Kabul Electricity Service Improvement ProgramPresented at:USAID INFRASTRUCTURE WORKSHOPDecember 16, 2009Washington, DC

Presented by:David KeithPA Government Services Inc.

Outline of Presentation

What’s Kabul’s Electricity Distribution System Like? What is USAID’s New Initiative There All About? Any Results So Far? Conclusions

(if there is time) “War Stories” From Other Countries

Da Afghanistan Brezhna Sherkat (DABS)Kabul Electricity Directorate (KED)

DABS is the National Electric Company of Afghanistan Although DABS is owned by government, it is to be managed as a corporation

rather than as a government bureau On September 30, 2009, DABS took over operation of the electricity system

from DABM, the legacy government electricity entity KED is the part of DABM (now DABS) that has historically supplied Kabul

Kabul Electricity Directorate (KED) KED, supplies about 70% of DABS revenues. KED has 1,500 employees KED has approximately 245,000 customers. Peak power supply now available to Kabul is approx 300 MW. The bulk of the on-grid electricity needs in Kabul are supplied from a series of

hydro power and fossil fuel plants located around Kabul province, and through power imports from neighboring country, Uzbekistan.

New USAID-funded diesel thermal power plant was commissioned in 2009, further strengthening supply.

Heavy reliance on self-generation of electricity by embassies, ISAF, NGO’s, and commercial enterprises, rather than connecting to KED

Imports from Uzbekistan The power from Uzbekistan is kept isolated from power delivered

by other Afghan sources, a demand of the Uzbeks. This is due to poor system stability in the remaining Afghan system caused by a

combination of delivery systems, loads, and power sources. Accordingly, hydro power plants are not synchronized with the NEPS, and the

Kabul electricity network is currently being operated as two separate systems. Uzbekistan sells power only on basis of annual contracts, which expire 31

December. In 2009, the Uzbeks have been “decoupling” electricity supply from their

neighbors - Tajikistan and Kyrgyzstan. So far, the Uzbeks have reliably provided power to Afghanistan, and the

Afghans have reliably paid them. Now the annual negotiations are under way….

Kabul Electricity Directorate (KED)

US Embassy

Kabul Electricity Directorate (KED) Historically, power interruptions have been frequent

due to load shedding and system breakdowns. In general, the entire system is in poor shape although recent improvements

have been made with the assistance of a number of donor agencies. Bulk power from 5 substations is distributed to 12 area load flow centers, known

in Kabul as “junctions”. From there power goes to about 720 distribution transformers making the final step-down to 400 volts for use by the commercial, governmental, industrial and/or residential customers.

Many of those transformers are said to be overloaded, making connection problematic for additional loads (e.g. compounds using self-generation).

Bulk meters on the substations and on the junctions exist, but many are not in good working order, and data is not collected.

No meters on the distribution transformers. Customers are required to be metered – in fact they have to buy their own meter

and bring it to KED to be tested!

DABS – The DABM Legacy Inherited DABM produced no financial statements for the past 25 years,

along with the lack of a formal system to account for costs. Just a manual, paper-based accounting system which has no

routine verification and controls available. No records available on assets and/or liabilities. No records that can accurately report technical and commercial losses. No “public utility culture” (one that recognizes customer-service as a valid

concern) Procurement processes which lack transparency and are subject to abuse and

corruption As many as 185 bank accounts for which there is no reconciliation and which

offer opportunities for revenue leakage

DABS – The Story So Far USAID and other donors have been trying to move Afghanistan

in the direction of a corporatized utility with a commercial focus to balance electricity delivered with revenue billed and collected.

As a result of the work over the past three years: – DABS was incorporated in early 2008 pursuant to Afghanistan’s Law on

Corporations; – Also in 2008, an analysis and assessment of all DABM assets and liabilities

was made along with an identification of all DABM employees. – By now, recruitment of the DABS Senior Management Team has been

largely completed. – Partial work in progress on operations manual, organizational chart, some

job descriptions, pay scale program and an incentive program, and training.

