people are stealing the Electricity through, • • • Kunda Systems Meter Slowing Meter Stopping
Our findings regarding profitability, production and labor management disputes are as follows.
The total revenue of the company increased by 22 percent year-on-year in FY10 which was attributed to the increase in total units billed and increases in tariff owing to rising cost of generation and power purchase. At the same time, the overall cost of fuel and power purchase led to an increase in the cost of sales by 18 percent year-on-year in FY10 due to the reduction in gas
Despite external constraints, the overall increase in revenue and reduction in transmission and distribution (T&D) losses resulted in a 'significant' improvement to the company's profitability, and the net loss for the period reduced from Rs 15 billion in FY09 to Rs 14 billion in FY10. It also contributed in achieving improvement in the EBIT ratio which was negative at 7.61 percent in FY10 compared to negative 11.4 percent in FY09.
REASONS BEHIND LOW PROFITABILITY:
INCREASING COST OF FUEL AND GAS:
As day by day cost of farness oil and gas is increasing which ultimately increases cost for generating electricity and effects profitability level.
PURCHASING ELECTRICITY FROM EXTERNAL SOURCES:
KESC is generating nearly 61% of electricity through its own systems and other 39% electricity is being purchased from WAPDA & IPPs who charge higher prices which ultimately effect profitability of KESC.
REPAYING OF DEBTS:
KESC has to pay dues of Rs30 billion to Sui Sothern Gas Pipeline and other organizations, and paying dues ultimately decrease in profitability.
NON COLLECTION OF ELECTRICITY DUES:
The Karachi Electric Supply Company has been facing big deficit of cash flow on the part of its non-paying consumers, who owe Rs. 36 billion to KESC, and this in turn is resulting in shortfall of power supply to the Metropolis. The KWSB is in debt of over Rs. 8 billion because of which a rotational load-shedding is being carried out on 12 dedicated feeders at its Water Pumping Stations for four hours during night time. On the other hand, Rs. 12 billion and 25 crores were due towards domestic consumers, Rs. 7 billion and 75 crores to commercial customers, Rs. 3 billion towards industrial consumers, Rs. 13 billion to public sector organizations, and Rs. 300 crores towards agricultural consumers. Rs. 124 million was payable only towards the mosques of the City.
KESC has capacity to supply 2,176 MW, of which 1,336 MW (equivalent to approximately 61%) is self-owned generation while the remainder, approximately 840 MW, is procured from external sources (currently WAPDA, two private IPPs, and Karachi Nuclear Power Plant18). And demand
for electricity in Karachi is 2442 MW. KESC is facing demand and supply gap over many years. The reasons behind low productivity level are following. (i) KESC has not increased its in-house generation capacity since 1998. Due to the poor maintenance and obsolescence of the existing plants (the oldest plant still in operation was installed in 1965), KESC’s generation capacity (A) Has been rerated by 420 MW (24%). (B) Only 25% is efficient with economic consequences. and environmental
(ii) No access to sufficient electricity generation (within the capacity of
the current network ─ “Grid “and considering latent demand that will become evident as additional supply is made available).
