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The Company

KESCsStory

The Role Playedby Private Equity

September 2011

The Impact of Private Equityin Emerging Markets

Case Study:Karachi ElectricSupply Company (Pakistan)

The Karachi Electric Supply Company(KESC), incorporated in 1913, is one ofthe few vertically-integrated power utili-ties remaining globally. Throughout thecompanys nearly 100-year history, KESChas undergone a variety of managementchanges, including privatization in 2005.

KESC manages the generation, transmission anddistribution of electricity to Karachione of thetop ten most populous cities in the world with18 million inhabitants. KESC supplies electricity to2.3 million consumers that fall under a networkspanning 6,000 square kilometers. It has a work-force of 18,000 employees and is listed on theKarachi, Lahore and Islamabad Stock Exchanges.

In March 2008, having been familiar with theprivatization case for KESC and knowing the his-tory of the assetalong with the resulting chal-lenges and opportunitiesAbraaj was presentedwith an opening to take over management.

Incumbent shareholders noted Abraajs trackrecord of business transformation through its ac-quisitions and exits across the region since 2002.

Following the due diligence process, com-pleted in May 2008, Abraaj Capital agreed toinvest US$361 million for a 50% stake in KESPowerthe holding company that owned71.5% of KESCwith the aim of nally realizingthe power companys goal of implementing aturnaround and growth plan. Existing share-holders retained equity in the business, withAbraaj assuming full management control.

Following the departure of KESCs CEO in2008, existing shareholders approachedAbraaj to invest in KES Power and takeover 100% management control ofKESC. The owners sought to leverageAbraajs established management andoperational track record in large-scaleturnaround investments, as well as itsdeep pool of capital and credibility withregional lenders, all of which would benecessary to nance and implementan ambitious series of power projects.After taking management controlin September 2008 and establishingcapable senior management andoperational teams, Abraaj pursued anumber of core initiatives for KESC.

To reverse cash losses upwards of US$15million per month, KESCs CFO TayyabTareen (a Principal at Abraaj) targeted capitalexpenditures to improve system efciency andrationalized the tariff structure to improvecash ow management. KESC also focused on

Essentials

Company: Karachi Electric Supply Company,www.kesc.com.pk/en

Country: Pakistan

Sector: Energy/Utilities

Business focus: Generation, transmission anddistribution of electricity

Size: Total revenue US$1.2 billion (FY 2010)

GP: Abraaj Capital, a private equityrm focused on investing in emergingmarkets, with US$6 billion in assets undermanagement (www.abraaj.com)

Date of investment: May 2008

Investment: Abraaj acquired a 50% stake withmanagement control in KES Power, the holding

company that owned 71.5% of KESC; Abraajcommitted a total of US$361 million, staggeredover a three year period

Impact Highlights

Abraaj developed a line loss reductionmodelIntegrated Business Centres (IBCs)that ended the split between the commerciaand technical sides of the business andreduced losses by 8% over two years

KESC put in place maintenance systemsand overhaul cycles for existing generationplants, improving eet efciency by 3%

New management turned around a 220MW plant within one year, re-negotiateda contract for a 560 MW plant andcommissioned two new 90 MW plants,adding 1000 MW to the citys grid

Abraaj focused on a stakeholder engagementstrategy in parallel to operational trans-formation; it engaged customers and employeesin open and continuous dialogue and partnerewith government, business and the media toimprove KESCs broken reputation

reducing transmission and distribution (T&D)losses and increasing the efciency of KESCsgeneration eet. Reductions in T&D losses andimprovements in system efciency cut KESCsnet losses by 48% from Q1 2010 to Q1 2011,representing a savings of US$24 million.

Parallel to this, Abraaj undertook a programto engage KESCs core stakeholdersitscustomers, the Government of Pakistan, local

businesses, regulators, its workforce and themediato rebuild the companys damagedreputation. This included direct engagementwith customers by hosting 11 OpenKutcheries, where customers could meet withsenior managementincluding the CEOtoprovide feedback and discuss grievances.

Part of a renewed focus on people included arecruitment drive that saw investment in thenumber of employees in KESCs 118 Call Centeroperations, which provide instant customersupport via a team of trained telephoneoperators, grow from 70 to over 350 agents.

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The Emerging Markets Private Equity Association (EMPEA) is an independent, global membershipassociation whose mission is to catalyze private equity and venture capital investment in emergingmarkets. EMPEAs 290+ members include the leading institutional investors and private equity andventure capital fund managers across developing and developed markets.

Contact us at www.empea.net Email: empea@empea.net Phone: +1 202 333 8171

Beyond the Bottom LineCSR forms a key component of Abraajstransformation strategy. With its ownhistory of strategic philanthropy andsocial investment through its AbraajStrategic Stakeholder Engagement Track(ASSET) program, Abraaj deployed a teamwith a budget to focus on sustainableprogramming and build bridges betweenthe community and KESC through long-term partnerships and engagement. TheCSR programming spans education andsports, womens empowerment, sanitationand healthcare and even local heritageconservation.

Employee engagement and CSR initiatives includethe Flood Relief Operation program governedand operated by KESC employees in collaboration

with the Government of Sindh and civil serviceorganizations. Following the heavy monsoonooding in Pakistan in 2010, KESC helpedover 30,000 Internally Displaced Persons (IDPs)by collecting US$650,000 (PKR56 million) indonations, primarily from personal contributions.

KESC also provided food, shelter and medicalassistance to the IDPs, treating over 200300patients per day. The IDPs residing in KESC CareCamps were provided with around 10,000ration bags throughout the program. TheOverseas Investors Chamber of Commerce &Industry, Karachis Chamber of Commerce,ranked KESCs ood relief operation as thefourth largest nationwide corporate relief effortduring the crisis.

KESCs executive management team, formed through a combination of members of Abraajand utility industry veterans, includes: Abraaj Partner Tabish Gauhar, CEO; Tayyab Tareen,Group CFO; Nayyer Hussain, CSO Distribution; Arshad Zahidi, CSO Generation andTransmission; Eram Hasan, Head of Supply Chain and a number of other senior executivesfrom across the region, including Zulqar Ali and Mazher-ul-Haq.

Though our core intentionis financial value creation,particularly in this casewe saw the opportunity tocreate deeper sustainablevalue through engagingthe people of Karachi andwinning their hearts andminds through delivery,coupled with an array ofcommunity programming.This has been an essentialand continuing theme in

KESCs transformation.Ovais Naqvi, Senior VicePresident, Abraaj CapitalsASSET Team (and KESCCMO 20082010)

Bringing KESC out fromits bunker mentality andturning the companyaround has been a realteam effort and the task andchallenges continue: long-term investment, externalstakeholder engagement,operational efficiency

improvement and employeeengagement have all beenessential to improvingthe companys image andperformance.Tabish Gauhar, CEO, KESC