USAID’s 2009 KESIP Initiative

KESIP focuses on operational improvements within DABS and KED

Improved utility operations will go a long way to addressing chronic distrust amongst consumer groups

At the same time it will begin to alleviate the burden on government resources

The goal of KESIP: Enhance DABS-KED utility’s core businessIt is important to get the commercial foundation built

and use that strength to then systematically tackle the difficult challenges

Policy

Legislation

Utility Operations

Consumer

Technical Improvements

Commercial Improvements

Confidence in Utility

Good Behavior

Regulation

Enabling framework

Goodwill

Reduced subsidies

Payments

Customer Service

Power quality

Freed up resources

Focus of the handbook

Related effort

Policy

Legislation

Utility Operations

Consumer

Technical Improvements

Commercial Improvements

Confidence in Utility

Good Behavior

Regulation

Enabling framework

Goodwill

Reduced subsidies

Payments

Customer Service

Power quality

Freed up resources

Focus of the handbook

Related effortKESIP Focus

Transition from DABM (state bureau) to DABS (commercial enterprise) Introduce professional management

– Restructure management to reflect a modern electricity corporation

– Functions and titles need to be matched with management expertise/capability

– Incentivize individual performance

Create a master program for commercial change– Management needs to preside over

development of an integrated, global, master plan for performance improvement

Focus on increasing revenue and reducing costs– Measure inputs and sales – meter

everything– Reduce outstanding debt by issuing

proper bills and collecting those bills– Plug leaks, remove illegal

connections– Improve customer service and, by

extension, customer satisfaction

Measure performance– You cannot manage what you do

not measure– What gets measured gets done – Establish baselines– Track improvements and struggles– Back measured results by

incentives

Put a Public Face on Reform: DABS and PA Sign Commercialization MOU on Afghanistan’s National TV

Dec 8, 2009

Key Terms of Commercialization MOU 1. PA Will Advise DABS in the Management of KED Advise on management of personnel, assets, finance,

commercial operations Help establish efficient operations, focus on reducing losses

and collecting revenue Assist the HR transition of personnel to new DABS culture Prepare and implement an annual plan for capacity building and staff training.

2. PA Will Design, Procure Install Specific Equipment and Systems IT systems, including network and facilities upgrading

Meters, especially for bulk electricity

Vehicles and tools, especially for commercial operation and loss reduction

Installation and training for all such projects.

DABS CEO Agrees to PA 1st Proposals1. Assigns KESIP team roles/counterparts at DABS Executive Utility Management Advisor (CEO) Financial Advisor (CFO) Commercial and Revenue Advisor (CCO) Electricity Delivery Advisor (KED Dir) Human Resources Advisor (HR Dir) Information Technology Advisor (IT Dir)2. Agrees to introduce formalized utility management procedures (see next 3 slides) Based on modern business practices Transparent Designed to improve management communications and control, both

horizontally and vertically3. Agrees to Improvements to Security and Facilities at DABS

Standing Committees To Be Formed at DABS1. Management Committee Chaired by CEO or nominee COO, CCO and CFO plus Head of KED Managers of IT, HR, Procurement, Admin, Legal, CPU Other participants by invitation

2. Procurement Committee Procurement Manager Finance, Operations, and Commercial Divisions KED Legal Corp. Planning Unit (CPU) KESIP Advisors and other Consultants if appropriate

Weekly meetings focus on actions, accountability and incremental improvements

Transparency, Accountability in -Supply Chain, Inventories Specifications and RFPs

Bid evaluation & contract award

Standing Committees To Be Formed at DABS

3. Corporate Planning Committee(If CPU startup delayed)

DABS key planning staff KESIP Advisors and

other Consultants if appropriate

4. Capital Works Project Management Committee

Annual planning cycleKPIs, Performance monitoring

Least cost system planning (with MEW)Corporate Business Plan

Government, Regulator and Donor liaisonFinancial planning for sustainability

Tariff planning

Budgets and priorities

Project planning and budgetingROW procurement and access coordinationImplementation, construction management

