R E S T R I C T E D

RETURN TO Report No. T.O. 61-i

REPORTS DESKWITHIN

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Tuils 6ocu~ient wv s preparecd for internal use in the Bank. In makiiigit available to others, "he Bank assumes nl responsibility to them forthe accuracy or completeness of the information contained herein.

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INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

APPRAISAL OF KARACIIII ELECTRIC SUPPLYY

CORPORATION POWER PROJEECT

PAKISTAN

June 8, 1955

DEPARTMENT OF TECHNICAL OPERATIONS

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CUIRENG5XC CONVERSION

$ 1.00 Rs. 3X31

Rs. I - $ 0.30Z

£1 Rs. 9.27

£ 1 $ 2.80

APPRAISAL OF KARACHI EIECr.RIC STYPPIJ. CORPORATION POCER PROJECT - PiXISTiA

Table of Contents

Page

I. Sunmary 1

II. Introduction 2

III. The Karachi Electric Supply Corporation (KESC)

Physical Properties 3Corporate History 3License 4Present Financial Position of the Company 4Earnings Record. 4Organization and Management 5

IV. Description of the Project 6

V. Estimated Cost of the Project 7

Schedule of Construction 8

VI. Method of Financing 8

Estiimated Rate of E-xpenditure andWithdrawal of Loan 9

VII. Power Market 9

VIII. Electricity Rates 11

IX. Estimated Financial Results of the Project

Estimated Tuture Barnings 11Cash Position 11Future Financial Position of the Company 12Bebt Service 13

X. Security 13

XI. Conclusions and Recommendations 14

Annexes I through VI

APPRAISAL OF - NTi L:7rTl: SUPPLYCORPOP'ATIOIT PG':Z TKRCJECT -T AI SrTAlT

1. This report covers an appraisal of a power project nowr beingcarried out by the Xarachi Electric Supply Corroration which has beensubmitted to the Bank as a basis for a loan equivalent to about $13.8million.

2. The Karachi Electric Supply Cornoraticn is controlled 'by theGovernment of Pakistan through holdings of 725c of share ca2pital. TheCompany has had a good record of earnings. At present its long termdebt represents 36% of total cap tnlization. Upon completion of theproject this nercentage is e7pected to have increased to 52,'., which isconsidered to be satisfactory. Total debt service w.!ill be covered bynet income from operations before d.epreciation and interest charges bya'bout 2.4 times in 1957. the first year after comnletion of the project.

3. The ComTnany adonted a nea, organization in Mlay 1954 which isapprotriate for an enterprise of this size.

4. The nroject consists of im-provements in existing steam anddiesel stations, the corstruction of a new 30,000 Iaz steam station andsubstantial additions to the transmission and distribution systems.

5. The estimated cost of the nroject is based on expendituresfrom January 1, 1954 to compoletion. The total cost amounts to theequivalent of ebout $21.1 million of wnhich $13.8 million is requiredin foreign exchange.

6. It is estimated that the newr steam station will be in operationearly in lc56 and that the entire project will be completed by the end ofthat year.

7. Based on the estimated market for power in the Ka.rachi area,the facilities to be provided by this project will be fully loadedwithin a short time after completion and they will not provide adeauatecapacity to satisfy the full demand. Additional investment will benecessary within a relatively short time.

8. On the basis of existing rates the future financial nositionof the Comnoany apnears to be good. During the period 1955 to 1960, theCompany should be able to nay a dividend of 75 on share canital (themaximum allowred by present regulations) and still have substantial surplusearnings for reinvestment.

9. The project is sound. It is recommended that a loan equivalentto $13.8 million be made to the Comnany for this project. It is alsorecommended that the term of the loan be 15 years with a grace period of2 years. Security for the loan will take the form of a mortgage rankingabove existing loans granted by the Pakistan Industrial FinanceCorporation and the Government, but subordinate to a first mortgageissue of about Rs. 3 million now held by the public.

