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O 151340Z NOV 09
FM AMEMBASSY ISLAMABAD
TO RUEHC/SECSTATE WASHDC IMMEDIATE 5941
INFO RUEHBUL/AMEMBASSY KABUL PRIORITY 1115
RUEHLO/AMEMBASSY LONDON PRIORITY 1743
RUEHNE/AMEMBASSY NEW DELHI PRIORITY 5709
RUEHKP/AMCONSUL KARACHI PRIORITY 2504
RUEHLH/AMCONSUL LAHORE PRIORITY 8106
RUEHPW/AMCONSUL PESHAWAR PRIORITY 7153
RUEAIIA/CIA WASHINGTON DC PRIORITY
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RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RHEBAAA/DEPT OF ENERGY WASHINGTON DC PRIORITY
RHMFISS/HQ USCENTCOM MACDILL AFB FL PRIORITY
RUEKJCS/JOINT STAFF WASHINGTON DC PRIORITY
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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