Progress monitoring

DABS/KED Working groups –Report to the Management Committee DABS IT Working Group Hardware network infrastructure (specify, procure, implement) IT Organization & Staffing Integrated Information Systems (specify, procure, implement) Distribution Operations systems and Engineering applications Business Process Alignment Liaison with Revenue and HR Working GroupsKED Revenues Working Group Loss Reduction Metering Customer enumeration Billing CollectionDABS HR Transition Working Group Organization structure of DABS and KED Staffing levels of Departments, Job Descriptions, Salary Ranges Performance evaluation systems and incentives Training needs assessment, and Training Plans Employee communications on change

Principles for Operational Improvement

We hope to instill these within DABS and KED:

1. The primary source of money flow into DABS needs to evolve to become collections from customers, rather than donors

2. Customer service will be the key to financial health and sustainability

3. A program of incremental change – step-wise improvement, let’s help them to walk before we run

4. Afghan leadership – the future is in their hands

Principle 1: Money flows into the electricity value chain from collections

Whether or not the tariff covers costs, the principle of payment for service must become habitual. In a sustainable commercial utility, consumer collections are the only true source of money for the rest of the value chain KED collects consumer tariffs to pay for all of DABS

upstream costs

In the event of a shortfall in consumer revenue, there are few alternatives Government subsidies (or donor aid) Chronic indebtedness Bankruptcy

The best way to improve operations is to get more cash into the system from customers

Power Flow

Cash Flow

WholesaleSupply

Distribution

Consumers

PowerGeneration

Transmission

Principle 2: Customer service is the key to DABS sustainability

Two key target outcomes from KESIP - Improved financial health of DABS Improved customer service to KED customers

Improved Operations

Improved customer service

Improved financial

health

Increased confidence in

DABS/KED

Increased perception of

value

Reduced reliance on subsidies

Generation of funds for system

enhancement

There is a mutually reinforcing, symbiotic relationship between improved customer service and improved financial health:

Willingness to Pay = Willingness to Serve

Principle 3: Incremental changeKESIP is premised on a program of step-wise improvement We are starting with very little – there is not even an IT system Set realistic goals, but expect set-backs (this is Kabul) Success breeds success

Starting Point

Targeted Goal

Step 1 Step 2

Step 4

Step 3

Path of Incremental

Improvement

Don’t try to do everything at

once

Tactics: KESIP Kit for Operational ImprovementUSAID is providing an equipment budget of $14 million. We are planning these initiatives: Utility company IT system for DABS starting from scratch

– hardware, network, software, training) - Financial accounting, human resources, management information, customer database, metering / billing / collection system, asset management, customer service

Bulk metering for system energy balances - Enable KED to determine where their losses take place by measuring at multiple points in the distribution system.

Revenue Metering – Establish a system of communal metering and billing to gain rapid control.

Tools and Vehicles - Basic equipment for KED, such as cranes, trucks, lineman’s kit, meter reader’s kit, safety gear

Customer service for improved cash collection efficiency - Some technology, but mainly human processes, including customer enumeration.

Tactics: Electricity Metering 101 Metering hardware alone is not enough. KED needs to USE them –

energy balance, billing and collections, calibration, secure tamper-proof connections, and customer information.

A dedicated metering program management unit. to ensure adequate program management and financial control.

An open and transparent procurement program will add credibility

Open and constant communication within DABS/KED (organizational units such as finance, billing, maintenance) ensures a holistic approach, interfaces, and handoffs.

External communications with customers, government, media, and other stakeholders will be critical to KED’s success in rolling out the metering.

Adequate time and effort to develop a suitable equipment (and installation) design, vendor selection criteria, and transparent tender evaluation process.

Accountability is the key element that metering provides to moving KED forward.

Above all, DABS management must remain 100% committed to KED’s metering program.

Tactics: Prioritize ImprovementPareto Principle suggests that we focus initially on a smallnumber of high value customers, then expand from that base as the improvement program progresses There may be only a small number of large industrial

customers, but the associated earnings per customer have the potential of being very high

On a per-kWh basis, the cost to serve these customers is very low, and so their value to the utility is very high

Correcting billing and collection issues with industrial customers can, therefore, be very remunerative

But this is Kabul and a lot of larger consumers aren’t even connected – they just run their own diesel generators (at much higher cost to them).