II. INTRODUCTION

10. This re-nort covers an appraisal of a power oroject now beingcarried out by the Karachi Electric Supply Corporation (KESC) which hasbeen submitted to the Iank as a basis for a loan equivalent to about$13.8 million. Pertinent recommendations are included.

11. A Bank mnission visited Pakistan in 1950, at which time thepolicies concerning novwer develo-ment lwere in a preliminary stage andno nrojects had been developed to a point warranting consideration bythe Pank. In July 1951 representatives of Pakistan informed the Bankthat a decision had been reached to carry out six thermal projects ofan emiergency nature in order to meet power requirements in various partsof the country until hydro nrojects could be built. The Bank providedsome ass'stance in the formulation of this program.

12. The Government retained IR.G. Acres and Co. to undertake anoverall power survey of West Pakistan to provide an estimate of powerrequirements for the next ten years. The International Engineering Co.was retained to make a similar survey in East Pakistan. The survey ofEas'u Pakistan is co-rnlete and a prelimninary report on lWest Pakistan hasbeen prepared. The Governmeent has also decided that it will retaincompetent enginecring firms to design and supervise the major powerinstallations rea -uired in the future. The Bank has worked closely withthe Government in establishing terms of reference for consulting engineersand in other matters connected with powver development.

13. In 1949/50, i1erz-Rendel-Va.tten, then engineering consultantsto the Pakistan Government, recommended a power development program forthe Karachi area. Plans were developed by the Central EngineeringAuthority 1/ and XESO for an expansion of the generating facilities ofthe ComDany. The current program provides for the installation of 30,000kI steam generating canacity and for substantial extensions and modifica-tions of the transmnission and distribution facilities. The firm ofBrian Colquhoun and Partners has been retained to engineer and supervisethe project which is now in an advarced stage of construction.

1/ A government organization responsible for planning power development.

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14. This report is based on information submitted by the KarachiElectric Supply Corporation and its consultants and on studies made inPakistan in November 1953 and April 1954 by the Bank staff. Eank repre-sentatives have worked closely with interested parties in Pakistan onthis project and have made a number of suggestions regarding engineering,financial and other features of the project.

III. IEE KARACHI ELECTRIC SUPPLY CORPORATION (KESC)

Physical Properties

15. The generating facilities of the Comnany consist of a dieselplant and a steam plant. The former consist largely of old units andonly about 504, of the installed catacity is useable, the maximum outputbeing about 6,000 kwr with a firm canacity rating of about 5,000 kwe Theexisting steam -olant, knowm as Station t"A", has an installed capacity of23,000 kw wIhich includes three modern units of 5,000 1ar each placed inoperation in 1953. The two generating stations are interconnected andoperate in parallel.

16. At the end of 1954 the maximum load which could be carriedby the system was only 18,000 kr due to inadecuuate distribution facilities.The system consisted of 132 substations with 34,000 kv 1/ of installedcapacity and about 129 miles of hi,;h voltage and 222 miles of low voltagelines. Due to the rapid growth of the city in the post Partition periodand lac. -c funds available for improvements, carts of the distributionsystem havc been extended in an improvised manner and must be redesignedin some respects to provide for future e:pansion.

Corporate History

17. The Company was formed in 1913 with an authorized capital ofRs. 1 million of which Rs. 150,000 were subscribed. Since that time,the capital has been increased at various times and at present Rs. 30million are authorized represented by 300,000 ordinary shares of Es. 100each. As of December 31, 1954, 241,917 shares had been issued having aface value of Rs. 24,191,700 which have been fully paid in. The Companyhad always been privately owfned until 1952 at which time the Governmentsubscribed to Rs. 17.5 million of share capital and gained the controllinginterest. At the present time the Government owms 72% of the shares out-standing. Government participation in the Comnany is stated to have beennecessary in order to provide funds for capital expansion which could notbe financed from private sources. The Govornment has stated that it in-tends to dispose of its shareholdings as and when market and other conditions

1, The proportion of 34,000 kw substation capacity to 18,000 kw peakload is about normal for a system of this type.