(iii) Should have a sufficiently large and reliable network to handle the
LABOR MANAGEMENT ISSUES:
The economic crisis which engulfed the world a couple of years back have appeared in Pakistan. The weakening economy is leaving its mark in every sector and the worst hit seems to be the Karachi Electric Supply Corporation (KESC) which was already a victim of corruption and a house of ‘ghost employees’ until the then President General Musharraf privatized the utility company to provide uninterrupted electricity to Karachities. The KESC fulfilled its promise and restructured the organization on revolutionary lines, from lodging FIRs against the electricity thieves to reducing the load shedding hours as less as 3 hours (comparing with rest of the nation facing more than 10 hours of load shedding). KESC took all necessary measures to turn the white elephant into productive organization. In an attempt to continue with restructuring and to make the company financially viable the KESC has decided to get rid of those employees who considered burden on organization as a result KESC is forced to lay off 4,000 of its unproductive workers, while 500 employees opted for Voluntarily Separation Scheme (VSS) under a cost-cutting drive. Most of the lay-off workers were from five different categories – security guards, bill distributors, sanitary workers, drivers and clerical workers who are offered one month’s advance salary and gratuity benefits as a result Collective bargaining agents and union leaders have rejected the policy and opted to confront the management by all means. With the passing days the KESC’s turmoil is increasing and the situation is getting more and more complex especially the scenario at the KESC Head office which is surrounded by a huge mob of sacked employees and their sympathizers representing the banners of several political parties. The live
media coverage has managed to gain the support of the ill informed people of Pakistan who think in favor of the sacked employees considered as a liability by the utility company. Indeed KESC is not an employment bureau however in a highly polarized country like Pakistan where political parties literally find issues to exploit and make maximum benefit out of them; corporate likes KESC should have conscientiously handled this particular issue foreseeing the post decision chaos. At this point in time mass downsizing would be an unwise step by the company when the country’s economic situation is alarming and Government and all other political parties are trying to capitalize issues for gaining public sympathy. KESC’s step looks impudent, and the situation doesn’t seem to go in the favor of their decision to lay off the employees. Instead they must come up with “safe strategy” which could be implemented to achieve the objectives gradually. The company should pursuit the policy of downsizing but in a subtle and planned way which will leave very less scope for the labor unions to strengthen. As an alternative, the company should also revise the appraisals policy which could be determined by company’s profit or productivity measures. After restoration, all employees should be systematically included in the part of wage reduction program. It would not be fair to slash the wages of entry-level or non-management recruits only, such decisions will further spur discontentment among employees who were initially being targeted. However as soon as the wages are reduced with no security of appraisals, the non performing staff already working on less wages would definitely look for the soon-to-expire- lucrative Voluntarily Separation Scheme (VSS).
IMPORTANT QUESTIONS WHICH ARE ANSWERED BY THE LABOR AND
Q1: What problems are you facing while working at the KESC? List the points. • • • • • Life Risk Violence Unsafe tools Bureaucratic Environment Poor Working Environment
OPINIO N 2 SAMPL E SIZE 23
PROBLEMS FACED BY KESC
Lack Of Resources Life Risk Labor Management Conflicts Misbehavior Of Consumer
12 4 9 9
23 23 23 23
52.17 17.39 39.13 39.13
Misbehavior Of Consumer Labour Management Conflicts Life Risk Lack Of Resources Beaurocratic culture 0 8.7 17.39
Q2: What benefits do you expect from the management and to what extend Mgt. is meeting your demands? List the points. • • • • • Job Security Benefits Adequate Salary Good working environment Employees must be equally treated BENEFITS No Favoritism Job Security Salary Good Environment Incentives OPINIO N 10 12 13 10 5 SAMPLE SIZE 23 23 23 23 23 %ages 43.48 52.17 56.52 43.48 21.74
Q3: Why the management is looking to downsize the labor? • Cost cutting
Q4: How many power plants are in working conditions? And are these power plants giving full output? •
• • • •
• • •
TPS Korangi GTPS Korangi GTPS SITE TPS Bin Qasim RPPs CPPs IPP Gul Ahmad IPP Tapal KANUP
60 MW 196 MW 88 MW 1080 MW 138 MW 20 MW 125 MW 125 MW 80 MW
Output is below then the average.
KANUP IPP Gul Ahmed CPPs RPPs TPS Bin Qasim GTPS Site GTPS Korangi TPS Korangi
Q5: What are the major problems which KESC is facing and how these problems can be resolved? • • • • • Corruption Political Interference Lack of production Electricity Stealing Huge Circular debts
OPINIO N 56% 78% 67% 83% 62%
PROBLEMS Corruption Political Interference Lack of production Electricity Stealing Huge Circular debts
Q6: How KESC mgt can solve these problems? • • • All the Exiting plants are capable to handle out the current Demand all what KESC has to do is to Focus on their up gradation. KESC should install power generating plants. Dams Construction.
Q7. Are you satisfied with the policies of the management? Are you being paid optimum wages and salary?
