Karachi Electric (KE) Emails and Pakistan Government Emails Intercepted by Wikileaks

Email 1

Email Intercepted of Karachi Electric (KE) by wikileaks
2009 February 12, 07:27 (Thursday)
C O N F I D E N T I A L SECTION 01 OF 03 KARACHI 000053 SIPDIS E.O. 12958: DECL: 02/12/2019 TAGS: ENRG, EFIN, EINV, PK

SUBJECT: SINDH - UNRESOLVED DEBT ISSUE COULD SHORT-CIRCUIT KARACHI ELECTRIC DEAL

REF: A. KARACHI 21
B. 08 KARACHI 508
C. 08 KARACHI 587
D. 08 KARACHI 533
E. 08 KARACHI 199
F. 08 KARACHI 420
G. 08 KARACHI 600
H. KARACHI 32

Classified By: Classified by Consul General Stephen G. Fakan for reason s 1.4(b) and (d). 


1. (C) Summary: In a January 27 meeting Karachi Electrical Supply Company (KESC) Managing Director Naveed Ismail told the CG that the Dubai-based Abrajj Group may not finalize the purchase of KESC unless the Government of Pakistan (GOP) assumes a debt that could run as high as $1.06 billion to the federally owned Water and Power Development Authority (WAPDA). WAPDA provides KESC power on an as-needed basis, but there is a major disagreement on price. Although KESC receives widespread criticism, Ismail is confident that he can turn the firm into a profitable corporation, and has taken such bold steps as slashing 10,000 jobs and turning off power at government agencies which haven't paid their bills. Until the WAPDA debt impasse and the larger "circular debt" issue are resolved, however, the possibility of Abrajj's handing KESC back to the cash-strapped GOP remains. End summary.

The WAPDA Debt: A Deal Breaker ------------------------------

2. (SBU) The Karachi Electric Supply Company (KESC) announced that Dubai-based Al Abrajj Capital, a consortium of private investors and sovereign wealth funds, would take over the company in July 2008 (ref F), but Abrajj did not assume operation of KESC until September 2008. At the time, KESC owed $620 million to the federally owned Water and Power Development Authority (WAPDA), which supplies electricity to KESC.
3. (SBU) WAPDA, for its part, claims KESC may owe it as much as $1.06 billion. The discrepancy arose over how the electricity was priced. Abrajj can still cancel the KESC purchase if an agreement is not reached on this issue. Ismail told the CG he wants the deal to work if at all possible, but his company is prepared to walk away from KESC if this is not fixed. Ismail emphasized that Abrajj does not have a set deadline to resolve the issue, but they are insistent that the GOP assume the entire debt, the amount of which has not yet been agreed upon.

Circular Debt an Impediment ----------------------------

4. (SBU) KESC's debt to WAPDA is part of a larger "circular debt" issue plaguing Pakistan's energy industry, which has its genesis in GOP subsidies. Power plants acquire fuel from distributors at a GOP-controlled price, which may not reflect the actual market cost. Since consumers are not paying full market rates for power, billing receipts are not sufficient to cover the electricity provider's actual fuel costs.
5. (SBU) WAPDA, which supplies or supplements many of the electricity providers, is not collecting enough revenue to pay power generation expenses. GOP subsidies intended to cover the difference are often delayed, making payments to fuel providers chronically late. As a result, the GOP has pressured many fuel providers to accept longer billing cycles or to cut prices, which impacts their ability to fund necessary imports.

Frustrating Missed Opportunities --------------------------------

6. (C) Ismail is frustrated by the fact that KESC nearly reached a deal with the GOP on the WAPDA debt under the previous Musharraf administration. The current government became reluctant to take on the WAPDA debt once it decided to accept IMF assistance, however, according to Ismael. Abrajj has already provided a USD 42 million loan to KESC and the KARACHI 00000053 002 OF 003 GOP retains a 25 percent stake in the company.

No Winners if Deal Fails ------------------------

7. (C) Both Abrajj and the GOP stand to lose if the deal falls through. More disturbing is the possibility that the GOP may end up operating KESC again, after first privatizing the company in 2004. (Comment: Rashid Rabani, Advisor to the Chief Minister of Sindh, told Econ Officer on February 4 that his party, the Pakistan Peoples Party (PPP), wants to re-nationalize KESC. However, he was not sure if the PPP could get a mandate to do so. Federal Minister for Privatization Naveed Qamar ruled out any possibility of reversing the privatization of KESC in an interview with the Business Recorder on February 7. End comment.)

