Topic: K-electric And Shanghai Agreement - Effects On Pakistan's Economy

Prepared by:•Atiya Jan Muhammad

•Nuzzar Naseem

Electricity Sector Of Pakistan:

•Electricity in Pakistan is supplied by 2 vertically integrated public sector utilities WAPDA, for all of Pakistan except Karachi and KE for Karachi and its surrounding areas.•There are about 20 individual power producers that contribute in electric generation in Pakistan.•In 2007, Pakistan faced worst energy crisis when production fell by 6000 MW.•The generation capacity of KE is 1756 MW.

Karachi's Contribution To Pakistan's Economy:

K-electric Overview:

•KE (formerly called KESC) was established on September 13,1913 to serve the power needs of Karachi.

•As Pakistan became a reality, Karachi saw a sudden surge in population and power demand also increased.

•KESC was nationalized in 1952 by the government of Pakistan.

•In 2005, KESC was privatized with the government retaining around 26% stake, while 71% was transferred to a foreign consortium.

•In 2008, the Abraaj group, a leading private equity firm based in Dubai, took the charged and the turnaround story began.

•KE is Pakistan's vertically integrated electric cooperation involved in generating, transmitting and distributing power to around 20 million inhabitants of Karachi.•It employees over 11.000 people and covers 6500 sq.km area under its net.

Sector wise electricity consumption in Pakistan:

Electricity Sources (2014)

•fossil fuel – 14,635 MW – 64.2% of total(oil-35.2% + gas-29%)•hydro – 6,611 MW – 29% of total •nuclear – 1,322 MW – 5.8% of total•average demand-17,000 MW•shortfall-between 5,000 MW and 6,000 MW

The Turnaround:

•Unprecedented Investment: Over the next few years more than US $one million was invested in KESC.•AZM change management program: The largest cultural change program was initiated with renewed mission, vision and values.•Regaining Karachi's Identity: Lowest ever power losses were recorded in 18 years in 2012-2013.•Thought Leadership: KESC worked on biogas and coal conversion projects. It won awards in CSR and environmental excellence.•Rebrand: KESC repositioned it self with a new identity and positive outlook.

Crisis Faced By K.E:

•KE owes liability worth Rs.68 billion to SSGC, which it has not paid for years, terming these dues as non payment of electricity bills by government department.•The company was blamed for causing the death of 1200 people due to heat stroke in the summer seasons.•The company has been facing many cases in different courts, mainly an overbilling and irrational tariff setting.

Energy Crisis And Its Impact On Pakistan's economy:

•The value of the rupee is falling.•Small manufacturing markets are affected by increase in prices, as they utilize 33% of product cost in terms of energy.•The cottage industry is taking its last breath and textile is also suffering.•Dependent on other countries.•As production cost increases cost of labour decreases.•The inflation rate is increasing drastically.

Shanghai Overview:

•Shanghai electric is Chinese multinational power generation and electric equipment manufacturing company head quartered in Shanghai.•It has three core objectives:

"core business concentration , self mastered innovation, and global resource consolidation."

•It is a state owned enterprise controlled by State Power Investment Corporation a fortune 500 companies.•It is responsible for power supply of Shanghai and has generation capability of 35.23 TWH(Tera watt hour) in 2015.

KE and Shanghai Deal (Background):

•In the recent months, Shanghai electric acquired KE's 66.4% shares for $1.77 billion.•The deal is one of the largest private sector transactions in Pakistan.•In 2009, the Abraaj group invested US $361 million in KESC to acquire 71% of its shares.•The interest of Chinese corporation to in Pakistan's utility company could be attributed towards the development of CPEC.

PREVIOUS EXPERIENCE OF SHANGHAI GROUP

Beijing has in the past two years been rolling out progressive reform measures to make the power market more competitive and transparent on pricing, to enhance efficiency and lower costs.

HOW IT WORKS? 1. It has broken monopolies on power distribution.

2. Revamped transmission tariffs to better reflect costs

3. Instill incentives to cut costs

4. Subjected generators to price

5. Sales volume competition on a rising portion of their output.

PSX 29 OCTOBERThe day before deal has finalized

PSX 5 NOVEMBERThe day after the deal has finalized

KSE-100 index Index down 3.4%. KSE-100 index has

reached on 39,873 by decreasing 1418 points or - 3.44%.

KSE-100 index has reached on 41,842 by increasing 1969 points or 4.94 %.

KSE-30 index KSE-30 index has reached on 21,818 by decreasing -671 points or -2.99 %.

KSE-30 index has reached on 22,751 by increasing 933 points or 4.28 %.

Average daily turnover

The average daily turnover during the week came in at 341mn shares traded showing a notable decline of 28% W/W.

Average daily volumes augmented to ~484mn (+42% W/W) as end of the political stalemate attracted investors back into the market.

Average value traded

Average value traded dropped by 22% clocking in at PKR11.5bn during the week, while volumes also took a plunge, declining by 28% on average relative to the previous week.

BOP retained its position as the volume leader, trading ~222mn share during the week followed by KEL (~164mn) and TRG (~72mn).

Development After The Deal:

• Transfer of technology will take place and system of smart cards would be initiated.• a the prices of electricity to be reduced and the customers will receive

quality service.• Load shedding is expected to end.• The company will invest $10 billion in T&D systems.

Effects On Pakistan's Economy:

• Cheaper electricity.• The industrial sector will boost up as the cost of finished goods will be

decreased.• Inflation rate will decrease.• Unemployment will decrease as power sector gets improved.• The relations between the two countries will strengthen.• Circular debt of KE will decrease.• International market.

Conclusion:

• In short this venture will open up new horizons for Pakistan,as this will also bring electricity in Gawadar. • For economy like Pakistan where it is risk to invest, Shanghai invested

and it has brought PSX to life.• Shanghai has promised to bring per unit electricity price to affordable

range.