9 14 23
POLICIES UNSATISFACTORY SATISFACTORY WAGES
“Why Karachi Electric Supply Corporation is unable to meet the current electricity demand of the city Karachi”
K.E.S.C is an electric supply corporation providing electricity to inhabitants of Karachi. K.E.S.C is currently experiencing several challenges. It is facing low production of electricity due to which load shedding occurs. K.E.S.C is also facing problem of low trained technical workers. Another most important is labor management dispute. There are several issues with the KESC which are as follows; • • • • • Electricity Thefting, Non-Paying of the Bills, Dependency on other electric corporations, Corruptions, Political Influences,
All of above mentioned problems are behind KESC’s lack of coverage. As the single power utility for Karachi, KESC is expected to provide 24-hour per day power supply while maintaining high standards of quality, efficiency, reliability, and safety but not! The ability to meet demand is essentially impacted by two main factors:
Access to sufficient electricity generation (within the capacity of the current network ─“grid” and considering latent demand that will
LACK OF PRODUCTION
become evident as additional supply is made available) but yet KESC is not over coming the problem. Having a sufficiently large and reliable network to handle the required supply but not handling.
KESC has capacity to supply 2,176 MW, of which 1,336 MW (equivalent to approximately 61%) is self-owned generation while the remainder, approximately 840 MW, is procured from external sources (currently WAPDA, two private IPPs, and Karachi Nuclear Power Plant18). And demand for electricity in Karachi is 2442 MW. KESC is facing demand and supply gap over many years. The reasons behind low productivity level are following.
KESC has not increased its in-house generation capacity since 1998. Due to the poor maintenance and obsolescence of the existing plants (the oldest plant still in operation was installed in 1965), KESC’s generation capacity (a) has been derated by 420 MW (24%), and (b) is only 25% efficient (with economic and environmental consequences. Total power plants working right now are: 60 MW 196 MW 88 MW 1080 MW 138 MW 20 MW 125 MW 125 MW 80 MW
TPS Korangi GTPS Korangi GTPS SITE (v) TPS Bin Qasim (vi) RPPs (vii) CPPs (viii) IPP Gul Ahmad (ix) IPP Tapal (x) KANUP
Producing Output below than the average.
Profitability The total revenue of the company increased by 22 percent year-on-year in FY10 which increase in total units billed and increases in tariff owing to rising cost of generation and power purchase. Despite external constraints, net loss for the period reduced from Rs 15 billion in FY09 to Rs 14 billion in FY10. It also contributed in achieving improvement in the EBIT ratio which was negative at 7.61 percent in FY10 compared to negative 11.4 percent in FY09. Reasons behind Low Profitability: Increasing cost of Fuel and Gas:
As day by day cost of farness oil and gas is increasing which ultimately increases cost for generating electricity and effects profitability level. Purchasing electricity from External Sources: KESC is generating nearly 61% of electricity through its own systems and other 39% electricity is being purchased from WAPDA & IPPs who charge higher prices which ultimately effect profitability of KESC. Repaying of debts: KESC has to pay dues of Rs30 billion to Sui Sothern Gas Pipeline and other organizations, and paying dues ultimately decrease in profitability. Non collection of Electricity Dues: The Karachi Electric Supply Company has been facing big deficit of cash flow on the part of its non-paying consumers, who owe Rs. 36 billion to KESC, and this in turn is resulting in shortfall of power supply to the Metropolis ELECTRICITY STEALING: Around one million people are stealing the Electricity through, • • • Kunda Systems Meter Slowing Meter Stopping
LABOR MANAGEMENT PROBLEM:
Major problem of KESC is due to the labors management dispute according to them KESC is not providing the safety against the Life Risk, Security from Violence, safe tools, unbiased Environment and good Working conditions. Management is downsizing labors for reducing the cost which is creating a clash b/w labor and management. Factually, they say, in the month of January 2011, KESC decided to terminate 4500 non-core employees, but due intervention of the federal government and political parties, the KESC management stepped back and retained them.
Karachi ites hope that with privatization of the utility Corporation, quality of its services would improve considerably coupled with reduction in electricity tariff. This might happen if the privatization process is properly structured and additional resources are infused for revamping the generation, transmission and distribution networks.