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are favorable in order to p)rovide much needed Lunds for investments inother development works wthich cannot be financed from private sources.

License

18. The original license for the supnly of electricity in theKarachi area was granted in August 1913 under the Indian ElectricityAct and was to have expired on Sentember 12, 1955. The license has beenextended by an order of the Pakistan Government for a period of 20 years.

Present Financial Position of the Company

19. A condensed balance sheet of the Company as of December 31,1954 is given in Annex I. Total assets amounted to Rs. 68.7 million($20.7 million) of ,.hich Rs. 57.5 million ($17.4 million) representedfixed assets, w*ork in progress and advance payments after deduction of adepreciation reserve of Rs. 11.8 million ($3.5 million). Outstandinglong term debt amounted to Rs. 15.6 million ($4.7 million) comlpared withan equity of Rs. 28.3 million ($8.5 million), representing a debt/equityratio of 36/64. The Companyls cash position was very tight. Currentassets amounted to Es. 10.5 million ($3.2 million) with current liabilitiesof approximately Rs. 18.3 million ($5.5 million), half of which representedamounts due to su-opliers and contractors. The Comnany, in anticination oflong term financing, and In order to be able to continue its constructionprogram obtained a line of credit from the National Bank of Pakistan atthe end of last year of Rs. 5 million ($1.5 million) of wqhich Es. 3.5million 'z-d been withdranm aS of the date of the balance sheet. This lineof credit which is guaranteed by the Government has subsequently been in-creased to Rs. 15 million ($4.5 million). By the middle of M'ay 1955 theCompany had dra;rn about Es. 7.6 million ($2.3 million). It is expectedthat this credit will need to be incieased to about Rs. 24 million($7.3 million) dua7ing the next months to cover the Company's constructionrequirements until about the beginning of October, when funds from theproposed I3RD loan should be available. The line of credit could then berepaid out of withdrawals from the I3P.D loan for reimbursement of foreignexchange exDenditures. The Company has given assurances that this lineof credit wzill be re-paid.

Earnings Record

20. The Company has had a long record of satisfactory earnings andwas able to pay a dividend to its shareholders w..thout interruption duringthe 35-year period 1916/1950. From 1934 to 1942 the annual dividendamounted to 9% and 7% thereafter until 1950. No dividend has been paidfor the years 1951 and 1952. The reduction of the dividend to 7% in 1943was the result of a dividend limitation promulgated by the Government upon

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recommendation of the Advisory Bcard appointed under the Electricity Actand is still in force. Starting in 1951, howrever, profits droppedsharply and this dowvaward trend continued until the middle of 1953. Thedecline was almost entirely due to a sharp increase in fuel costs, with-out cormpensating rate increases. On June 1, 1953 new rates went intoeffect, which on the average represent an increase of 13; over the oldtariff. The new rates are adequate to provide the Conap6aVy writh revenuessufficient to cover all operating expenses, depreciation and interest ondebt, the payment of a 7% dividend tnd to leave a substantial surolusfor debt amortization and reinvestment. For 1953 the Comrany has paidl adividend of 6f., and is expected to pay a dividend at the same rate for1954.

21. Income statements for the years 1948/1954 compiled from datareceived from the Coerpany are shoi.n in a condensed form in Annex II.

Organization ,nd iManagement

22. Policy d.irection of the company lies in the Doard of Directorscomposed of 12 members of which 10, including the Chairman, are thenominees of the Government. Four of these directors represent denart-mental interests of the Government and six- are chosen from industry,commerce aIid other consumiers of electric -nower. One director is thenominee of the Trustees of the outstanding debenture loan and one ofthe Pakistan Industrial Finance Corporation.