Unfulfilled $350 Million Pledge -------------------------------

8. (SBU) After Abrajj took control, Ismail became KESC's Managing Director and Abrajj pledged to invest USD 350 million to upgrade the company's power generation and distribution system. (Comment: Since the average age of KESC,s generators is 27 years old and 99 percent of their electricity comes from burning oil, an upgrade of KESC equipment is much needed. End comment.) Abrajj has not yet made the promised investment and some observers think the company may back out off its agreement to purchase KESC instead of making the $350 million investment (ref A).
9. (C) Ismail revealed that in addition to its stated pledge to invest $350 million, Abrajj may invest another $450 million and seek total capital investment in KESC of around $4-$5 billion. He also said that he doesn't have confidence in KESC's in-house audit staff and uses Price Waterhouse Cooper (PWC) to conduct audits.

Abrajj Makes Improvements, Has Plans ------------------------------------

10. (C) Ismail told Islamabad Commercial Counselor on February 4 that, since September, he has slashed 10,000 positions from KESC's payroll and turned off the power at more than one GOP agency for non-payment, including an Army installation. Abrajj plans to hire consultants from McKinsey and Company and is considering filing suit against former KESC operator Siemens for non-performance. (Comment: Ismail believes Siemens made unnecessary purchases of their own equipment while running KESC. End comment.)

Wanted: Energy Policy ---------------------

11. (SBU) Ismail sees a path forward for KESC but believes it will be painful. He sees modernization of KESC's plants and switching from oil to gas or coal generators as the key to the company's future. Raising electric rates or taxes will be difficult for the GOP. Ismail also has a long list of operational problems that must be fixed. Widespread theft of electricity is common, as are dishonest meter readers and customers who simply refuse to pay their bills, reducing KESC's expected monthly collections from $94 million to $80 million. Ismail hoped energy conservation measures could help lessen demand, but noted that the coming summer months will bring peak demand for electricity. Comment -------

12. (SBU) Ismail, whose comments to the CG mirror those he made during a February 4 meeting with Islamabad Commercial Counselor, has nearly forty years experience in the utility business and has built a career out of repairing troubled power companies throughout the world. In Pakistan, he previously served as country director for AES Corporation, one of the largest independent power producers in the country. A proponent of developing Thar coal to meet the country's energy needs (ref H), Ismail is an advisor and close confidant of Dr. Asim Hussain who heads the Ministry of KARACHI 00000053 003 OF 003 Petroleum and Natural Resources.

13. (SBU) Ismail faces a sizable challenge but isn't shrinking from it. He proudly mentions operational improvements such as the addition of 120 megawatts to KESC,s generation since his arrival. Ismail has proposed adding a few cents to each customer's monthly bill to amortize the WAPDA debt over a period of years, an idea the GOP has yet to embrace. The withdrawal of Abrajj Capital could force the GOP to step in and take on financial obligations it can ill afford. FAKAN FAKAN

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Email 2


UNCLAS SECTION 01 OF 02 KARACHI 000211

SENSITIVE SIPDIS

E.O. 12958: N/A TAGS:
EIND, ENRG, ECON, PK

SUJECT: KARACHI - ONGOING POWER OUTAGES LEAD TO CALLS FOR NATIONALIZATION


REF: A. 08 Karachi 173
B. 08 Karachi 420
C. 08 Karachi 458
D. 08 Karachi 533
E. 08 Karachi 587

1. (SBU) Summary: Electricity supply, a perpetual problem in Karachi, deteriorated further as demand increased in the summer heat of May. Karachi Electric Supply Company (KESC) resorts to load shedding and several major interruptions to the power supply have caused protests in the city and serious disruptions to industry. Local and national politicians are closely watching the situation amidst some calls for re-nationalization of the KESC. End summary.

2. (U) As the temperatures in Karachi rose during the month of May, rolling power outages (known locally as load shedding) increased, and residents in various parts of the city reported 8 to 10 hours of load shedding per day, while in a few areas claims of power outages reached up to 20 hours. Protests, some turning violent, have often been directed at the KESC; several of their customer service centers have been attacked and service trucks set on fire. So great is the frustration that protestors even took to pelting passing vehicles with stones.

3. (U) According to KESC CEO Naveed Ismail, by early June the summer heat had already increased demand by 35 percent, and he estimated that as the temperature continued to climb, the demand on the system due to increased use of fans and air conditioners would increase by 640MW. Since according to some estimates the grid was already 600MW to 800MW short of meeting normal demand, the only recourse left to KESC was further load shedding

4. (U) By early June the situation had reached crisis proportions and was affecting local businesses and industry. City and provincial politicians called daily for the government to nationalize the KESC, which was privatized in 2005, and is still the only private power company in Pakistan. The federal government formed a special committee to look into the KESC management and load shedding in Karachi. The Karachi city council adopted a resolution on May 26 calling for the handover of KESC to the city government, which would run the utility using a group of experts. In response, KESC announced a 100-day summer plan to bring load shedding to an end and decrease electricity theft.