Handing over the control of KESC to the Sindh government as presently it is controlled by the federal government and the Privatization Commission. Building new power generation plants on fast track basis in order to meet the present shortfall in power supply. Joining KESC system with Hubco at Hub Choke for meeting the supply gap presently met from Wapda through Jam Shoro. There is presently no transmission line between Hubco and KESC for the purpose and its construction might take about two years. Moreover, Hubco presently has contract for supply of all electricity to Wapda. The arrangements might have to be first renegotiated and documented. Other options for improving KESC conditions may include: Private industries which are generating power for their own industrial electricity coverage if these generating capacity are merged too this might become extra power and this power can reduce the KESC’s problem to some extend at mutually agreed price. This would help, augment the capacity available to KESC and to that extent reduce load-shedding at costs that are not exorbitant. KESC should recheck generation sites so that obsolete power generation plants within Karachi can be revitalized. Install gas-based power plants on fast track and generate power to cater the demand of the city. Privatization of KESC to be structured on the pattern of Wapda as against the present scheme of privatizing as an integrated utility. Distribution function can be privatized or leased out first to 5-10 private sector distribution companies, each company should clearly marked out licensed area depending upon the number of existing grid stations allocated. Generation might be privatized in the second phase while transmission could be entrusted to NTDC in the public sector. Labor and management should make a committee to resolve the issues to deal with this core issue. As far as profitability is concerned KESC should look into the matter for generating profits. KESC must review its Costing procedure and should find the way out to reduce the cost. The Karachi ites have to also continue exhorting the KESC for taking steps to change the attitude of its management and staff toward the existing and the prospective consumers. The tendency for illegal connections should be minimized by making the legal connection. KESC should consider providing temporary new connections and the electricity meters to the consumers for enhancing their profitability, just by receiving an application. The pricing of electricity is another major issue which requires careful consideration. In order to become demand and socially competitive, our economy needs cheap and stable utility prices. The electricity consumers in Pakistan are already paying high prices of electricity. If the prices are not
reduced the consumers will be quite justified in agitating against the corporation and the Government as well. Beside this current position of KESC can be improve if above measures are adopted efficiently and effectively.
Following are the Internet links from where the Secondary data resources are gathered.
• • • • • • • • • • • •
http://www.kesc.com.pk/en/media/get/20100930_kesc-ar-27-09-10.pdf http://www.kesc.com.pk/en/section/investorrelations/financialdata http://www.urckarachi.org/KESC%20News%20Articles.HTM www.adb.org/Documents/PCRs/PAK/pcr-pak-25389.pdf http://www.newslinemagazine.com/2011/06/interview-tayyab-tareenchief-financial-officer-of-kesc/ http://jang.com.pk/thenews/jun2011-weekly/nos-26-06-2011/spr.htm http://www.pakistaneconomist.com/issue2003/issue35/f&m.asp http://www.kesc.com.pk/en/news/mediacenter/currentnews/pressreleaseofjune18.html http://findarticles.com/p/articles/mi_hb092/is_5_31/ai_n28792563/ http://www.pakinvestorsguide.com/index.php?topic=225.0 http://www.chowk.com/wajahat/iLogs/views/The-end-of-Karachi-ElectricSupply-Corporation-KESC KESC “Annual Report” from “2010 to 2011” obtaining link is “www.kesc.com.pk”
Articles from jang and Dawn News and internet.
1. “KESC Post Lost” published on October 29, 2011. 2. “The End of Karachi Electric Supply Corporation (KESC)” published by 3. “Mr. Wajahat” on January 15, 2011. 29
4. “ELECTRICITY DISTRIBUTION IN THE PRIVATE SECTOR: Prospects and Pitfalls” published by “Syed Hassan Nawab”. 5.
“The downsizing will not have a negative impact” Interview Tayyab Tareen, chief financial officer, KESC
Following are the primary data resources collection materials. • • Questionnaires Interview from Labor Management Head.
Article # 1: KESC posts loss of Rs2.2bn for 1Q
Our Equities Correspondent | Business | From the Newspaper October 29, 2011 (4 weeks ago)
The company earned revenue amounting to Rs23.931 billion, representing a four per cent improvement over Rs22.940 billion earned in same quarter of previous year. — File photo KARACHI, Oct 28: The board of directors of the Karachi Electric Supply Corporation (KESC) announced the first quarter 2012 financial results on Friday, revealing net loss of Rs2.203 billion, up by 23.6 per cent over the loss of Rs1.782 billion incurred in the corresponding period of the previous year. Loss per share was a paisa higher at Re 0.10, from Re 0.09. The company earned revenue amounting to Rs23.931 billion, representing a four per cent improvement over Rs22.940 billion earned in same quarter of previous year.
