CASE STUDY ANALYSIS ON ABRAAJ

CAPITAL & KARACHI ELECTRIC SUPPLY

COMPANY

Course: Seminar in Business Policy

SUBMITTED TO:
Sir Shazaib Aijaz

SUBMITTED BY:
Aakash Lakhani | 18233
Muhammad Talha | 17249

Dated: December 17, 2016

Contents
Executive Summary .................................................................................................................................. 3
Background ............................................................................................................................................... 3
ABRAAJ CAPITAL ....................................................................................................................................... 4
KARACHI ELECTRIC SUPPLY CORPORATION ............................................................................................ 4
PROBLEMS FACED BY KESC ...................................................................................................................... 5
1.

Generation: ....................................................................................................................................... 6

2.

Transmission & Distribution (T&D):................................................................................................. 6

3.

Extensive Politicized Human Resource: ........................................................................................... 6

4.

Communication Strategy:................................................................................................................ 6

CONCLUSION ................................................................................................................................................ 9

Executive Summary
Energy sector restructuring and reformation is although a relatively new, yet a useful methodology which
is being exercised by the economies around the globe. The ultimate objective of reformation or restricting
is to achieve the maximum profitability from a diseased or infected system, which is unable to perform
due to the dis-functioning of one or more segments. Several types of restructuring and reformation are
applied for the complete recovery of the system which may include privatization of the entire entity or
privatizing the infected segment, policy reformation, prioritizing, foreign investment, third party
involvement, revised regulation, multi-dimensioning, human resource reformation etc. The report
analysis the privatization of Karachi Electricity Supply Company (KESC), which was underperforming due
to in-effective government control and was decided by the government to prioritize in order to achieve
the desired performance and result oriented delivery of the service. The KESC was privatized in year 2009
and after about three years, it is useful to academically analyze the outcome and results of the
privatization strategy and to investigate the effectiveness of such methodologies used for energy sector
restructuring and reformation. The report provides an historical overview of the KESC and discusses the
factors which led to the privatization decision. The steps taken into account for ultimate privatization and
the post privatization scenario as presented by the company is also investigated to identify the
effectiveness of the privatization strategy applied. The report then provides an overview of the
technological innovation utilized during and after privatization and examine the impact of such
innovations in theoretical energy management aspect. The issues and challenges faced by the company
during privatization process are discussed and scrutinized in order to determine the lessons learned and
to discover the possible stratagem which may be used to avoid the identified constraints.

Background
Karachi Electric Supply Company Limited (KESC), (formerly Karachi Electric Supply Corporation) is one of
the city's largest employers: around 17,000 people currently work for the company. It is also one of the
oldest companies in Karachi and was established in the city even before the creation of Pakistan in 1947.
Incorporated in September 13, 1913, under the Indian Companies Act of 1882, the company was
nationalized in 1952 but was re-privatized on November 29, 2005. KESC came under new management in
September, 2008.
In 1996, deterioration in KESCs financial health began, which promoted suggestions for the utilitys
transfer into private hands. During the interim between 1996 and 2005, Army management instated at
the state utility with a view towards enhancing the Companys operational and financial health in May
1999. There are conflicting views towards this shift and management, with allegations of severe
misconduct.
During 2002 and 2003, incentives were introduced in preparation for KESCs privatization, which
eventually finalized on November 29, 2005 with a 71% transfer of ownership to an association comprising
of the Saudi Al-Jomaih Group of Companies and Kuwaits National Industries Group (NIG), with the
government still retaining a 26% stake. Due to various operational setbacks and the unfortunate choice
of Siemens as an Operations and Management (O&M) contractor, the privatized association was unable
to improve the Companys financial and operational crisis.
In the earlier part of 2008, Saudi Al-Jomaih approached Abraaj Capital, a leading private equity firm based
in Dubai, with a proposal for a potential stake in KESC. The deal was eventually finalized in October 2008
at a ticket price of $361 million for a significant equity stake in the Company, which grants Abraaj Capital

full management control. Abraaj Capital has brought in a professional management team with over 41
senior managers to immediately address the management crisis at KESC.