5. (SBU) Electricity theft is a major problem for the KESC and, in a city as large as Karachi with little or no enforcement authority or oversight, it is very difficult to overcome. Ismail told EconOff that even prominent Karachites and government entities with the means to pay their tariffs do not pay some or all of their electricity bills. He added that, ironically, the people in the neighborhoods with the highest levels of electricity theft are those who generally protest the most against load shedding. As part of the 100-day plan, KESC hoped to conduct 10,000 raids against defaulters and thieves by July.

6. (SBU) Further compounding the problem, on June 17, Karachi suffered a massive blackout when a thunderstorm in another part of Sindh damaged a major power transmission line. The disruption caused blackouts in nearly 85 percent of Karachi. In an effort to find some relief from the heat, residents slept in parks and on the streets; in addition, at least half of the city was without water because pumping stations could not operate. It took several hours before power began to be restored, and in much of the city it was well into the next day before any power returned.

7. (U) A light rainstorm on June 25 again disrupted the power supply to many parts of the city and caused residents and politicians to question what will happen to the power grid when the monsoon rains reach full strength in July. This question has led to intensified calls by politicians to reverse the privatization of KESC.

8. (SBU) The current owners of KESC, the Dubai-based Abraaj Capital, only finalized the purchase in April. (Note: In 2005, Saudi's Al-Jomaih Group and Kuwait's National Industries Group purchased KESC. In early 2008, Al-Jomaih approached Abraaj for a purchase offer. End note.) Ismail told EconOff that electricity KARACHI 00000211 002 OF 002 demand increases by 7 to 10 percent each year, but the last major investment in power generation or grid maintenance was over 25 years ago. As a result, during the summer months there is a shortfall of several hundred megawatts. The company plans to invest $360 million in upgrades to the transmission system and construction of new power generation capacity over the next few years, including plans to build four coal-powered plants over the next five years. In an attempt to curb wastage, KESC has also launched a conservation campaign in an effort to save 200 to 250MW per year.

9. (SBU) Ismail told EconOff that he attempts to manage the load shedding to avoid industrial areas, government hospitals, or other vital institutions. However, many business owners in the major industrial estates tell Post their biggest problem is load shedding. As the largest factories often produce their own power, it is the medium and small businesses with lower margins that are suffering the most.

10. (SBU) Comment: Regardless of the actions taken by KESC it will not be able to eliminate load shedding as the summer continues. The advent of the monsoons could very well exacerbate the problem if, as on June 25, the system is unable to withstand even moderate rain. Protests against KESC will likely continue throughout the summer and during periods of particularly egregious load shedding. KESC's problems are symptomatic of those facing the country as a whole. For example, on June 30 the turbines at Mangla Dam, which normally supplies 1100 MW to the grid, broke down when they were pushed to produce 1150 MW. It will take at least two weeks to repair them and restore this power supply. Even with increased investment and system upgrades it will take KESC three to five years to produce noticeable results. Power will meanwhile continue to be a contentious economic and political topic in Karachi, and will continue to generate unrest in the streets. End comment. FAKAN   


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Email 3


UNCLAS SECTION 01 OF 05 ISLAMABAD 001623
SENSITIVE SIPDIS
E.O. 12958: N/A
TAGS: ENGY, EFIN, ECON, EINV, PREL, PK

SUBJECT: NAVIGATING THE MAZE OF PAKISTANI ENERGY POLICY- PART ONE REFS: A) Islamabad 00655 B) Islamabad 00810 C) Islamabad 00921 D) Islamabad 01420 E) Karachi 199


1. (SBU) SUMMARY: Pakistan's energy crisis has the potential to slow down economic growth and create law and order problems. With massive blackouts affecting every region and every demographic, energy policy and shortages are daily front page news. Not a single mega-watt of electricity has been added to Pakistan's national grid since 2000 despite record breaking economic growth and population expansion. With economic and manufacturing capacity slumping due to power outages, unemployment is increasing while tempers and temperatures are rising. Complicating the situation is the complex maze of GOP policy makers who cannot coordinate Pakistan's energy policy due to overlapping and contradictory authorities. As a reference for USG efforts in providing aid to Pakistan's energy sector, the following serves as a roadmap of GOP energy policy making bodies and entities. END SUMMARY

2. (SBU) This three part cable reviews the haphazard mix of horizontally and vertically placed institutions which comprise the energy policy making sector of Pakistan. Part one explains the Ministry of Water and Power and its 19 subordinate agencies involved with electricity. Part two, in "Navigating the Energy Maze," will address the Ministry of Petroleum and National Resources and the 16 subordinate agencies. Part three will address the other 4 Ministries and 7 other agencies involved in and at various levels of the GOP energy policy process. A lack of coordination and absence of any clear line of authority hampers any formulation of policy efforts to address the current energy crisis in Pakistan.