Gross profit rose 71 per cent to Rs1.731 billion in the latest quarter, compared with Rs1.013 billion same times last year. Operating loss also decreased by 12.5 per cent to Rs615 million, from Rs703 million. The company did not issue a statement with the accounting figures. Yet, at an analysts’ briefing a day ago, the company officials had provided little insight into the first quarter results. The stress, however, was on elaboration of the full financial year 2011 performance. The officials reminded the analysts that the company had finally made a gross profit for FY11 which was positive change against the last five years (i.e. ever since Abraaj took control of its management). However, the company still ended FY11 with a significant net loss of Rs9.5 billion, though it was considerably lower than the earlier year. The analysts’ briefing takeaways, reported by Taurus Securities included, among other things, the following: KESC’s much anticipated Bin Qasim Power Station – II (BQPS-II) with a theoretical capacity of 560MW was on schedule to start commercial operations by 1HFY13. The KESC officials told analysts that the utility was able to cut down excess staff via its Voluntary Separation Scheme; an estimated 6,500 employees opted for the VSS. Payables by the company rose to Rs75 billion by the end of FY11 and receivables also increased to Rs58 billion. In order to meet its growing cash flow needs, the utility was in the process of launching TFC worth Rs2 billion, including Rs1 billion in green shoe option. Transmission & Distribution (T&D) losses were marginally down during FY11 but post FY11, transmission losses had declined to 1.86pc from 4.19pc, the analysts were told. The company was said to be making attempts to replace existing cables with Aerial Bundling Cables (ABC) ‘particularly in no-go and slum areas’ which, the company officials said, accounted for 42pc of KESC’s market. ABC installation, is supposed to greatly discourage electricity theft (via Kunda).
Article # 2: The End of Karachi Electric Supply Corporation (KESC)
By Mr. Wajahat January 15, 2011
Karachi must be the unluckiest places on earth and its people are victims of absolute greed and nepotism that is displayed overtly by the President of Pakistan and his cohorts. KESC is a shining example in our president’s list of achievements to undo the Pakistan society as his personal greed and the nepotism of his close associates is about to finish off the Karachi Electric Supply Corporate (KESC) as we know it. In Karachi, a 3 hour daily load-shedding based outage is now considered normal by Karachi ites who must be by far the most patient (read helpless) community in the world. KESC was recently acquired by the Abraaj capital, a UAE based firm which is staffed primarily by Zardari’s relatives and associates. The deal itself is a complex and creative acquisition where Abraaj Capital itself does not own any shares of 31
KESC, which are still held by the previous owners Al Jomaih Group (KES Power) and the Government of Pakistan. From the onset the new and very expensive executive management team from Abraaj, required the resignation of all existing Executive Management and replaced them with their own in-experienced and non technical management teams which included new graduates, bankers and career accountants to run the operations of an electric supply utility for one of biggest cities in the world (Well it could be worst as Zardari’s appointed a night club manager to run the national insurance company). Next, a detailed asset inventory was taken including of all hardware and land assets owned by the KESC Group in Karachi and its surroundings. These included prime properties and very expensive copper wire surplus and stock held by the KESC. These were sold at rock bottom prices to more of Zardari's cohorts. In the public imagination KESC’s biggest problem is the generation of power, the truth of the matter is that KESC is perfectly capable of generating all the demand from its regional customers. It is in-fact the availability of furnace oil and gas that is the main issue. In 2008, KESC owed 80 Billion Rupees to its main suppliers which are WAPDA and Sui Southern Gas (SSGC). By the end of 2010, KESC now owes 350 Billion rupees to WAPDA and Sui Southern Gas. Zardari has been using his presidential powers to pressure WAPDA and SSGC to continue to provide the required furnace oil and gas to KESC without getting the bills paid for the last few years which results in this unprecedented debt. This off-course involves both government pressure on the suppliers and also large bribes paid to the senior executives at WAPDA and SSGC. In the meanwhile KESC continues to collect sizable cash from its regional consumers and that Cash is disappearing in the Black Hole of Zardari’s and Co’s well of greed. It is said that already Abraaj capital has gotten 50 times the return on its original investment. All the stakeholders are now awaiting is the imminent fall of the Zardari’s government and then all hell breaks loose. The future will look something like this. Fast and timely exits of all key players from Abraaj capital from the country before their names are put on the infamous exit control list. A suspension of furnace Oil and Gas supplies to KESC, resulting in censure of all power generation by KESC. Potential social havoc in Karachi due to complete daily outages with only limited hourly power supply during the day. Mass social unrest as hospital, schools and the general social structure is deeply affected by complete and limitless power outages. In case of a Sharif Government coming in (as it would be technically their turn to rip the country off) a hard-line approach is expected towards Karachi which would result in political upheaval and further violence in the city. In short, this would be by far the worst affecting corruption scandal in our history rife with massive and overt corruption scandals. And all this is happening as I write these words.