And if we connect them, is there going to be enough power to go around? And what about power quality – will their equipment stand up to low voltage?

Tactics: Customer relationsThe more satisfied a customer is, the more likely that customer will pay Customers typically feel powerless to affect change and

have a sense of hopelessness regarding their service situation. Electricity is unreliable. It is no wonder they steal electricity.

Customer outreach is a powerful, positively reinforcing tool to promote changes in consumer behavior. It should be used as counterbalance to more blunt enforcement methods, such as shut offs.

Improved customer service pays dividends – on both sides People must feel they are getting something in return for their payment

Addressing chronic problems is important, such as response time to service calls, time to connect/reconnect, power quality and interruptions, ease of paying a bill, prevalence of bribes.

Expand customer relations in the field during times of major change Tell customers what is going to happen before it does.

Use field-resident ‘customer care’ representatives to smooth the transition.

Conclusions Hopefully now Afghanistan has strong political will to reform

– KESIP will provide professional discipline

DABS executive management is committed to lead the change to commercial orientation as its top priority

Start simple and low-tech and grow in complexity– Recognize DABS/KED initial technical limitations and starting competency

endowment and nurture it

Don’t try to do it all right at the outset– A gradual, step-wise approach will be more sustainable

Build a fiscal base from which DABS can launch additional improvements– Focus on cash collections

Conclusions Lasting commercial improvements are fostered by both

internal and external efforts– DABS and KED business processes must change and

performance measures must be applied– Improved quality of electricity service and customer

relations will breed responsible consumer behavior

Incremental progress is success in itself; we cannot eliminate all losses and subsidies in a short period of time– Commercial losses (corruption) in electricity distribution start with bribes

paid to front-line employees (meter readers, collectors)– Creating a culture of serving a paying KED customer (and serving them

well) reinforces the willingness of customers to pay

Kabul is unique; culture and conditions will dictate what is an appropriate approach– Afghanization is critical - solutions must be customized to a volatile situation

OK … so it’s all about good management, not rocket science

if you have time…maybe a couple of other USAID examples?

The state-owned UEDC serves 70% of the Georgian territory, with about 2.5 million residents in its service territory.

The company has a long history of intense corruption and mismanagement:– Assets were sold off to insiders– Cash disappeared; records were destroyed– Collusion on procurements; inflated prices, kickbacks– The company never properly defended a single legal case, losing as much

as $35 million in the year. Government attempts to privatize had failed; in response the Georgian

government requested donor assistance to manage the company. The donor community as a whole supported this idea, and USAID agreed to

sponsor a management contract. PA Consulting took on this assignment, following competitive tender.

Georgia UEDC Case StudyIntroduction

Georgia UEDC Typical Customers

Georgia UEDC Technical Condition of the Network

What we expected: 3,200 employees 660,000 customers Limited cash on hand at least to fund daily

operations Collections of at least 20% from which to

begin work Ability to work with the banking system Limited technical qualifications of staff Some metering infrastructure in place.

What we found:• 6,200 employees• More likely, +700,000 customers• Not a dollar in petty cash and no equipment

supplies on hand• Collections of 10%• Bank loans had been booked as collections

to artificially boost performance• Salaries were not being paid• Credit lines were fully extended• No safety training, no equipment on hand• Less than 10% of customers metered

adequately.

Georgia UEDC Congratulations PA! You Won the Contract

Response: First, target predictability of supply, then

move towards reliability. Distinguish paying customers from non-

payers through improved metering. Start with communal metering and

billing in most locations. Meter all wholesale inlets and outlets,

keep track of energy balance and losses.

Find a way to treat transformers as “customers”. For example – electricity user groups, village chiefs.

Gain government support for strict disconnection policy.

But, in return for payment, ensure much better levels of service.