3. (SBU) This is a continuation of cables on Pakistan's energy sector.


---------------------
A SIMPLIFIED OVERVIEW--------------------- 


4. (SBU) The lead line agency in government for the electric power sector is the Ministry of Water and Power. However, the Ministry of Petroleum and Natural Resources controls fuel supplies; the Finance Ministry holds the purse strings; the Planning Commission manages the investment approval process; and National Electric Power Regulatory Authority (NEPRA) regulates companies operating in the power sector. These operating companies include the Water and Power Development Authority (WAPDA), owner of the public sector hydro power plants, and the Pakistan Electric Power Company (PEPCO), the holding company for WAPDA.

5. (SBU) PEPCO includes three power generating companies (GENCOS), in the south, center and north; the National Transmission and Dispatch Company (NTDC), a central purchaser, dispatcher and wholesaler of power; the Central Power Purchasing Agency (CPPA) which has been set up as an autonomous body to acquire power from the generation companies (GENCOs), on behalf of the distribution companies (DISCOs), and deliver it via the NTDC network; nine power distribution companies (DISCOS), including one for the Federally Administered Tribal Areas; the Karachi Electric Supply Corporation, a private generation and distribution company covering Karachi; and the independent power producers (IPPs), the privately-owned power generation companies selling to the NTDC.

----------MINISTRIES
----------


6. (SBU) Each federal ministry in the Pakistani government is headed by a Minister. A Secretary (a vice Minister equivalent) heads the administrative functions of the Ministry and is assisted by varying numbers of second tier Additional Secretaries and Members. While Additional Secretaries are career civil servants with functional and administrative background in that Ministries' functional area, Members are subject specialists with specific professional qualifications. At the third and fourth tier of each ministry are varying numbers of Joint Secretaries and Deputy Secretaries. In the energy policy making arena, each committee and subordinate agency contains a crisscrossing network of appointments from this cadre to ensure full authority by the federal government over the "privatized" joint ventures and provincial bodies. ISLAMABAD 00001623 002 OF 005


---------------------------
Ministry of Water and Power---------------------------


7. (SBU) The Ministry of Water and Power (MWP) develops all policy relating to water and power as well as the strategic and financial planning for both the public and private sector. A Secretary heads the administrative functions and is assisted by an additional secretary, three joint secretaries, an advisor and a member. SIPDIS
8. (SBU) The Ministry of Water and Power monitors activities in the fields of power generation, transmission and distribution, and performs a supervisory and advisory role for the power sector's overall smooth operation. MWP reviews all public sector power projects submitted by the Water and Power Development Authority (WAPDA) and its 19 "unbundled" corporations with a mandate to scrutinize the technical and financial viability. Similarly all private sector projects in the power sector are approved by the Private Power and Infrastructure Board (PPIB) under the close supervision of the MWP which sets the policy guidelines for approval. The MWP also oversees preparation of the five year plans and the Annual Development Program (ADP) in the water and power sector. Areas of conflict arise due to this delegated oversight review capacity delegated to the MWP which pits government oversight against private sector competitiveness.
9. (SBU) In its water capacity, the MWP also coordinates inter-provincial water sharing issues and activities related to irrigation, drainage, water logging and monitors the operation of Indus Water Treaty of 1960 between Pakistan and India. The Water and Power Wing are the main functionaries of the MWP including office of Chief Engineering Adviser/Chairman, Federal Flood Commission and PPIB.

-------------------------------------
SUBORDINATE ORGANIZATIONS OF THE MWP
-------------------------------------


10. (SBU) There are 19 subordinate, yet distinctly independent organizations, which report to the Ministry of Water and Power. Descriptions follow below.