ABRAAJ CAPITAL
The Abraaj Group is an investor operating in the growth markets of Africa, Asia, Latin America, Middle
East and Turkey. Founded in 2002 by Arif Naqvi, the group has over 20 offices spread across five regional
hubs in Istanbul, Mexico City, Dubai, Nairobi and Singapore. Abraaj currently manages US$10 billion in
assets globally.
In April 2015, the firm closed a US$990 million sub-Saharan Africa fund, its third in the region according
to the company. Combined with US$375 million raised in August 2015 for a fund that will focus on North
Africa, the two funds give Abraaj just under US$1.4billion to invest in Africa, a record sum raised in a single
year. In July 2016, the firm announced that it raised US$526 million for investments in Turkey through
Abraaj Turkey Fund
The Abraaj Group invests in private equity and in thematic businesses including healthcare, energy
infrastructure and real estate. The Abraaj Group is an investor in global growth markets and has made
more than 140 investments across a range of sectors. These businesses currently include:

Acurio, a Peruvian restaurant group.

Hepsiburada, the largest e-commerce player in Turkey.
KPN Academy, a Thailand-based multi-educational group focused primarily on the K-12 segment.
Libstar, one of the largest unlisted food and personal care manufacturers in South Africa.

Abraajs Real Estate Investment Team has invested in a range of real estate asset classes, focusing on
attractive returns derived from underlying growth fundamentals such as urbanization and increased
consumer spending.

KARACHI ELECTRIC SUPPLY CORPORATION

The power sector in Pakistan, which consists of two public sector utilities, namely, KESC and Water and
Power Development Authority (WAPDA), which is facing an unprecedented financial crisis that basically
stems from weak governance, political interference in decision making, poor staff morale, and disregard
to prudent business practices. The worsening problems in these areas have had a major impact on the
financial performance of the utilities, and have hindered the effectiveness and sustainability of the power
sector. Specially, weak governance has resulted in inefficient utility operations, power theft, reduced
billing and collection, and nonpayment of arrears. Given the long history of operational and technical
inefficiencies, mismanagement, and political interference, the Government recognized the urgent need
to restructure the power sector on commercial principles and transfer the ownership of the utilities to
the private sector. 2.2. KESC was in majority-owned by the Government, which held a 91 percent equity
stake, controlled directly (63 percent) and indirectly (28 percent) through public sector organizations. The
remaining 9 percent of shares were privately held. The Government, through the Ministry of Water and
Power controls its management. KESC ranks among the top 15 Pakistani companies in terms of market
capitalization and is listed on the Karachi, Lahore, and Islamabad stock exchanges.
KESC is the only vertically-integrated power utility in Pakistan and manages the generation, transmission
and distribution of electricity. KESC covers a vast area of 6,000 square kilometers and supplies electricity
to all the industrial, commercial, agricultural and residential areas that fall under its network

Karachi Electric Supply Company Generates and supplies electric power to Karachi, a metropolis, with a
population of over 17 million and one the most populous cities in the world. KESC currently provides
electricity to over 2.1 million consumers, not only in Karachi but also in the towns of Dhabeji & Gharo in
the province of Sindh and Hub, Uthal, Vindhar and Bela in the adjacent province of Baluchistan.

PROBLEMS FACED BY KESC

The Karachi Electric Supply Company was been facing big deficit of cash flow on the part of its non-paying
consumers, who owe Rs. 36 billion to KESC, and this in turn is resulting in shortfall of power supply to the
Metropolis. The KWSB is in debt of over Rs. 8 billion because of which a rotational load-shedding is being
carried out on 12 dedicated feeders at its Water Pumping Stations for four hours during night time.
They are facing the problem of theft of electricity.

They are having short means of generations.