ELECTRICITY DISTRIBUTION IN THE PRIVATE SECTOR: Prospects and Pitfalls
By Syed Hassan Nawab
The primary objective of privatizing any utility service is to improve its efficiency, so as to result in reliable service to its consumers at affordable prices. The privatization of electric distribution is also being considered with the same expectation. 32
Privatization of electricity distribution has been under discussion for almost a decade. M/s. Price Waterhouse conducted a study on the privatization of the Karachi Electric Supply Corporation (KESO) in 1991, in which they recommended to privatize the (KESC) as a single unit comprising generation, transmission and distribution functions. The Strategic Plan for the Privatization of WAPDA prepared by M/s. International Resources Group of the USA in 1992, recommended to privatize the distribution area boards of WAPDA by first converting them into corporate entities, and then off-loading them to strategic investors through the sale of their assets and liabilities. The process was to be completed by 1996. In 1995, the GOP appointed M/s. International Financial Corporation (IFC) as the financial advisor for the privatization of the Faisalabad Area Electricity Board, with a mandate to complete the transaction in two years. Subsequently various financial advisors have been appointed for the privatization of KESC. So far not a single transaction has been completed. While there is complete consensus on the need for privatization, the procedure of privatization has remained subject to debate. Privatization of electricity distribution is absolutely essential to curtail the high distribution losses and pilferages that have plagued this vital industry. There are however significant issues that need to be addressed, before embarking on the process of privatization. This paper attempts at outlining some of those issues, for the purpose of enabling a debate aimed at arriving at workable solutions. The first issue is the accurate assessment of assets and liabilities of any distribution system. This is necessary to enable the potential private investor to formulate a bid offer. The investor will be able to make an offer by first developing a financial model capable of reasonably forecasting the revenues and profitability of the privatized entity over the period of the distribution license. The existing distribution assets have been financed largely through various power sector development loans borrowed by the Government of Pakistan from the multilateral development institutions over a period of time. On the books of account, their written down value might be rather low, but in terms of replacement value, they are quite significant. The question is, should these assets be sold on the basis of their book value or replacement value. Obviously, the book value would be much below their actual value. It would therefore be an unfair transaction to privatize these valuable assets at below their market value. Estimating a reasonably accurate replacement value is in itself quite a difficult and time-consuming exercise. Once a fair value has been assigned to those assets, the liabilities can be accordingly worked out on the basis of their ownership structure. These assets are largely held by the GOP or by public sector financial and investment houses. The owners of distribution assets enjoy a monopoly over the consumers in their respective distribution areas. The consumers have only one power line connecting their premises with the distribution system. If that connection or system fails, they are left to face a black out, or rely on self-generation during the outage period. Both options are undesirable. Since the responsibility of providing essential utilities to all citizens ultimately falls on the state, these distribution systems must be viewed as strategic assets, rather than purely commercial assets. Their security and maintenance is also ultimately the responsibility of the state. Since these assets are located far and wide in every street and mohalla, they are at a high risk of arson and damage, both intentionally and unintentionally. Handing 33
over the important responsibility of their maintenance and security to the private sector will expose the end users to significant risks, which will be difficult and expensive to mitigate. For the private sector investor, the responsibility of providing security to those assets will be a prime concern; its outcome will determine the ability to provide uninterrupted supply of electricity. The question of replacement of a private sector owner/operator is also another significant issue. If a private owner of the distribution assets fails to perform, i.e. to maintain the assets properly and/or to provide reliable service to the end users, there will be very limited options left to deal with the problem. Cancellation of distribution license on non-performance is normally the most potent threat to any licensee. However, to re-acquire the privatized assets, and to sell them to a third party, will be a highly complicated legal and commercial matter, which is likely to drag over years. In the meanwhile, the consumers will continue to suffer. A mechanism has thus to be evolved to enable the replacement a non-performing distributor at short notice, without distributing the supply of electricity to the end consumer. The pricing of electricity is another major issue which requires careful consideration. The distribution companies will obviously enter in the privatization transaction with a profit motive. They will buy electricity in bulk from generating companies, at the prices allowed to those companies under their respective agreements and licenses. The distribution