It declares the decision to sell entire KESC to a single buyer. This was probably decided in haste by the government due to its obsession for privatization and advice from our mai bap donor (Loaner) agencies. How critical are the two parts of this decision will be obvious after going through the procedures & guidelines of privatization process and earlier policy decisions of the government for the power sector privatization.

The very first step of the process of privatization is to identify the entity / entities to be privatized after seeking guidance on all related issues such as pricing, restructuring, regulatory frame work and legal considerations2. In order to identify entity in context of power sector and public utility, the Privatization Commission and the Cabinet should have referred to the Constitution of Pakistan and Government of Pakistan’s adopted Strategic Plan for privatization of Power Sector of Pakistan of 1992. The Plan proposes to restructure WAPDA/KESC into a disaggregated system, splitting it in to Generation, Transmission and Distribution entities, with as much competition as practical to induce efficiency. Later in 1994, KESC Restructuring & Privatization Study had recommended to split the operations of KESC in to generation, transmission and distribution. Privatisation and Alternative courses of action for restructuring together with financial analysis were recommended3.

Although the term re-structuring (that includes unbundling) is referred and repeated several times in the process/rules of privatization4, but even then unbundling was not considered. Unbundling of WAPDA had already taken place in 1998, how the same could have been ignored by the Privatisation Commission and the Cabinet Committee.

Vertical and horizontal unbundling of KESC should have been done at that stage by restructuring it. The more capital intensive components like Power Generating Stations, Transmission Lines Networks and the Grid Stations of KESC have been operating satisfactorily from the beginning. It is the Grid Stations’ 11 kV part and downward distribution networks and its losses, new connections, billing, theft, preventive maintenance and mal-administration that were to be considered for privatization in one form or another.

It was very much desirable to restructure the Utility and assign only the selective unbundled functions to different private companies. By selling it to one buyer, the spirit of open market competition (Laissez Faire economy) that normally results in improved efficiency and lower costs, was killed. One monster (monopoly) was replaced by another one, and that too of a foreign origin, hence of even less accountability. Handing over the control to the private monopoly will eventually lead to poor performance, regulatory capture, underinvestment and damage to the public interest.

The Strategic Plan and TA had provided guideline for the government to sell only 25% shares initially and then increase it to not more than 51%. But yet 73% shares were handed over to private party in one go. Valuation of assets was also down played that reduced the share price, Government wrote off Rs 57 billion and converted 83 billion to equity, only to please the buyer. One reason given for privatization is abolishing of subsidies as burden on taxpayer. Why then did government award such a huge subsidy to the buyer? The experience of Manila is that citizens continue to bail-out the private sector with huge subsidies.

Even the pre-qualification of the bidders was not carried out as per rule 3 (b) of privatization5 that requires to evaluate whether the prospective bidders are technically and financially in a position to own, manage and operate the assets being privatized. None of the member of the consortium that took over KESC has any experience of managing, operating or maintaining any power utility. On the contrary M/s Siemens being the manufacturer of electric power equipment, would use this opportunity to become monopolistic supplier of all its equipment to KESC at higher costs. Transfer pricing for concealed profits is not confined to multinational pharmaceuticals. If Siemens sells generation equipment, there is a clear conflict of interest since bad service by KESC leads to higher sales of private generation equipment.

The successful bidder failed to deposit the bid money in time. The bid should have been cancelled as per rules of privatization commission and fresh bids should have been invited. The Agreement was announced months after going through closed door negotiations. To date we do not know the details of actual terms & conditions of the agreement.

There is no evidence that the Privatisation Commission also involved NEPRA to examine and approve the investment and power acquisition program and enforce its standards. It was mandatory for the Commission as per dictates of the NEPRA ACT6 that nominates NEPRA to play its statutory role in this regard and oversee the restructuring process and regulate monopolistic services. NEPRA also prescribes the performance standards that include scheduled and unscheduled outages as well as principles and priorities of load shedding. It approves investment and power acquisition programs and requires detailed profile of experience of the applicant in the power sector. But NEPRA has been kept out of this process which is a gross violation of law.

Decision to sell a Public Utility has very different consequences from privatization of other industries. Since it affects the access to basic services by the public at large, therefore it requires a special set of principles, regulations and rules to be framed for privatization commission if at all part of basic services are to be assigned to private sector. Neither the government nor the Privatisation Commission considered this seriously. The matter regarding privatisation of KESC should have been publicly consulted and informed consent should have been obtained. But it was not even put in the Parliament to seek advice, let alone sought the consent of the Sindh Assembly. It was also mandatory for the government to get its approval from the CCI, which was never done.

