Pakistan: PAK: KARACHI ELECTRIC SUPPLY COMPANY LTD. (KESC) POST-PRIVATIZATION REHABILITATION, UPGRADE & EXPANSION

Nonsovereign Project | 40943-014

Summary

The assistance finances the turnaround of KESC, a loss-making, integrated utility with an exclusive license to supply electric power to the city of Karachi and surrounding areas. Following nationalization of KESC in the 1950's, ADB has supported KESC with several loans over the last 30 years through its public sector operations. Initially, ADB's assistance was mainly directed towards upgrading of physical assets, but with an acknowledged lack of focus on governance and management reform. Later efforts have recognized this, and privatization of KESC became a priority in later ADB interventions in the sector. After KESC's privatization in late 2005, assisted by ADB, its new owners have embarked on a three-tier turnaround strategy based on (i) organizational restructuring and development; (ii) system balancing, modernization, and replacement; and (iii) generation capacity enhancement.

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Project Name PAK: KARACHI ELECTRIC SUPPLY COMPANY LTD. (KESC) POST-PRIVATIZATION REHABILITATION, UPGRADE & EXPANSION
Project Number 40943-014
Borrower/Company K-ELECTRIC LIMITED (FORMERLY KARACHI ELECTRIC SUPPLY C
Country Pakistan
Location Karachi, Pakistan
Approval Number 7254, 7254/2329
Type or Modality of Assistance
7254 Loan USD 150.00 million Committed
7254 Equity Investment PKR 25.00 million Committed
Strategic Agendas
Drivers of Change
Sector / Subsector Energy - Electricity transmission and distribution
Gender Equity and Mainstreaming
Responsible ADB Department Private Sector Operations Department
Responsible ADB Division Infrastructure Finance Division 1
Responsible ADB Officer Mohammed Azim Hashimi
Project Sponsor(s) KES Power Limited
Description

The assistance finances the turnaround of KESC, a loss-making, integrated utility with an exclusive license to supply electric power to the city of Karachi and surrounding areas. Following nationalization of KESC in the 1950's, ADB has supported KESC with several loans over the last 30 years through its public sector operations. Initially, ADB's assistance was mainly directed towards upgrading of physical assets, but with an acknowledged lack of focus on governance and management reform. Later efforts have recognized this, and privatization of KESC became a priority in later ADB interventions in the sector. After KESC's privatization in late 2005, assisted by ADB, its new owners have embarked on a three-tier turnaround strategy based on (i) organizational restructuring and development; (ii) system balancing, modernization, and replacement; and (iii) generation capacity enhancement. The turnaround strategy requires capital expenditure during FY2007 to FY2009 of approximately PRs52 billion ($809 million): (i) generation rehabilitation and expansion, approximately PRs34 billion ($525 million); (ii) transmission and distribution (T&D) network investments, PRs17 billion ($268 million); and (iii) upgrading of commercial systems and rehabilitation of existing generation facilities, PRs1 billion ($16 million).

In January 2014, KESC launched a rebranding strategy for its 100th year of incorporation, and changed its business name to K-Electric Limited.

Objectives and Scope

The project outcome will be that satisfied consumers of electricity in Karachi have access to reliable supply of power at reasonable cost from a financially sustainable KESC, which is able to create value for its stakeholders. These benefits will accrue to the 16 million inhabitants ( about 10% of the country's total) of Karachi, Pakistan''s largest city and industrial core, accounting for 20% of national gross domestic product. Specifically, the Project will undertake the following:

(i) Address an immediate and accelerating energy crisis in Karachi and help address a growing energy deficit in Pakistan. The new investment will increase net electricity generation by more than 750 megawatts and greatly improve KESC's T&D network leading to rapidly reducing system losses to meet ill-serviced current demand. It will establish the basis for addressing future needs of a city whose overall electricity demands are increasing by more than 8% a year.

(ii) Introduce higher energy efficiency in one of Pakistan's largest and least efficient power utilities. With the proposed rehabilitation and upgrade, KESC is aiming to reduce energy losses from the current, unacceptably high, levels; and to install new, efficient generation plants. These measures will lead to significantly greater energy efficiency with financial, economic, and environmental benefits.

