K-Electric has lately been in the news, but not for all the good reasons. Load-shedding this summer and power outage during unprecedented rains invited bad press. The media narrative on KE privatization is changing. The argument is that virtual monopoly of generation, transmission and distribution in the biggest city of the country puts inhabitants at a loss. Before delving into this debate of monopoly, it is pertinent to note that the whole argument for discos’ privatization in the last decade is premised upon good performance of KE. One cannot deny this reality in the heat of the moment.
KE was privatized in 2005. But the real change was observed only after Abraaj’s investment in 2009. The then management under the leadership of dynamic and impulsive Tabish Gohar (who is now appointed as PM’s special assistant on power) did a massive exercise of change management. At one point, to resist the change, PPP, PTI and MQM, JI– all protested against KE management outside its office in DHA Karachi. But the management withstood the storm.
The proof is in the pudding. Aggregated Technical and Commercial Losses (AT&T) of KE were at 43 percent in 2009; while for discos (rest of the country) the losses were 28 percent at that time. The number reduced to 31 percent for KE by 2015 while for discos, the number remained unchanged at 28 percent. The better comparative performance of KE versus rest of the country’s transmission and distribution network was making KE the exemplary boy in the family.
KE was innovative and the rest of the country followed in the footsteps of this utility. For example, KE started load management based on losses – higher planned outages in areas of low recovery. That had substantially improved the recovery. The rest of the country adopted this policy based on KE success. Now the AT&C losses in KE are 26.5 percent, while rest of discos are 27.6 percent. Everyone is at par; and the improvement rate in KE is diminishing. That is why the good boy is becoming a poster child.
But the need is to see what has happened after 2015 which has slowed down the improvement process. KE is becoming an orphan – a common problem other departments/functions in Karachi are facing today. Abraaj was a private equity venture. Its model was to turnaround the ailing utility company and then sell it to a third hand. And it did.
In October 2016, Shanghai Electric buying KE from Abraaj Capital was announced. Four years gone, and the deal remains pending. Abraaj Capital is in liquidation process for the past two years; yet nothing is being decided on the deal. The company needs fresh investment. But for that, the management has to be transferred to new hands. This stalemate has halted the process of improvement in KE. Now, there are talks on removing the exclusivity of KE in transmission and distribution in Karachi. At first, how can this be done when the company has contractual rights of exclusivity till July 2023. This may create another Reko Diq. Plus, Shanghai Electric might not complete the transaction in such a case.
Even ending exclusivity by 2023 could create issues. Shanghai Electric did the deal in 2016. There were seven years to end exclusivity. That was enough time to make investment and plan accordingly to compete by 2023. Now only three years are left, it would not be wrong to ask for extension of exclusivity.
The other problem of ending exclusivity is who will provide electricity to tough low collection areas in Karachi. The new players, if they come, will opt for better residential areas and good industrial costumers in Karachi, leaving the bad eggs to the KE. Today, KE charges a blended tariff. How will the new tariff structure form? These are tough questions which are required to be addressed before even ending exclusivity by 2023.
Not to mention the haphazard urban development of Karachi. Recent rains have demonstrated that how unplanned informal settlements and construction of high-rise buildings on plots allocated for houses have wreaked havoc in the city. KE’s T&D system cannot be separated from this mess. Today, there are examples of 11Kv lines crossing from houses where people are actually residing. Things are not as simple. Ending exclusivity is not a magic wand as some may think. Doing it prematurely could create more problems.
The first step is to conclude the deal with Shanghai Electric. Let them bring investment plans on table and come up with a solution to bring competition where it is required. The second logical step is to separate generation business from transmission and distribution. NTDC is supplying 850 MW to KE. This is to increase further as higher capacity coming online in South under NTDC system should be used in Karachi as supply is already in excess in the North.
KE old plants and those of others (such as Gul Ahmed’s) should be replaced with newer efficient plants. Transmission (wire business) should remain in the hands of KE and distribution can be deregulated. But for that competitive market development is the key. Let that happen for the rest of the country, and if it would be a success, bring the same model in Karachi.
Copyright Business Recorder, 2020
Ali Khizar is the Head of Research at Business Recorder. His Twitter handle is @AliKhizar
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