-------------------------------------
Water and Power Development Authority-------------------------------------


11. (SBU) With a umbrella workforce of 175,000 employees, and 14 subordinate agencies, Pakistan's Water and Power Development Authority (WAPDA) is one of the largest employers in Pakistan. WAPDA, Pakistan's only remaining public sector utility company, was created in 1958 to coordinate and develop the water and power sectors. WAPDA is headed by a Chairman, appointed by the Prime Minister for a three-year renewable term.
12. (SBU) Since October 2007, WAPDA has been separated into two distinct entities: WAPDA and the Pakistan Electric Power Company (PEPCO). Headed by a Chairman and assisted by three Members, for water, power and finance, WAPDA is responsible for water and hydropower development, whereas PEPCO is responsible for overseeing the privatization efforts related to thermal power generation, transmission, distribution and billing. However, privatization efforts have remained stalled for over a decade and WAPDA continues to forestall approval of drastically needed reforms to allow the unbundling to continue.

-------------------------------
Pakistan Electric Power Company-------------------------------


13. (SBU) Established in 1992, Pakistan Electric Power Company (PEPCO) was established as a state owned private limited management company to manage and oversee activities related to privatization. PEPCO now has an independent Chairman and Managing Director. While GOP interlocutors tout PEPCO's independence, in practice PEPCO must get approval from WAPDA for decisions who in turn seeks approval from the MWP. "Privatization" has not translated into "independence" in Pakistan's energy sector. ISLAMABAD 00001623 003 OF 005

14. (SBU) The unbundling of the power sector has resulted in the formation of fourteen corporate entities; three power generation companies (GENCOs), one national transmission and power dispatch company (NTDC) and nine distribution companies (DISCOs). These companies are each working under independent Boards of Directors. Yet, WAPDA still controls the finances of all these companies and in turn must get permission from the Ministry of Water and Power to make payments to each entity.

15. (SBU) Despite GOP claims that these companies are administratively autonomous, none of these distribution companies have any autonomy over their finances sixteen years after creation. Privatization efforts have stalled due to the inability of these companies to set their own tariffs based on the marginal cost of their individual production and largely because of the GOP's continued use of fuel subsidies which prohibits any free market price stabilization.

16. (SBU) The three GENCOS are Jamshoro Power Generation Company covering the south, Central Power Generation Company covering the central areas, and Northern Power Generation Company covering the north. The nine DISCOs include Faisalabad Electric Supply Company (FESC); Gujranwala Electric Supply Company (GESC); Hyderabad Electric Supply Company (HESC); Islamabad Electric Supply Company (IESC); Karachi Electric Supply Corporation (KESC); Lahore Electric Supply Company (LESC); Multan Electric Supply Company (MESC); Peshawar Electric Supply Company (PESC); and FATA Electric Supply Company (FATA ESC).

-----------------------------------
Karachi Electric Supply Corporation-----------------------------------


17. (SBU) The Karachi Electric Supply Company (KESC) was incorporated in 1913, and the Government of Pakistan took control by acquiring a majority shareholding in 1952. As Pakistan's only "private" sector utility company, KESC's privatization was finalized in November 2005 with the transfer of management control and a 73 percent share from the GOP. KESC is listed on the Karachi, Lahore and Islamabad Stock Exchanges.

18. (SBU) KESC generates, transmits and distributes electricity. KESC provides electricity to some 12 million people through two million connections over a 6000 square kilometer area. Its two million connections reach a customer base that is primarily residential (1.5 million) and industrial (425,000).

19. (SBU) Despite privatization, the MWP meddles in the business affairs of KESC to ensure consistent electricity rates, manage the KESC debt and also gives permission to WAPDA to bridge any demand and supply gaps. KESC is not free to set its own tariff rate and thus operates at a loss. The GOP's use of fuel subsidies forestalls KESC's ability to charge competitive market rates.

20. (SBU) KESC is still purchasing electricity from WAPDA to meet its needs two years after privatization. Infrastructure upgrades cause severe strain on KESC's financial resources. As a result, WAPDA and KESC have continual payment disputes. Most recently, in March 2008, WAPDA literally turned the lights off, plunging Karachi's 12 million people into darkness for up to 8 hours in various parts of the city because KESC owes WAPDA USD 558 million. While WAPDA only cut the electricity for 1 hour and 25 minutes, KESC was unable to restart its systems properly due to its outdated equipment. (Ref E).

--------------------------------------
Private Power and Infrastructure Board
--------------------------------------


21. (SBU) The Private Power and Infrastructure Board (PPIB) was created in 1994 to facilitate private sector investment in power generation with a "One-Window" facility for the establishment of power projects and related infrastructure. PPIB is responsible for the negotiation of implementation agreements, establishing investor incentives, and clarifying investor rights and obligations. PPIB also provides a guarantee to the individual power producers (IPPs) for the performance of the power purchaser and fuel supplier. It ISLAMABAD 00001623 004 OF 005 also assists the regulatory authority (NEPRA) in determining and approving the tariff for new private power projects.

