A regrouped consortium under the same banner accepted the PC's invitation to match the Kanooz Al-Watan bid. However, as the consortium had to regroup with some participants dropping out (AKD and others) and Aljomaih group joining in, there was a deviation, and therefore the Cabinet Committee on Privatisation decided to place the matter before the full Federal Cabinet for approval. This is the first time that the collective responsibility of all the cabinet members was ensured.
Among all the privatisation deals, the sale of KESC has been the biggest challenge facing the Commission. There were just no takers for the electric utility because of the mounting losses. Handing the corporation to a uniformed management from the Army did improve things but not far enough.
The KESC balance sheet continues to be in the red and a hefty subsidy from the government keeps the lights on and the industrial wheels turning in the largest city and the commercial centre of the country. The choice is either to continue to pour more money under government management or else let the private sector manage it more efficiently with the government in a supportive role and stem the tide of red ink in the financials.
In the instant case, the dilemma for the government was that either there were no takers, or, those who showed interest lacked the deep pockets to buy and also invest $300 million to upgrade KESC's distribution system. Doubts about Kanooz (operating janitorial services in some Saudi cities) as a prospective buyers were raised by relevant quarters.
But they were told that a Saudi prince was backing the purchase. But stories about rent-a-prince in the Middle East are aplenty. However, these doubts were cleared when it was learnt that Siemens, the German conglomerate, was backing them with a commitment to provide technical expertise to run KESC.
The second highest bidder, Hasan Associates, was reported to be in the market seeking a backer for a bid bond of Rs 100 million. When the bids were opened it was clear that the second bidder had participated and gone through the motions in order to keep the process alive.
As feared, earlier, Kanooz Al-Watan failed to conclude the transaction. And the Privatisation Commission under rules made the offer to Hasan Associates to match the Kanooz bid. This time another Saudi business group Aljomaih came up as a white knight.
They are said to be agents for carmakers - General Motors and also are distributors for Shell Oil and Pepsi in Saudi Arabia. Aljomaih too tapped Siemens. The German giant would have exclusive management to operate KESC. Siemens over the years has been a key supplier of hardware to KESC and, is said to be familiar with its problems. It has turned around utilities in similar circumstances in Turkey and Singapore.
Despite the perception of (Kunda) illegal connections being main source of revenue leakage it is said that electricity theft accounts for less than five percent of line losses. The balance 45 percent line loss can be halved by replacing the old overhead distribution with underground cables, inducting other technologies, and having a firmer grip on billing and collections.
We do hope the Privatisation Commission will fulfil all its commitment, to the new buyers before issuing the Letter of Interest (LoI) on November 14, 2005. The removal of Rs 9 billion bank guarantee from the books of KESC is essential as it could hamper the ability of the new owners to raise the financing required for upgrading its network. Also the unpaid bills owed by KESC to its gas and furnace oil suppliers that are to be paid from the Federal Budget need to be clearly sorted out.
Both issues lie in the court of the Ministry of Finance. The Commission must ensure that the Finance Ministry resolves these ticklish issues promptly. There may be budgetary implications in meeting the demand of the buyers. However in reality government is committed to paying the loans with interest and also clearing the circular debt (ie NRL to PSO to KESC) under a special mechanism.
The taxpayer has to foot the bill for the hole in KESC balance sheet prior to take-over by new buyers. Let us do it upfront. We pray that the hard work put in by the Commission for sale of KESC - a difficult sell to say the least - is crowned with success. Karachi can only remain a major industrial hub if it has cheap and reliable electricity supply.