Under the provision of Karachi Electric License of 1913, KESC is bound to provide power supply facility to all consumers of its areas, irrespective of income group and locality. Being public utility under State control, certain priorities could be assigned keeping in mind the public interest. After privatization, given the corruption and inefficiency on part of government functionaries and the loose, maneuverable regulatory body, KESC will act only on profit motivation while approving new connections. Poor localities, old town and rural areas under its jurisdiction, would be neglected. It would not define or maintain performance standards.

The experience of Privatisation of electricity in third world countries has demonstrated that the private monopoly Operators always try to raise tariff, expand network on commercial priorities rather than human needs, investments are delayed, desired reduction in power losses is not achieved. The government subsidies will continue to flow in on pretext of higher fuel prices and meeting any emergency in public interest. In short the stated goals of privatization will never be achieved and this will continue in utter violation of Articles 9, 29 and 38 of the Constitution of Pakistan and degradation of quality of life specially for the general public of Karachi.

Besides policies of the federal government and WAPDA, it is the Asian Development Bank that has been a major player in halting the further growth of Generating capacity and neglecting rehabilitation and enhancement of the Transmission & Distribution system. The Asian Development Bank, The World Bank, US AID and IMF have effectively forced Pakistan to privatize generation and to opt for privatization of KESC and WAPDA. Governments of Pakistan, strictly adhering to neo-liberal policies, stopped investing in the power generation and extended free hand to donors to push their agenda.

So far KESC has received loans for five projects. The ADB began its assistance to KESC in 1972. From 1972 to 1983 the Bank loans were mainly meant for the Power Plants. From 1984 to 1994 only one loan KESC 5 was approved for improving Transmission & Distribution system. But it could not be materialized because on pretext of non-compliance in maintaining accounts receivable below 3 months of sales. The Bank imposed embargo on award of contracts due to which some procurement could begin in 1993. Later, KESC 6 loan was approved for the period 1995 to 1998, to rehabilitate & Augment Transmission & Distribution System as well as to facilitate restructuring and privatization of KESC.

The ADB together with USAID and the World Bank had been pursuing with the government the restructuring and privatization of both WAPDA and KESC. To promote privatization of Power Sector in line with neo liberal agenda of the G-8, the Banks adopted the policy to put it as conditionality on approving Sectoral Loans7. In this regard Technical Assistances (TAs) were provided to both KESC & WAPDA to conduct studies through Bank’s consultants. Donors’ agenda is self evident, they represent the interest and policies of G-8 countries and the big transnational corporations who are the share holders/investors of IFIs and earn huge profits by the loans and such privatizations that involve foreign monopolies for take over. But it is our governments that instead of investing in the power sector, prefer to make Presidential and Prime Minister Palaces, buy Mercedes Cars & luxury planes worth billions and spend more on non-productive sectors. Had the present military regime invested in increasing power generation capacity of Pakistan after take over, the country in general and Karachi in particular, could have avoided the Power Crises.

The sequence of policy and sensitive decisions, and coordination between the government and the donors in the power sector of Pakistan is worth noting: From the mid 80s the Government despite having good financial resources, does not invest or develop the power sector. In late 80s it signs the Structural Adjustment Plan with the IMF and adopts Neo Liberal Policies. The donors also do not provide loans for power generation and instead provide Technical Assistance, and depute consultants to conduct studies. The advice comes for privatization of power and energy sectors in 1992. The government approves the reports without critically examining them or putting the reports for public debate to formulate national policy. Based on Donors’ recommendation, the government adopts Strategic Plan for Privatisation of Power Sector in the same year and amends WAPDA Act 1994 to privatize its generating plants. The Power Policy is also adopted in the 1994 to attract the private sector to invest in the power sector and ensure sufficient generation capacity. The policy allows full flexibility to independent power producers (IPPs). But instead of improving, we have greater shortage of electric power in the country and this is despite paying exorbitantly high rates to IPPs like Kot Addu and Hubco power plants after succumbing to the Bank’s pressure.

Karachi Electric Supply Corporation was established in 1913 as a joint stock company to provide electric power to Karachi and its adjoining areas. In 1951 the Government acquired 51% of the shares. Subsequently the Government’s share was increased to 93% of KESC’s total equity and management control was handed over to Pakistan Electric Agencies (PEA) Limited whose nominee was posted as Chairman and Managing Director. But the Government intervention was minimal and it was allowed to run KESC quite independently. Up till 1970s it demonstrated efficiency and professionalism. In 1977 decision to handed over KESC to the province was announced but martial law regime of General Zia Ul Haq acted swiftly to take it back to the central government. As if it was not enough, in April 1984, the martial law authorities handed over its control to the Ministry of Water & Power. The WAPDA Chairman was also made the Chairman of KESC Board, the WAPDA member finance became Chairman PEA Board and a Chief Engineer of WAPDA was appointed as Managing Director of KESC. This was the second phase marked by penetration of Wapda’s bureaucracy, inefficiency, increased line losses, increased arrears, delays in completion of power generation units 4 and 5 at Bin Qasim and suspension of reinforcement/augmentation of transmission and distribution networks. Adequate funding was never provided to coup up the system with increasing demand. Later, the tight control of WAPDA was also removed and federal government kept deputing bureaucrats as well as technocrats of its choice through the Ministry of Water & Power.