(iii) Support private sector development. As one of the first large-scale infrastructure privatizations in Pakistan, the success or failure of KESC will have major implications for future privatizations. Success should help revive/sustain the political and public will for further large-scale privatization.

Linkage to Country/Regional Strategy The assistance to KESC is fully in line with ADB's country and sector strategies, as well as the Government's strategic intentions. ADB is fully engaged with private sector power entities in Pakistan, through loans and investments made since 1996.
Status of Development Objectives

The two new combined cycle thermal power stations (220MW Korangi CCPP and 560MW Bin Qasim II) are fully operational, and have improved K-Electric''s generation fleet efficiency. About 1,010 MW of new capacity is on line, which provides lower cost and more reliable power to Karachi residents. System improvements and loss reduction initiatives have reduced the average T&D losses of K-Electric during the fiscal year ending June 2014 to 25.3% from 27.8% in fiscal year 2013. Collections, especially from residential and industrial consumers, increased. Ten new grids have been energized, 62 kilometers of new transmission lines have been laid out, and 189 kilometers of existing transmission lines have been rehabilitated. K-Electric continues to add more grid stations at strategic locations and expand/rehabilitate its transmission and distribution networks. Fifty four percent of Karachi does not experience any load-shedding, while the remaining customers experience scheduled load shedding of 3 to 6 hours. Average daily load shedding has improved from 6 to 7 hours to 4.5 hours, which is better than in other parts of the country (including the capital city of Islamabad). A system of local integrated business centers with streamlined operational procedures has greatly increased K-Electric''s responsiveness to its customers. Distribution service providers were contracted in high-loss areas. The company registered profitability in Jun 2012 after 17 years of operating at a loss. K-Electric registered net profit of PRs12 billion for the fiscal year ending June 2014.

Through its Corporate Social Responsibility programs, K-Electric has delivered various water purification and educational programs to communities in the areas of its generation plants and consumer bases. Sixteen major hospitals have also been exempted from load-shedding.

Material Changes In 2009, the Government of Pakistan consented to Abraaj Capital Limited of Dubai investing in KESC by way of subscribing to 50% (with management control) of KES Power Limited shares, the parent company of KESC. Abraaj has installed a new executive and management team focused on implementing the turnaround strategy and replaced the operations and maintenance management contract.
Safeguard Categories
Environment B
Involuntary Resettlement C
Indigenous Peoples C
Summary of Environmental and Social Aspects
Environmental Aspects Key potential environmental impacts during operations such as air emissions, thermal discharge, wastewater effluent discharge, noise and solid waste management are continuously being monitored and mitigated at the corporate and power plant levels. Results show that all tested parameters comply with Pakistan's National Environmental Quality Standards and international standards. No endangered flora and fauna were affected with the construction of the new thermal plants since these were developed on the sites of existing thermal plants. An emergency response plan, including health and safety awareness training is part of the safety management strategies that contribute towards K-Electric's safety culture.
Involuntary Resettlement Land acquisition for both plants was completed long before the project was approved in 2007.
Indigenous Peoples The two new thermal plants were constructed on non-tribal lands.
Stakeholder Communication, Participation, and Consultation Public disclosure for all projects is done on the K-Electric website and in the local media to satisfy regulatory requirements as well as environmental authority. Public consultations include: i) press advertisements describing the project and inviting interested parties to attend the public hearing and review of the EIA report; ii) public meetings in the local union council hall with the involvement of local people, public officer holders, and NGOs; iii) preparation of EIA summary describing the project, its potential environmental impacts and the measures to address them and circulation of the document locally; and iv) ongoing consultation through an 'open-door' policy. K-Electric collaborates and partners with nongovernment organizations and civil society groups to ensure effective ways of communicating with communities and implementing community programs. The company's sustainability policy revolves around promoting economic growth while simultaneously promoting environmental and social gains. K-Electric extends free electricity and system enhancements to nongovernment organizations, hospitals, educational institutions under its social investment program.
Timetable for assistance design, processing and implementation
Concept Clearance 07 Dec 2006
Due Diligence 15 Feb 2007
Credit Committee Meeting 17 Apr 2007
Approval 29 May 2007
PDS Creation Date 14 Jun 2007
Last PDS Update 24 Sep 2014

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