August Issue 2009
Should the KESC Have Been Privatised?
Demands to cancel KESC’s privatisation are surging, and a key party in Karachi, the Muttahida Qaumi Movement (MQM), has aggressively turned on the company. The MQM held its first public demonstration against KESC on July 22, and its senators, MNAs, MPAs and nazims held a press conference at the Karachi Press Club arguing for the re-nationalisation of the electric company as they believe that the private management seems unable to improve its performance and put an end to daily power outages in the city.
Joining this chorus of anti-privatised KESC voices is G.R. Bhatti, a former general manager at KESC. “The privatisation decision proved to be a disaster for the residents, commercial concerns and the industry of Karachi from the very outset. It was a conspiracy against the Karachiites,” says Bhatti.
In an interview with Newsline, he argued that the privatisation of the KESC was non-transparent and violated the rules of the Privatisation Commission of Pakistan (PC) and the NEPRA Act. He maintains that before the privatisation, neither the government nor the PC deemed it necessary to place the matter before the parliament to seek its advice or get its approval from the Council of Common Interests (CCI), as per the constitution. “Similar to the irregularities that were pointed out by the Supreme Court in the Pakistan Steel Mills case, the value of the land, which was about Rs 40 billion, was not accounted for. Additionally, the value of other assets, like power stations, grid stations, transmission lines, PMTs and HT/LT lines was not accounted for while calculating the fixed value of Rs 1.32 per share,” explained Bhatti.
The government sold 73% of the KESC’s shares for Rs 15.86 billion, at the rate of Rs 1.65 per share, to the consortium of KES Power Ltd, Hasan Associates and Premier Mercantile. It is interesting, he remarked, to note that Rs 22 billion were receivables at the time of privatisation. The face value of the shares was, at that point, cut from Rs 10 to Rs 3.50. Bhatti accuses PricewaterhouseCoopers, the financial advisor for the transaction, of incorrectly valuing KESC assets. The reserve price was fixed as Rs 1.32 per share, even though, at that time, the KESC shares were being traded at more than Rs 7 per share in the stock exchange. The government also wrote off Rs 57 billion worth of KESC debts, and converted Rs 83 billion to equity to please the new buyers.
“At the time of privatisation, the reason given was that the government wanted to get rid of subsidies, which were a burden on the national exchequer, but the buyer was given a huge subsidy. And the subsidies still continue on one or the other pretext,” Bhatti continued. Also, there were no conditions imposed and no mechanism devised for the monitoring of the post-privatisation performance of the KESC.
According to Bhatti, transmission and distribution (T&D) losses have increased from 34.2 to 40% while the revenue has decreased and no improvement has been witnessed in any sector. As per the financial improvement plan of Rs 13.4 billion granted by the government, the losses were to be reduced to 24% by the end of June 2007, which means that, at present, the losses are 16% behind the target.
Bhatti elaborated that, in order to privatise WAPDA, it was unbundled into three different sections — distribution, grid stations and transmission. Separate companies (GENCO, NTDC, and 8 DISCOs) were thus established. The KESC, however, was privatised as one entity, leading to the inefficiency of a single management team.
In addition, the required pre-qualification of the bidders, to evaluate whether the prospective buyers were technically and financially in a position to own, manage and operate the utility, was a step the government simply ignored. None of the members of the consortium that took over KESC in November 2005 had such experience. “Instead of making the requisite investment and improving the network, subsequent owners transferred the shares and management to Abraaj Capital,” said Bhatti. Neither the government nor the PC took notice of the situation; instead, they facilitated the transfer of shares, even in violation of the Share Purchase Agreement, which stipulated that shares could not be transferred before the passage of three years.
In Bhatti’s view, instead of concentrating on the actual problems faced by the customers, the new management’s emphasis is on the restructuring, re-designation, remodelling, refurbishing and renovation of offices. Instead of structural changes, he believes reforms should have been introduced in phases, in order to reduce customer dissatisfaction.
According to Bhatti, previous instances of privatising power utilities in third world countries have demonstrated that the private monopoly operators always try to raise tariffs, expand their network based on commercial priorities rather than consumer needs, and delay investments, paying no attention to the desire for fewer power cuts. “For some time, government subsidies continued to flow in on the pretext of higher fuel prices, but they have now been stopped on IMF instructions,” Bhatti goes on to say, adding that the stated goals of privatisation have not been, and never will be, achieved.
Essentially, Bhatti states that since the privatised management of the KESC has failed to fulfill the obligations of an efficient utility, it should not be allowed to continue operating the crucial enterprise, and so, the government has to take the bold step of reversing the privatisation. This, he feels, will save Karachiites from the misery of power failures and unprecedented loadshedding.