22. (SBU) PPIB also provides support to the power purchaser and fuel supplier while negotiating the Power Purchase Agreement (PPA), Fuel Supply Agreement (FSA)/Gas Supply Agreement (GSA), other related agreements, and serves as a liaison with local and international agencies for facilitating and expediting progress of private sector power projects.

23. (SBU) The Minister for Water and Power serves as the Managing Director of the PPIB. The organization is governed by a Board of Directors which consists of the Minister for Water and Power; the Advisor to the Prime Minister on Energy; the Secretaries from the Ministries of Water and Power, Petroleum and Natural Resources, Finance, and the Board of Investment, plus the Member Planning Commission, the Chairman of WAPDA and the Managing Director of PPIB. The Managing Director is responsible for the administrative control of the organization and is assisted by four directors in the areas of administration, finance, projects and legal.

------------------------------------
Alternative Energy Development Board
------------------------------------


24. (SBU) The Alternative Energy Development Board (AEDB) is mandated to act as a "One-Window" facility for establishing, promoting and facilitating renewable energy projects based on wind, solar, small-hydel, fuel cells, tidal, ocean, biogas, and biomass.

25. (SBU) AEDB is governed by a Board of Directors chaired by the Minister of Water and Power. The other members are the MWP Chief Executive Officer, AEDB Secretary, Advisor to the Prime Minister on Energy, and Secretaries from Ministries of Finance, Water and Power, Science and Technology, Petroleum and Natural Resources, Planning Commission and Environment. The board also has three Members from the private sector.

26. (SBU) The GOP has tasked the Board to ensure that five percent of the total national power generation capacity (or approximately 970 MW) will be generated through renewable energy technologies by the year 2030. In addition, under the remote village electrification program, AEDB has been directed to electrify 7874 remote villages in Sindh and Balochistan provinces using renewable energy. The AEDB is responsible for creating development which incorporates private sector participation in plans for solar products, including lights, fans, stoves, and heaters.

27. (SBU) The AEDB has thus far issued 94 letters of intent to potential investors for setting up 50 MW wind power plants; however, none are operational yet because of on-going land title disputes and the absence of a set tariff. The inability of the AEDB to produce tangible projects resulted in internal political shifts. While established in May 2003 as an autonomous Cabinet division, the administrative control of the Board was downgraded to be subservient to the MWP in February 2006, and the subsequently ruffled feathers are still visible in turf wars over control of various projects.

-------------------------------------------------

Pakistan Council of Renewable Energy Technologies
--------------------------------------------- ----


28. (SBU) Under the administrative control of the Ministry of Science and Technology, the Pakistan Council of Renewable Energy Technologies (PCRET) coordinates renewable energy technology research and development. PCRET is actively involved in research and development activities in photovoltaic, solar thermal applications, micro-hydel power plants, biogas plants and wind energy. AEDB and PCRET have duplicative mandates, yet AEDB falls under the MWP and PCRET under the Ministry of Science and Technology. 

--------------------------------------
National Engineering Services Pakistan--------------------------------------


29. (SBU) Established in 1973 as a private company by the GOP, the National Engineering Services Pakistan (NESPAK) is ranked in the ISLAMABAD 00001623 005 OF 005 world's top 200 consulting firms. With a staff of over 2400 employees including 1900 engineers, architects, planners, geologists, economists and other professionals, NESPAK has undertaken 2816 projects worth USD 151 billion, of which 2419 are domestic and 397 are overseas.
30. (SBU) NESPAK specializes in power and mechanical engineering; water and agriculture; architecture and planning; highways, bridges, airports and seaports; environmental and public health engineering; engineering for industry; heating, ventilation and air-conditioning; information technology and geographical information systems. NESPAK has provided pre-feasibility and feasibility studies to power producers in public and private sectors.

-----------------------------------
National Power Construction Company
-----------------------------------


31. (SBU) A state owned enterprise under the control of the MWP, the National Power Construction Corporation (NPCC), was established in 1974 to execute power engineering projects including extra high voltage transmission lines, cable networks, distribution network, substations, power generation plants, industrial electrification, and even the external lighting of housing complexes. The Secretary of Water and Power heads the NPCC's five member Board of Directors drawn from the Ministries of Water and Power and Finance. With an enormously expansive mandate, NPCC was created to ensure speedy execution of power projects.