23. According to usual practice in Pakistan, the management of theCompany is entrusted to Managirg Agents. In 1952 the Pakistan ElectricAgencies, Ltd., the t.naaging Agents of the Comnany, was acquired by theGovernment in ord.r to permit the Government to exercise better controlover the onerations of 1USC. The Managing Agents have been receiving acommission of iO- of the Comr,anyls net earnings before taxes. TheGovernment have under consideration the IMlanaging Agents, proposal toreduce this commission, starting with the fiscal year 1955, to 7-% forthe first Rs. 5 million profit, c% on the ne=t Rs. 5 million and 5% onany excess profits - with the provision that the rate on the firstRs. 5 million profit will be increased to 8.5% whenever the Managing Agentshold 25% or m.ore of the Corporationts share capital.l/

24. In order to provide an organization suitable for an enterpriseof this size, it was agreed in May 195L4 that the Copcany would be re-organized in order to obtain more efficient administration and to providefor additional operating staff. This reorganization plan created newposts for three deputy managers, one to be in charge of power generation,the second in charge of transmission and distribution, and the third to

1/ At present the IManaging Agents own no shares in the Con-pany.

be in charge of the commercial department. A special project secton wasprovided. to develop new plans andl check estimates o'L work prepared by theengineering departments.

25. Considerable difficulty wras encountered in the recruiting of ex-perienced personnel to provide for the required expansion of the organiza-tion. It was found to be practically impossible to recruit men of suitablequalifications and experience in Pakistan. The Conrany has engaged stafffrom the U.K. and Germany to fill some of the key positions. Tne consult-ing engineers for the Company assisted in the recruitment. The positionsof two deputy managers generation and commercial - have been filledO.The duties of the deputy manager for transmission and distribution w.illinitially be performed jointly by two superintending engineers, one incharge of planning and the other of field work, both of whom have beenon the staff of the Comlpany for some time. It is considered- that thenew organization is adequate for the operation of the Company.

IV. DESCRIRPIO-T OF Tba PPEOJE'CT

26. The project which has been presented to the Bank consists ofthe following principal items:

a. Imorovement of Existin_ Stenm Station.

Replacements and spare parts will be purchasedfor boilers, heaters, numps and electricalequipment. Switchg,ear required for inter-connection with the new s'eam station will beadded.

b. Imsorovement of Diesel Plant,

This plant consists of 19 generating sets,only 7 of which are presently useable. Re-placements, spare parts, switchgear, machinetools and new rwater coolers will be purchasedin order to place 9 of the larger units, in-cluding those now-r in oneration, in propercondition for continuous service.

c. New Steam Station.

The new steam generating plant to be known asStation tt31l will contain two units of 15,000 kwwith 3 boilers operating at 400 lbs./sq. in.pressure and 7750 T. Each boiler will be capableof carrying one turbo-generator. The boilers willbe equipped to burn either oil or gas.

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d. Trnnsmission end Distribution. Facilities.

A 66 kv single circuit transmission ring willbe erected to carry the full output of the newsteam station to new load centers at SindIndustrial Estate (5 miles) and Landhi IndustrialEstate (18 miles). The steel towers -willPbe de-signed to carry a second. circuit to be installedin the future. Within the city a 66 kv under-ground cable will be used. Step-dowm substationswill be erected at four load centers. Substantialextensions of the cistribution network will beprovided, designed to handle the combined outputof tho existing generating plants and. the newpoweer station.

e. Head OLffice and. Stores.

Office ecuipment, business machines, scales,furniture, etc. will be purchased.

27. The order for the newr poDwer station was aw.arded to the SiemensCompany in Liarch 1952 on the basis of inuernational comTnetitive bidding.Siemens is responsible as nrimae contractor for the supply of equi-Dmentfor the ent'ire pl½nt and for its erection. According to this contract,Siemens will provide personnel to assist in the operation of the plantfor a period. of 12 months.

28. In October 1952 EESC retained the British consulting firm ofBrian Colqahoun and Partners in association wIth Handcock and Dykes forthe design and layout of the nlant, foundFtions and buildings, and thepreparation of soecifications for the civil engineering works and equip-ment. The consultants are also responsible for supervision of con-struction, in--ection of' equinment, etc. The detailed plans of thetransmission system have been prenared by the consultants. The distribu-tion system has been laid out by i-SC and approved by the consultants.