They are neglected by the government.
They have serious disagreements among themselves.
Kunda system is very rampant. It causes major loss in KESC.
Corrupt employees have a hand in providing kundas to some people.
The public does not consider theft of electricity as theft. They see it as their right to electricity.
There is a simple connection of kunda and there are also planned connections.
Media presents just the consumers problems and does not show problems faced by them
Their biggest threats are the kunda system and the public.
Corrupt employees exist thus bribe systems are present.
Corrupt employees have a hand in providing kundas to some people.
Those employees that are not corrupt are very sincere in their work showing up for work during
severe load shedding days though they know that their building can be attacked by angry mob.

Geographic Location of KESC Power Plants: Most of the generation capacity of KESC is located in
east of the city. This adds an unnecessary transmission cost in moving this power to north, west
and south of the city.

Distribution Problems: Now let us come to KESCs distribution woes. The distribution network is
not only below demand but there is a huge factor of power theft also. This theft happens in three
ways:

KESC clients, who already have connections, bypass the electricity meters. Few years ago KESC was being
run by the Army and even they couldnt stop the power theft in spite of moving electricity meters of most
of the city out on the streets. This was done to ensure the meters are not tempered with.
Industrial clients who are billed according to a sanctioned load use bigger grips to get more power
No one was ready to believe KESC could end daylong power breakdowns and plug annual financial
hemorrhage of Rs15 billion and post a profit within few years when private equity firm Abraaj Capital
bought majority stake in the company along with management control in 2008.
The restructuring plan is being spearheaded by a strong, experienced and highly motivated senior
management team assembled by Abraaj, which took over operational control of KESC on September 16,

2008. A diagnostic analysis through a comprehensive due diligence process has evolved the business
strategy for Restructuring KESC into five distinct work streams that are being worked at and managed
contemporaneously.

1. Generation:
405 MW added to the system Existing Capacity Improvement. 55 MW recovered from existing plants
through major overhauling and maintenance of units 220 MW and 560 MW Projects. 220 MW project
fast-tracked and commissioned. Contract for 560 MW renegotiated with COD expected in April 2012 Mix
Optimization: Increased reliance on self-generation and diversified fuel mix Enhanced Efficiency: Overall
efficiency improved to 32.3% and plans to increase average efficiency to over 34% by 2010.
2. Transmission & Distribution (T&D):
Overloaded network due to delays in commissioning of grid stations and manual operation of system load
High T&D losses due to significant theft and high technical losses Billing mismanagement, poor customer
service, and inefficient IT infrastructure 15% increase in grid stations leading to 650 MVA increase in
transformation capacity Proactive maintenance has led to significant reduction in network tripping and
faults Pilot project (IBC) launched for the overall rehabilitation of the T&D network Focused disconnection
and reconnection drive launched.

3. Extensive Politicized Human Resource:

But before the turnaround came in-house cleaning. KESC had over 18,000 employees. The management
decided to outsource non-core operations like power-line repair work and forced 7,000 employees to
take golden handshake. The result was a revolt.
Hundreds of charged employees, led by politically-backed unions, stormed the companys new head
office located off Sunset Boulevard Road. Those who refused to join the protests were beaten, cars
were damaged and burnt, and executives moved under cover of police escorts. Gauhar was fired upon
twice.
Abraaj team retaliated. Gauhar led an intense media campaign with press conferences and statements
defending the retrenchment. A car destroyed by the mob was placed over the offices entrance as a
sign of protest against official apathy for months. And they prevailed.

4. Communication Strategy:
Communications strategy envisioned to align KESCs stakeholders to the Companys interests. Marketing
campaigns to communicate milestones and drive transparency in public messaging. Focused CSR and
internal campaigns launched to enhance public image and motivate employees. Leverage of KESCs
infrastructure, rights of way, and capitalizing on its two million strong customer base through
collaborations with telecom, consumer and marketing companies. Value creation through an unbundling
strategy.
KESC was the first utility company in Pakistan to take two very important strategic decisions.
First one was to exempt the industrial zones of Karachi from scheduled load-shedding. This is the
difference between us and any state owned distribution company. KESC has 1300 feeders in the system