32. (SBU) Created in 1976, the Pakistan Engineering Council (PEC) is a regulatory body responsible for overseeing the transparency of bidding documents, setting evaluation criteria as well as awards and execution of construction and consultancy contracts for public and private sector power projects. PEC works with both federal and provincial governments and must approve project proposals. The PEC also regulates the engineering profession in Pakistan and oversees the accreditation of engineering programs at all educational institutions. PATTERSON


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 Email 4


UNCLAS SECTION 01 OF 03 ISLAMABAD 002741
SENSITIVE SIPDIS

E.O. 12958: N/A
TAGS: EFIN, ECON, EAID, ENRG, PK

SUBJECT: NEW CEO ON CHANGE IN KESC LEADERSHIP AND FUTURE OF KARACHI'S POWER SYSTEM REF: A. ISLAMABAD 2022 B. ISLAMABAD 1724


1. (U) This is a joint Consulate General Karachi-Embassy Islamabad message. 2. (SBU) Summary: Karachi Electric Supply Company (KESC) CEO Tabish Gahaur said that KESC had made significant strides in increasing collections and bringing new generation on line since Abraaj Capital took over its management in September 2008. However, Gahaur was installed in place of former CEO Naveed Ismail on November 2 in order to manage and reform KESC's human resources, improve power distribution, reduce distribution losses, and further increase collections. Gahaur said Abraaj already pumped $193 million into KESC as part of its $361 million purchase; between debt and equity, Abraaj would bring over $1 billion to KESC for capital improvements. Though generation, distribution, and collection improvements were necessary to turn KESC around, Gahaur added that the long-term viability of KESC also depended on the increase in tariff rates and the payment of GOP arrears to the utility. End Summary.
New Leadership at KESC ----------------------

3. (SBU) Tabish Gahaur replaced Naveed Ismail as CEO of the Karachi Electric Supply Company (KESC) on November 2, with Ismail remaining on the KESC board and put in a new position with KESC's holding company in Islamabad. In a meeting with Assistance Coordinator, Acting USAID EG Director and Econoff, Abraaj Managing Director Mustafa Abdel-Wadood explained that, though former CEO Ismail had brought 405 MW of new generation on line under his tenure and increased collections, he did not have the necessary skill set to put in motion the next phase of Abraaj's plans for KESC: improving distribution, reducing losses, further increasing collections, and managing and trimming KESC's bloated 18,000 employee work force. He added that Gahaur was the prime mover behind Abraaj's original acquisition of KESC and therefore knew more about the company and Pakistan's energy sector players than Ismail. Gahaur has over 10 years experience in the energy sector with Exxon, HUBCO, and AES. Why Abraaj Purchased KESC
-------------------------

4. (SBU) As reported reftels, KESC is a vertically integrated utility with generation, transmission and distribution assets serving 18 million consumers in Karachi and its environs. Decades of under-investment, poor maintenance, and mounting demand have contributed to chronic blackouts. KESC and Abraaj have been vociferously criticized by the media for their poor performance, with some calling for the utility to be re-nationalized. When Abraaj took over its management, KESC had operating losses of $27 million each month.

5. (SBU) Abdel-Wadood said Abraaj was attracted to KESC because it was performing so poorly. For example, KESC had 40 percent losses in its distribution system when Abraaj took control, and every one percent improvement in distribution translates into $12 million in increased revenue. To date, KESC has reduced losses to 35 percent, realizing $60 million in revenue. He said Abraaj will profit by turning the company around, breaking off its more valuable generation assets from its distribution components, and selling it off to long term investors. Abraaj's Plans for KESC -----------------------

6. (SBU) New KESC CEO Gahaur said that Abraaj had already invested $193 million in KESC, putting it ahead of schedule ISLAMABAD 00002741 002 OF 003 in its purchase agreement to invest $361 million over three years (ref A). Under the same agreement, the GOP has injected $45 million and agreed to provide an additional $95 million. Gahaur plans to leverage the Abraaj and GOP capital contributions with debt to raise over $1 billion for capital improvements. He said that with these investments, Abraaj could turn KESC around in three to five years.

7. (SBU) Gahaur said KESC had already increased its generation capacity by 405 MW through the construction of new plants and the rehabilitation of older facilities, with an additional 50 MW due to come on line by December 2009. He said between its own generation and power purchases from the GOP and independent power producers (IPPS), KESC has 2579 MW in capacity supply. (Note: This is still roughly 1000 MW short of peak demand. End note.) He added that KESC had finalized financing with the International Finance Corporation (IFC) and the Asian Development Bank (ADB) to build a 560 MW gas-fired plant to be completed by 2013.