The process of bureaucratization reached its peak in the third phase after military takeover of the country, when KESC was given under army control in 1999. Pakistan Army has been the biggest defaulter of WAPDA for decades. Inefficiency, corruption, wrong priorities, adhocism, non-transparency, non participation of other stake holders and delays in implementing power projects rose to new heights. During the army control, due to unnecessary harassment of its technical staff, KESC has witnessed the volunteer departure of the most competent technical staff besides the increase in Transmission & Distribution system losses from 17% in 1985/1986 to above 40% in 2001/2002. By 2002, KESC was suffering with nearly Rs 18 billion losses8, whereas KESC has been making profits till 1995 since its birth in1913. Even NEPRA in its document (Nepra/trf-14/KESC-2002/4121-23), parts of which were published in DAWN of July 9, 2003 after three years of Army takeover, says “We agree that the financial condition of KESC has reached an unsustainable level. The experiments with public sector management through non-traditional methods including the induction of army personnel in uniform as top managers has not shown any significant improvement in reduction of technical losses and pilferage”.

Thus it is evident that the history of KESC for the last 30 years, has been a history of increased federal control and increased bureaucratization, resulting in inefficiency, corruption, mismanagement and heavy financial losses. KESC in its original form, is a public limited company and it has demonstrated its superior performance as electric power operator, when it was allowed to do so during its first phase ending in 1984. It were the external (federal as well as donors) controls that have been responsible for its destruction.

The new management has done nothing to reduce Transmission & Distribution System losses that remain nearly 40%. It has hardly put any money in reinforcement and augmentation of the distribution system, in increasing the capacity of Grid and Sub Stations that was promised in the agreement. Similarly, there are no signs of construction of new power plant for Karachi as promised. The management has also miserably failed to address the issues of reliability of supply, proper adjustments of protective Relays & Protection system or introduce the concept of preventive maintenance. No improvement in management or reduction in corrupt practices in billing, sanctioning of load and permission for new connections is visible.

Disregarding non transparency and possible foul play in privatization, it is true that all the problems public is facing, already existed with lesser intensity. Handing over the management control back to the old guards will not solve the problem. It will have to be radically reorganized and restructured. The alternate Restructuring should acknowledge that markets will not satisfactorily mediate critical social relationships of rights and obligations in essential services. In other words, reforms should not diminish the social responsibility towards citizen rights in exchange for efficiently responding to consumer privileges. The restructuring should encompass unbundling as well as both institutional and organisational restructuring of KESC. Reasonably efficient power supply has to be provided at affordable prices to all citizens. If this means that a minority will have to switch off air conditioners or depend upon self generation, then that must prevail until the rich pay their fair share of taxes. Conversion of the bureaucratic organization to a performance based, effectively regulated, transparently monitored organization should be the objective of restructuring.

To begin with, the Federal Government should revoke the agreement with the new management of KESC and preserves the principle of public ownership of this vital public utility. To facilitate decentralization in unbundling, shares should be transferred to Sindh government, CDGK and towns of Karachi district. The KESC should then be restructured and vertically unbundled in Generation & Transmission, Grid Stations, Primary & Secondary Distribution systems. The ownership and management control of the unbundled entities is to be transferred as under:

· Generation and Transmission to the Government of Sindh,

· Grid stations to the City District Government

· Primary & Secondary Distribution system to the Towns

Accountability demands that the federal government should hold an enquiry through a commission headed by renowned judges of the superior courts, to fix responsibility on those who are responsible for this shabby deal. Disciplinary action against those who are found guilty should be taken.