Georgia UEDC Challenge – Improve Reliability of Supply

New Communal Meter Installation

0%

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100%

2003 2004 2005

PredictableReliable

Georgia UEDCPercentage of Customers with Predictable and Reliable Supply (Winter)

Response: PA formed a commercial security

service within the company, led by a German trained prosecutor.

Incumbent management sacked. Internal controls put in place,

buttressed through IT infrastructure.

Results: 990 cases of electricity theft

investigated recovering over $1 million. Criminal prosecution of over 70 former

management, employees and customers.

Over 50% convictions.

Georgia UEDC Challenge – Endemic Corruption

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Transfers

Collections

Regional Expenses

Georgia UEDC –Collections and Expenses from 2003 through 2005

GEL (000s)

Challenge

Corruption at all levelsFew internal controlsNo accountabilityPoor financial performancePoor technical performancePoor governancePoor customer service; little concept of consumer protection

What the PA team did about itMassive staffing changes.IT systems (billing, accounting).Monthly targets for management; dismissals for failure to meet targets.Communal wholesale metering.Consumer protection function established.Litigation against debtorsRemetering of end-users

Results

Staffing levels reduced by 50%; turnover ~ 70%.All new management team, including non-energy specialists.Financing operations entirely from internally generated cash.Average salaries tripled and were paid in full and on-time.All current tax obligations were being paid in full.

Ultimately, successful privatization of UEDC to Energo Pro as part of a $300 million transactionUSAID project ends, PA Exits

Georgia UEDCOverview of the Challenges and Results

Kosovo KEKOverview of the Challenges Facing the USAID-funded Team

Leadership – lack of skilled management and leaders at all levels – Ability to function without fear of repercussion from inside and outside

Technical & Operational – Dwindling coal supply, generating unit risk, inability to disconnect some privileged consumers, lack of automated disconnection capability, and poor quality customer metering.

Corruption – management and employees, customers, outsiders interference in KEK’s procurement

Interference – Board of Directors, Politicians (selection of managers and employees, procurement, decision making, customer disconnection).

Lack of rule of law – theft of electricity is not treated as a crime.

Procurement – Continuous failure of tenders, rigged tenders by insiders and outsiders.

1

Energy Accounting; 2006-2008 & Jan-Oct 2009 ActualFirst

Full Year Full Year Full Year 10 months of2006 2007 2008 2009

Energy Direct to 110 KV Customers 80,146 199,071 473,449 429,424 + Energy Delivered to Distribution 3,923,538 4,134,012 4,255,445 3,599,226 = TOTAL Energy Flows into KEK 4,003,684 4,333,083 4,728,894 4,028,650

100% 100% 100% 100%

Less: Technical Losses (Distribution) 693,749 702,276 704,843 621,347 18% 17% 17% 17%

Less: Energy Delivered to Minority Areas 229,163 326,049 426,999 283,724 6% 8% 9% 7%

Less: Internal Consumption 72,693 74,690 107,140 81,725 2% 2% 2% 2%

Less: Energy Billed 2,080,392 2,258,100 2,780,027 2,437,694 52% 52% 58% 60%

Equals: Unaccounted For Energy 927,688 971,968 709,885 604,160 23% 22% 15% 15%

Energy Billed (000) Euros 129,661 144,727 178,440 154,648

Energy Collected (000) Euros 96,187 110,806 134,604 126,666

2

Energy Supplied and Collection Information(Source: Monthly Energy Accounting Report to Board of Directors)

Energy CollectedAvailable Energy Billed Collected as %for Sale Billed as % Billed Collected as % Energy

Period (MWH) (MWH) EAFS € (000) € (000) Billed Supplied

Total 2007 3,230,068 2,258,100 70% 144,727 110,806 77% 54%

First 6 Months of 2008 1,729,416 1,389,951 80% 88,948 60,029 67% 54%

Second Half of 2008 1,760,496 1,390,076 79% 89,492 74,575 83% 66%

(Jan- Oct) 2009 3,041,854 2,437,694 80% 154,648 126,666 82% 66%

Projections (Nov-Dec) 2009 85% 85% 72%

Thank you!