8. (SBU) Gahaur said that the next management challenge was to improve KESC's human resource management. He noted that KESC's work force jumped from 8,000 to 18,000 between 2003 and 2008, as employees were added to the company payroll prior to privatization. While nothing in the implementation agreement prevents KESC from right-sizing, Gahaur said it is "difficult in this political environment." Instead, KESC plans to slowly right-size through retraining and dedicating some employees to corporate social responsibility activities. According to Gahaur, payroll costs are not the main problem with the thousands of extra employees. He said the effect on culture and productivity is the larger issue. To combat the negative effects, he plans to put several thousand "trouble-making" employees into placeholder jobs where they would essentially do nothing. He said KESC was working on CBA's with the five employee unions, which are all "connected to political parties." He planned to lobby the GOP to declare KESC an "essential service" which would curtail the unions' ability to strike.

9. (SBU) Gahaur said KESC would also focus on improving the distribution network, through investments in infrastructure and human resource improvements. He said lower technical losses and improved collections had already more than halved monthly operating losses from $27 million to $12 million. Abdel-Wadood noted improvements to the antiquated grid would reduce blackouts and improve KESC's public image.

10. (SBU) This week, KESC worked to resolve the outstanding debts with Karachi's largest IPPs, Gul Ahmed Energy and Tapal, to whom it owes $75 million. KESC reached an agreement with Tapal in which it paid $5.6 million and agreed to a payment schedule that will reduce the entire debt over the next several years. The same deal was offered to Gul Ahmed, and KESC hopes to have an answer soon. Potential Hurdles with the GOP
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11. (SBU) Gahaur said KESC had positive working relationships with the Ministries of Finance, Water and Power, Petroleum and Natural Resources, as well as NEPRA, the power sector regulator. He added that PEPCO -- Pakistan's holding company for public sector distribution and generation companies -- had also been cooperative, though he opined "it might not be in their interest to see us succeed as a private company."

12. (SBU) Gahaur said the GOP owes KESC $217 million in unpaid subsidies and $265 in unpaid power bills from public sector entities. In turn, KESC owes $373 million to both private and GOP-owned power and fuel suppliers. He said Finance Minister Shaukat Tarin agreed to pay these arrears but has yet to do so. KESC CFO Zulfiqar Ali said that ISLAMABAD 00002741 003 OF 003 current tariff rates also undermine KESC's financial viability. He noted that the NEPRA-set tariffs did not adjust enough to cover rising fuel and thermal generation costs. Moreover, he said the tariff should be adjusted upwards to reflect KESC's poor collection rate, allowing that it could be adjusted down over subsequent years as collection rates improved. Abdul-Wadood said these "sovereign issues" were the one area that made Abraaj hesitate before investing in KESC, and the long-term viability of the firm depends on their resolution. Winter Forecast ---------------

13. (SBU) Demand is already reduced from the summer highs, but Karachi still faces three hours of load shedding per day. Although peak demand will drop to 1600-1700 MW, KESC's supply diminishes as well. PEPCO normally sells 650MW to KESC, but given reduced hydropower production during the winter, KESC was informed that for at least 30 days in December and January, they will receive no more than 350MW. (Note: KESC is supposed to phase out, over five years, receiving power from PEPCO. End note.) The supply of natural gas received currently is only 180 million cubic feet per day, but a minimum of 225 is required. Additionally, KESC is, with GOP help, working to broker a deal with Pakistan State Oil (PSO) that will enable KESC to purchase furnace oil on 45-90 day credit. Gahaur stated that if a minimum of 225 million cubic feet per day of natural gas and 350 MW of power from PEPCO were supplied, and a deal reached with PSO, then KESC will be "ok" for the winter. Otherwise, the "winter will be tough" with increased blackouts.

14. (SBU) The final variable in KESC's equation is the strength of industry. Load shedding and the supply-demand gap were reduced because of lower demand from the economic slowdown. When industry begins to recover, their demand for power increases and everyone, including private households, will face increased power outages. (Note: As a policy, KESC tries to avoid load shedding to industry due to the economic impact and because industry pays its bills. End note.)

15. (SBU) Comment: Gahaur and Abdel-Wadood made a compelling case that they are taking the much needed steps (including a change in management) to turn KESC around. Even in the best case scenario, however, change will not be instant. Under former CEO Ismail's tenure, KESC was pilloried in the press and on the streets for its inability to provide power, especially during the peak summer months when there were daily blackouts of up to 18 hours in some areas. Gahaur and Abdel-Wadood will have an uphill battle if they are to avoid the same fate. We agree with Gahaur and Abdul-Wadood that until the GOP clears energy sector arrears and sets tariff rates that adequately recover costs, KESC and others in the energy sector will never have the financial wherewithal to fully rebound. PATTERSON


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