The City District Government of Karachi through invitation of public tenders, should award the management contract of the primary and secondary distribution system of the 52 (or so) Grid Stations to local private parties with the responsibility to operate and maintain the distribution system, manage billing and provide new connections in their respective service areas. These private operators will also be responsible to invest in rehabilitation and modification of existing distribution system. But expansion in 11kV distribution system would be the responsibility of the respective Towns till such times when the new operators develop the financial and technical capability of the same. This would give opportunity to more than 50 local entrepreneurs / companies to get business and improve economy of the City instead of handing over KESC to foreign monopoly that will take huge profits out of country. Payments to the operators should be linked to their performance such as availability of power, new connections, reduction in Distribution losses and bill collection efficiency etc. Management Contracts in this regard may be drafted carefully and put to public scrutiny before finalization. Creation of a new Local Regulatory Body at City level would be necessary to generate competition, increase efficiency and reduce costs since NEPRA will remain subservient to Islamabad. The regulations should be formulated by the City Council after going through public hearings and building informed consent. The City Council will also act as Oversight body for the regulators.

Financing will definitely be a core issue. The problems have developed because after 70s, no government made investments in generation, or put the desired investment for rehabilitation and augmentation of T & D system. Therefore it is the obligatory for the Government of Pakistan to continue its annual subsidy of the tune of Rs. 12 billion to KESC to minimize its losses, for a maximum period of next three years. It is expected that the level of government subsidy will substantially reduce as the new operators will also be investing in the system and stopping leakages that affect their profits. For public financing of other activities, funds may be raised through tax-exempt municipal bonds issued by the City Government.

Last week the government allowed WAPDA to come up with new generation schemes. Therefore it will be logical that the government also invests in increasing Generation capability of the industrial hub of the country by installing combined cycle generating units at the sites of Korangi Thermal Power Plant, Bin Qasim Plant and West Wharf Power Plant. All three sites already have a developed infra-structure and switch yards connected to transmission networks and conversion to combined cycle will also improve efficiencies of these plants. Capacities of Korangi Township Plant and SITE Station may be enhanced with or without participation of private sector, as a short term measure to provide peak loads.

The Alternate Energy Board has demarcated lands for establishment of Wind Parks near Gharo and has signed at least three LOIs and has leased out some land for the same. To date no scheme is coming up despite the assurance of government to purchase the power generated. Initial investment levels for wind parks will be higher than the conventional ones. Therefore they might demand higher rates for their units sold. Keeping in mind the trend of increase in fuel cost for conventional plants and environmental considerations, the government should consider the subsidy in this regard like European governments. Future is wind energy. Europe is aggressively pursuing wind energy and its share will reach 25% of the entire generation in next 20 years. The investment and subsidies in power sector may look exorbitant and questions of finance is raised, but at the end it is a question of priorities whether we need military hard ware worth over US$ 6.5 billion or power plants and T & D networks to keep our industries running and save our economy and people from slipping into dark ages.

Immediate and cost effective measures are needed to lower the peak demand of the load till Karachi gets additional power with reliability. It is an irony to have 40% shortfall in generating capacity of the city and yet a very high air-conditioning load is being maintained. If the television advertisements are some indication, the A/C load is increasing at an alarming rate. Measures like revising tariff for commercial and residential consumer’s category to make it progressive (higher for those having higher demand) and installation of time of the day meters to charge at higher rates during peak hours could be considered. After defining new tariff rates, penalties may also be imposed on those who are violating these guide lines. All the street lights, Neon signs and bill boards etc may be controlled through solar cells that will keep them off from sun rise till late evening. Solar cell circuits will be very cheap to install. Higher charges for consumption of electricity by such loads may be introduced. After all we should not promote excessive consumption of non-essential consumables at the cost of industrial production, commercial and office activities and residential demand. Penalties may be imposed on shops, restaurants, marriage halls and on all such commercial installations that light any bulb outdoor or in front part of premises, from 6 pm to 9 pm. Town councils may assign special magistrates for this purpose. Energy saving devices and bulbs may be promoted in the residential areas.

Installation of Co-generation in large commercial buildings and industry is to be promoted and necessary incentives should be given because of its efficiency and hence reduced fuel costs.

Needless to say that had there been a popular government responsible and responsive to public needs, peak demand could have been reduced drastically through guidelines and pursuance, no punitive measures were required.

1. Preliminary Notice: Privatisation of the Karachi Electric Supply Corporation

DAWN March 27,1998

2. Privatisation Process, Document of Privatisation Commission at its website

3. TA 1655-PAK, Final Report issued Sept 1992 from Asian Development Bank

4. Privatisation Process, Document of Privatisation Commission at its website

5. Privatisation (Modes and Procedure) Rules, 2001, Privatisation Commission

6. NEPRA ACT of 1997 National Electric Power Regulatory Authority

7. RRP:PAK 25389 KESC SIXTH POWER (SECTOR LOAN) PROJECT

8. 90th Annual Report 2002, KARACHI ELECTRIC SUPPLY CORPORATION (LTD)

Muhammad Nauman, department of electronic engineering

NED University. Cell: 0345-2228006, Res: 4990566