V. ESTIIATE' COST OF TEE PROJECT

29. This project is a nart of a continuing investment programrequired to meet the nower needs of the Karachi area. Thus therehave been continuing expenditures on the existing steam and dieselplants for a nt'.ber of years as well as on the transmission anddistribution systers. Also nayments have been made on the new steamstation. Costs have been estimated. as the amounts required to completethe various items included in the nroject and for this purpose, e2pendi-tures required after January 1, 1954 have beer used. On this basis, the

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total estimated cost of this project amounts to approximately Rs. 69.9million ($21.1 million). A breakdown of the total cost by items and inforeign e.change and local currency is as follows:

(E&ures in Rs. 1000)(Figures between brackets rebresent US8 000 eauiv.)

Item Descrintion Total Local Expenditures Foreiz_.n Clurrenrc:

1. Existing Steam Station 1,423 768 655 (198)2. Diesel Station 1,118 374 744 (225)3. New Steam Station 26,170 10,831 15,339 (4,632)4. Transmission and Distribution 37,722 11,432 26,290 (7,939)5. Head Office andl Stores 3?7 zo6 171 (ri)

66,8io 23,611 43,199 (13,045)6. Interest during Construction 1o6 675 2.387 ___(_72)

69,872 2-4,286 45,586 (13,767)

(21,101) (7,334) (13,767)

30. In the above estimate, contingencies, amounting to 10% onforei,gn currency ex,enditures and to 15,;9 on local currency costs, havebeen included. Provision for escalation has been added according to theterms of existirg contracts. Consulting engineers'fees have been included.The above estimates were prepared by KES0 and. have been checked by theconsulting engineers. The estimates are reasonable and on the conservativeside.

31. Of the foreign exchange requirements of about $13.8 million,orders ha.ve been nlaced for the equivalent of about $10 million, of whichabout $5 million nas been raid. The balance of the orders will be placed.'before the end of the year also oin the basis of international comoetition.Orders placed or to be olaced in the U.K. amount to the equivalent ofabout $7.7 million and in Germany to about $5.1 million. The remainderof the equipment is being ordered in other European countries.

Schedule of Construction

32. It is estimated that all items in this project will be completedand in full operation by the end of 1956. The new steam -plant should bein operation early in 1956.

VI. ?T.-TT,D OF t'TP-TFCIrG

33. As shoim above in -sra. 29 expenditures on the -project duringthe period 1954 through 1956 are estimated at the equiivalent of $21.1million of which the equivalent Of $13.8 million will be in foreign ex-change and $7.3 million (Rs. 24.3 million) in local currency.

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34. It is proposed that the foreign exchange expendituresequivalent to $13.8 million be financed w!ith a loan from IBRD. Thelocal currency requirements of Rs. 24.3 million would ultimately befinanced by the sale of shares of Rs. 10.8 million and the remainingRs. 13.5 million from the Company's own resources. Sale of sharesof Rs. 5.8 million is scheduled to take place during the latter partof the current year and the balance of Rs. 5 million during 1956.These issues will be offered for sale to the general plublic. Inanticipation of the IBPRD loan becoming available and the sale ofshares, construction expenditures in excess of the Comoany's ovm re-sources have so far been financed with two Government loans totallingRs. 10 million and a line of credit obtained from the National Bankof-Pakistan referred to in paragraph 19 above. This credit will, asalready meniioned, be repaird as soon as the proceeds of the IBRD loancovering reimbursement of foreigni exchange expenditures already made,become available, The Company plans to pay off the Government loanwith the proposed sale of shares.

