Privatizing
Power
On February 4, 2005,
the privatization of Karachi Electric Supply Corporation
finally took shape as a Saudi Consortium, the Kanooz
Al-Watan, which includes the German engineering
firm Siemens, submitted the highest bid. Counting
a financial commitment made by the buyer, the winning
bid was for about 20 billion rupees in exchange
for 74% of the company. It appears the bidder also
took on about 10 billion rupees of KESC debt, so
the net receipt of the government was about 30 billion
rupees or 500 million dollars. KESC supplies Karachi
with electricity, and has 1.8 gigawatts of installed
capacity.
Due to insufficient
upkeep, that capacity has eroded to 1.2 gigawatts
in reality. The power sector in Pakistan has up
till now been totally state-owned, except for some
independent power generators set up in the 1990's.
WAPDA, which supplies the rest of the country, has
been broken up into eight electric supply companies.
Both WAPDA and KESC are chronic money-losers, and
have required heavy subsidies from the government.
KESC alone was costing the treasury 1 billion rupees
a month, which the government will no longer have
to pay. Another 50 billion rupees per year subsidize
WAPDA. Total power subsidies per year run to over
60 billion rupees, more than the budget for higher
education or roadbuilding.
As long as the government
runs the power companies, those subsidies will not
end. The reason is that no government could muster
the incentive to clamp down on the inefficiencies
of the power sector. The biggest issue is what is
called "line loss" or what is known also as stealing.
Many people tap into the electric grid and essentially
siphon off power on their own. This power theft
has been a longstanding problem, and runs as high
as 35% of power output by the electric companies.
Second, the current (government) managers of the
power companies are not motivated by profit and
efficiency. As such, the companies are not run under
the best global practices, but muddle along in a
second-rate manner that leaves the companies dependent
on government bailouts.
The privatization
of KESC is thus a major test case. Can the private
owners reduce line losses, increase efficiency,
expand electric production, and turn a profit, while
hopefully not having to fire employees or raise
electric rates? If the new owners of KESC can do
this, then the momentum to privatize the rest of
Pakistan's power sector will be sustainable. According
to the government, there is already a plan of action
to move more of the power sector under private control.
In late February, a large stake in Kot Addu Power
Company, which is a power generator only, will be
sold through the stock market.
In the second quarter
of 2005 the plan is to sell HESCO, Hyderabad Electric
Supply Corporation, and in the first quarter of
2006, Peshawar Electric (PESCO) is slated for sale.
But the sale of HESCO and PESCO will likely turn
on what happens at KESC. If the power sector is
successfully privatized, it will perhaps be the
greatest achievement of Aziz's government. By getting
rid of a 60-billion rupee annual subsidy bill, the
government will have freed up huge funding for education,
health, and infrastructure. The new private owners
of the power companies should be able to make this
work. With a surging economy, electricity demand
is rising at 7% per year or faster. In this high
growth environment, good management should be able
to turn a profit.