and it has divided them in four categories namely, low-loss, medium-loss, high-loss and very-high loss. At
present, almost 25 percent of Karachi's residential areas are facing zero load-shedding which is a just
reward for their good behavior. But a large numbers of areas still face extended load-shedding as they
either don't pay their bills or are indulged in electricity theft Secondly, KESC has been able to improve its
financial performance significantly from previous years, though KESC confess, it still remains way below
what it wants to achieve.
Sixteen out of 28 business centers of KESC are now under 20 percent T&D loss. Just three years ago, the
T&D losses were as high as 40 percent in most of the areas. The real problem lies with the remaining 12
centers, which give KESC the real headache as the losses range between 40 and 50 percent high and the
collection ratio is dismal at 60-70 percent. This is why they end up being on the receiving end of load
shedding. Nearly all industries are good payers; KESC collection ratio for industries is above 98 % with 89% losses. KESC only has two fuel sources - gas and furnace oil. It used to get 250 mmcfd of natural gas
three years back, which was reduced to 190 mmcfd the very next year, further reduced to 150 mmcfd last
year and today KESC is only getting around 120 mmcfd. Previous year, KESC burnt almost 1 million ton of
furnace oil which is equivalent to Rs 50 billion. Two years back, it had burnt furnace oil of Rs 25 billion.
The price of furnace oil in the last two years has doubled and that of gas has also increased. The more
expensive the input, higher will be the power tariffs. The dilemma is that the captive power producers in
Karachi are getting 180 mmcfd currently, whereas KESC being the utility company of the city is receiving
only 120 mmcfd. There is efficiency loss in this distribution of gas, as KESC could have generated 800 MW
from the same amount of gas, whereas the captive power producers are not generating more than 600
MW. KESC guarantees uninterrupted power supply, if given this gas which is going to the captive power
plants and being burnt inefficiently. The gas allocation policy of 2005 is being blatantly violated to facilitate
the captive power plants. The policy clearly states that gas will only be supplied to captive power plants
only when the needs of WAPDA and KESC have been served, the government provides KESC the promised
276 mmcfd gas, KESC tariff differential claims would be negligible -which would benefit the entire chain
and circular debt will ease off. This will bring in efficiency to the overall system and KESC would even be
able to reduce the load-shedding in the high loss areas, when KESC has the liquidity which is possible only
when the overall generation cost comes down.
KESC, under its present management, has injected around USD 1.5 billion in shape of equity and debt.
This includes USD 300 million of fresh equity that is part of the total USD 361 million investments, agreed
and committed by the KESC management.
Through this financing, KESC have added almost 813 MW of incremental capacity over three years.
Another 2000 MW will be fully commissioned by May 2012, formalities are being finalized for a combined
cycle power plant at Bin Qasim. If you look it in the context of KESC summer peak load, which is 25002700MW, the addition of nearly 1000 MW is a significant achievement. KESC have also launched a stateof-the art call centre as customer service sits top on our priority list. It has increased our call center
strength from 70 to 350 people serving our customers. KESC has undertaken a number of steps to reduce
dependence on gas and achieve fuel diversification. Below are the project highlights:

KESC signed a USD 200 Million JDA with a Hong Kong based firm, BEEGL for converting FO based
units at BQPS-1 to coal. Starting with Phase I (2 units of 210 MW). And has recently also signed an
MoU with the same firm for setting up fast track coal projects of upto 1000 MW in Karachi. The

Company is also working to develop bio-waste to energy project which will convert cattle manure
from Landhi Cattle Colony and organic food waste to produce electricity and bio-fertilizer.
KESC also plans to set up 300 MW coal fired power plant at Thar. For this purpose, a Joint
Development Agreement between KESC and Oracle Coalfields has been signed.