companies will add their own margins on their purchase price to arrive at the price charged to the end consumers. The distribution margin will cover their operating costs and provide a reasonable return on their investment. It might also have to cater for building adequate reserves for major maintenance and up- gradation of the system, to cope with increasing demand. Thus the price charged to the end consumer will have a number of markups, added at each successive stage of production and distribution, and is likely to go up, at least in the short run. To expect the electricity prices to fall as a result of privatization appears therefore to be unrealistic. On the other hand the consumer would be justified in expecting that privatization of electricity distribution will lower their electricity bills. In order to become export competitive, our economy needs cheap and stable utility prices. The electricity consumers in Pakistan are already paying rather high prices of electricity. If the prices are not reduced the consumers will be quite justified in agitating against the private owner and the Government. Before any serious attempts at privatization, it is therefore essential to develop a comprehensive pricing model covering electricity prices at all stages, i.e. generation, transmission and distribution. The model should test the price forecasts rigorously, to ensure that there will be real reduction in electricity prices as a result of privatization. Other wise this exercise might result in another disaster in our economic history. The issue of providing subsidies and cross subsidies also needs to be carefully considered. Certain sectors of the economy might justifiably require subsidies for their survival and growth. There will however be rather a limited scope to provide subsidies in a privatized environment. The metering, billing and recovery of subsidized electricity will create problems. A mechanism to account for, and pay the private distributor of subsidy amounts will have to be evolved. The issues discussed above require careful review, before attempting to embark on a mass scale privatization. Even when these issues appear to have been 34
satisfactorily addressed, it would be prudent to attempt privatization of only one Distribution Company at the start, and to review its post privatization performance over at least two years, before attempting to replicate the experience in other distribution companies.
“The downsizing will not have a negative impact”
-- Tayyab Tareen, chief financial officer, KESC The News on Sunday (TNS): Who is responsible for the ongoing protest? By the KESC labor Tayyab Tareen (TT): The Labour Union Alliance is creating undue pressure on the KESC management and adversely affecting its operations. We want to resolve the issue of labour and it’s right-sizing as soon as possible -- as it’s causing severe hardships to the KESC customers as well as the staff. Only 20 per cent of the KESC team is working; even they are not working from their offices. Our offices are cordoned off by protestors and we are operating from makeshift offices in local hotels. Obviously, KESC is willing to solve the issue. TNS: What should be the government’s role? TT: The government should play a very strong role. It should effectively mobilise the law enforcement agencies to diffuse the situation. Everybody has the right to protest but not in such a hostile manner. The issues must be settled in the court. The Sindh High Court has directed the authorities to provide protection to the KESC staff and installations, the government should at least implement the writ of law. Further, the government along with the political parties should understand the situation and support the KESC management. If their undue interference continues, the Company will have to shut down, investors will leave and no other investor will dare to invest in Pakistan. TNS: How has this protest affected the KESC operations? TT: It’s causing severe hardships to the customers as well as the financial health of the country. Our people are being attacked, installations are sabotaged and workers are not allowed to work. Our capacity has been reduced to a mere 25 per cent. TNS: Do you think the political groups are supporting the protestors?
TT: Yes, of course. It couldn’t have carried on the protest and sabotage activities for so long without the backing of the political parties. The Collective Bargaining Agent (CBA) is backed by a number of political parties -- in leading labor unrest, threatening employees opting for voluntarily separation scheme (VSS), threatening management and resorting to quite unjustified agitation against the management in violation of restraining order from National Industrial Relations Commission and Sind High Court. TNS: Why does KESC need re-structuring and outsourcing? TT: The Company comprises two sectors: core and non-core operations. The Company is suffering a deficit of around 15 per cent in the core employment sector while the non-core segment is overstaffed by 70 per cent. We have all the legal rights as well as a Supreme Court ruling on right-sizing the surplus staff as per our requirements and feasibility. The right-sized position will have no negative impact on the power supply to consumers instead it will provide cost effective solutions through service providers. It’ll leave a positive impact on KESC’s core business; it would save cost by 300 per cent. KESC has no legal obligation to offer severance package to non-core employees and yet it decided to offer a very generous severance package to all the right-sized employees who had served the Company for at least one year. The Company allocated Rs6.0 billion in this regard.
