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).
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
___________________ XXXXXXX ______________________
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
___________________ XXXXXX ____________________
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---------------------
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
___________________ xxxxxxx _____________________
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
------------------------------
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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