Following significant technical innovations has been introduced in KESC system following its privatization
plan:
1) Generation & Transmission all power units and grid stations monitored by a centralized Load Dispatch
Centre using state of the art SCADA system
2) Distribution - a Rapid Response nerve Centre in place that coordinates with 118 Call Centre and
various Operations Centers to address HT/LT faults
3) Number of owned MTL vehicles increased to 1,010 with trakker system in 500 vehicles+ another 815
from third parties
4) Training of technical staff at our Gulshan Training Center recently started providing cross functional
training to LT employees for HT work
5) Procurement of key items (PMTs, Cables, Joints, VCBs etc) streamlined/fast tracked 6) EOQ concept
introduced in Inventory Management 7) Decentralization process partially completed to bring HT & LT
departments under one head.
New management of KESC aims to increase its plants efficiency to over 34 % by year 2010. The figure 5,
below depicts the periodic efficiency improvements through technical innovation in KESC units.
The problem in the energy sector is that an integrated energy plan has never been put in place. The basic
reason for the failure of restructuring regime. The common ground is missing, as the number of ministries
is a lot more than what is desirable. Every country has a ministry of energy which will bring synergies and
efficiencies in the system. The regulators should be independent and not under the political administrative
influence - merging them in one entity will make them competent. Political interference from the energy
sector has to end. This is why KESC is not in the good books of many a people because its job is to focus
on our core business and not to entertain political hiring. Similarly, the privatization process and
restructuring of KESC still ignores the vital demand and supply projections, the capacity enhancement and
other initiatives are largely focused on recovering from historical losses however increasing future
demand is far above the projected demand analysis carried out, there is a need to conduct a detailed
demand and supply analysis to ensure the adequacy of performance improvement plans. KESC has
introduced several technical innovative plans to enhance the system performance however a segregated
and dis-integrated component focused plan is required to introduce cost effective and energy efficient
retrofitting for enhanced reliability of the entire system.
There is a need to introduce and add alternative technologies in KESC system, which in turn will contribute
in reducing the system expenses, losses and dependency on expensive conventional fuels. Additional
projects such as Karachi Bio Waste Landhi, should be initiated on priority basis to obtain social,
environmental and economic benefits. Training and recruiting of technical staff should also focus on the
Energy Management aspects of the reformation, a well-qualified team of energy management experts
can contribute and can be beneficial for the entire system and will result in increased performance.

Component based regular energy audits must be scheduled and may be conducted through subject
matter experts in order to ensure the adequacy of the audits, the recommendations of energy audits must
be adhered on priority basis to ensure timely outcome. Regular and comprehensive awareness campaigns
through print and electronic media may be maintained to ensure that general public is aware of their role
and responsibilities of sensible consumption along with an emphasis of load management and loss
reduction. Manufacturers and retailers of electronic appliances may be encouraged to adopt
internationally acceptable energy efficiency standards for their appliances, as energy efficient appliances
can contribute significantly in reducing the load on the system. Comprehensive and target oriented energy
policies can also streamline the long term performance goals of KESC.

CONCLUSION
It is evident from the above facts that the Karachi Electric Supply Company Limited (KESC) is one of the
citys largest and the oldest company patronizing around 17000 employees. After its incorporation in
1913, the Karachi Electric Supply Company Limited (KESC), (formerly Karachi Electric Supply Corporation)
has witnessed many eras including nationalization, re-privatization and change of management but the
company has the potential of survival even in adverse circumstances. However, it is a fact that in spite of
the alteration in management and standard operating procedures, the company has not yet achieved its
desired objective in full and its resources are still being underutilized because of various reasons and one
of the main reasons is political involvement. There are many local political parties which are active in
Karachi. They are always involved in various decisions like hiring, de-hiring, privatization, change of
management etc. management and staffs are forced to do work in their favor either right or wrong which
is caused to corruption.
Although management has to face political involvement, The CSR department is very active to address
very basic problems of local society. CSR department has installed water purification plants; make aware
our young generation about power conservation, medical camps, educational scholarships for deserving
students etc. and recently KESC has also participate in Earth Hour which was celebrated all over the world.
During the recent years the company has thrived for excellence and is taking every single step to achieve
its desired objectives. The SpeakUp campaign, new billing system and the endeavor for adaptation of the
latest technologies show that the company is heading into the right direction. However, there is still a lot
to be done to successfully run the organization which can surely be achieved by implementing some
productive procedures.