Karachi University Business School Questionnaire for Labor Management
Name: _____________________ Date: ______________________ Dept: ______________________
Note: Answers Questions In Points.
Q1: what problems are you facing while working at the KESC? List the points. Ans: ______________________________________________________________________________ ________________________________________________________________________ ______
Q2: What benefits do you expect from the management and to what extend Mgt. is meeting your demands? List the points. Ans: ______________________________________________________________________________ _______________________________________________________________________________ Q3: Why the mgt. is looking to downsize the labor? Ans: ______________________________________________________________________________ ______________________________________________________________________________ Q4: How many power plants are in working conditions? And are these power plants giving full output? Ans: _____________________________________________________________________________ _____________________________________________________________________________ Q5: What is your opinion about new management? Ans: ______________________________________________________________________________ ______________________________________________________________________________ Q6: What are the measure problems which KESC is facing and how these problems can be resolved? Ans: ______________________________________________________________________________ ______________________________________________________________________________ Q7: Why KESC is going for the option of gas rather then coal usage? And how KESC can meet the current demand of the city? Ans: ______________________________________________________________________________ ______________________________________________________________________________ Q8: How much political influence is affecting the production and efficiency level? Ans: __________________________________________________________________________ ______________________________________________________________________________ Q9: Why KESC mgt is not looking to install more plants so that the problems can be addressed? Ans: ______________________________________________________________________________ ______________________________________________________________________________ Q10: Are you satisfies with the policies of the Mgt.? Are you being paid the optimum wages or salary? Ans: _____________________________________________________________________________ _____________________________________________________________________________
Karachi University Business School
Questionnaire for Management
Name: _____________________ Date: ______________________ Dept: ______________________ Designation: _____________________
NOTE: Answer all the questions in points. Q1: How many plants are in working conditions and what is the production level? Ans: ___________________________________________________________________________ __________________________________________________________________________________ Q2: What are the factors behind the low productivity of the KESC? List the points Ans: ______________________________________________________________________________ __________________________________________________________________________________ Q3: What is the current demand of electricity and what is the production level of electricity? Ans: _____________________________________________________________________________ __________________________________________________________________________________ Q4: How can KESC enhance its productivity? Tell us about your Strategy. Ans: _____________________________________________________________________________ __________________________________________________________________________________ Q5: How much political influences affect the productivity and efficiency level? Ans: ____________________________________________________________________________ __________________________________________________________________________________ Q6: Why KESC is going for the option of natural gas rather then coal however coal is in bulk quantity in Pakistan? Ans: ____________________________________________________________________________ __________________________________________________________________________________ Q7: Why per unit charges are increasing day by day? Ans: __________________________________________________________________________ __________________________________________________________________________________ Q8: What do you feel is the strongest point of KESC and how is the mgt. taking advantage out of these? Ans: ____________________________________________________________________________ __________________________________________________________________________________ Q9: To what extend KESC is dependent on the other electricity providing corporations? 38
Ans: __________________________________________________________________________ __________________________________________________________________________________ Q10: why management is looking to downsize the labor? Ans: ___________________________________________________________________________ __________________________________________________________________________________
GLOSSARY OF TERMS:
• Rupees = Rs
• • • • •
ADB– Asian Development Bank BQTPS– Bin Qasim Thermal Power Station CAGR– Compound average growth rate DSCR– Debt service cover ratio EBITDA– Earnings before interest, taxes, depreciation, and amortization EIRR– Economic internal rate of return IFC– International Finance Corporation IPP– Independent power producer KESCKarachi Electric Supply Corporation Limited KTPS– Korangi Thermal Power Station LIBOR–
• • •
• • • • •
• • • • • •
London interbank offered rate NEPRA– National Electric Power Regulatory Authority NTDC– National Transmission and Dispatch Corporation O&M– Operation and maintenance SBP– State Bank of Pakistan TA– Technical assistance T&D– Transmission and distribution WAPDA– Water and Power Development Authority
• • •
Weights and Measures
• • • • • • • • • • km– kilometer kV (kilovolt)– 1,000 volts kWh (kilowatt-hour)– 1,000 watt-hours MVA– megavolt amperes MW (megawatt)– 1 million watts