Estimated REte of E:zte.nditure ndl 7:1ithdrawral of Loan

35. Expenditures on the project and vithdrawal from the proposedI3RD loan are estimated a.s follo%s:

Bxpenditures in I-Millions of RupeesActual I tim2te Total1954 1505S 1956

Foreign Currency Expenditures I/ 11.36 21.09 13.13 45.58Local Exchange Expenditures 6.86 1h.0 9 3.34 24.29

Total 18.22 35.18 16.47 69,87

1/ Equivalent in US Dollars(million±s) (3.43) (6.37) (3-97) (13.77)

IBED Loan Withdrawals (9-80) (3 97) (13.77)

VII. POWJER i.ERXT

36. The population of the Earachi area has increased from 400,oooto 1,300,000 since Partition or by more than 2005;o, whrile the peak poweroutput has increased by only about 1005<. Also, there has been an un-usually rapid industrial development in this area which has resulted ina proportional increase in industrial demand. At present the demand forpower far exceeds the available supply and it has been necessary for the

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Government to establish regulations limiting the use of power through apriority system. There are now over 2,000 applications from industrialusers and over 8,000 residential and commercial applications before theallocation committee which cannot be satisfied.

37. In forecasting the power demacnd through 1960, it has been as-sumed that as soon as new capacity for both generation and distributionbecomes available, restrictions will be lifted so far as possible. Itis estimated that the pent-up demand for residential and commercial usesplus the very substantial increase required by industrial consumers willfully load the new facilities within a short time after they becomeavailable and that the facilities included in this project will at no timesatisfy the full demand for pover in the Karachi area. For example, it isestimated that a peak demand. of about 55,000 !Ia- will exist in the beginningof 1956 as compared with an availotble generating capacity of 48,ooC kw(including the diesel station). This teak load is estimated to increaseto about 85,000 k, by 1960 and this estimate is considered to be conserva-tive if the present plans for industrialization in the Karachi area arerealized on schedule. It anpears, therefore, that there is nn auestionregarding the market for power for this project.

38. The consultants for KESO have projected the nower market forthe Karachi area through 1970 as shown in Annex III. These estimatesindicate that additional canacity of at least 60,000 kw should be in-stalled by 1958 and an aaditional 90,000 1aq by 1970 taking into accountretirements and reserve canacity. The financing of these additionalrequirements is not taken into account in this appraisal but the figuresindicate the order of magnitude of the added facilities required in thearea.

39. The sales of power by KESCO for the period 1947 through 1953and projected sales for the period 1954 through 1960 are given in thefollowing table together with the maximum demand on the system and theload factor.

Maximum Units SoldOutput Million

Year . iW Load Factor T¢m % Increase1947 7.9 57.5 25.41948 8.9 57.0 28.1 ll.(1949 8.8 65.0 32.5 15.01950 11.1 52.5 40.1 23.01951 12.6 55.0 47.9 19.01952 14.5 56.o 56.9 19.01953 18.2 53.0 67.9 19.0

1954 20.3 57,o 85.7 20.01955 23.0 56.o 96.7 13.01956 31.5 56.o 149.2 55.01957 45.0 ]j 55.0 183.9 23.01958 45.o 57.0 191.3 4.o1959 45.o 59.0 198.6 4.01960 45.0 61.5 206.0 4.o

1/ After 1956 the capacity of the diesel station las not been included.This plant will be used as standby.

40. In the above table it is assumed that no additional facilitieswill be installed during the period 1954 through 1960 except those in-cluded in the project. Therefore, the increase shown after 1957 isrelatively small due to the fact that the facilities will be substantiallyloaded at that time.

VIII. FIECTRICITY RATES

41. Electricity rates of 17.SC are regulated by the Government.Rate applicatisns made by the Comcany are subject to approval of theGovernment, based on recommendations of an Advisory Board appointed bythe Government.

42. A revision of rates was approved by the Government effectiveJune 1, 1953 which provided an overall average increase over previousschedules of about 13%. On the basis of present rates, the average sell-ing price per b..rh is aprroximately 3.5 annas (7 UJ.S.) for domestic useand 1.8 annas (3.6 U.S.,) for industrial use. Theqe rates are high com-pared writh those of more highly developed countries. They may be reducedsomewhat if the cost of gas from the Sui field is reduced as is expectedin the next few years. It has been assumed in this analysis that thecurrent rates will apply to future sales through 1960 except for downwardadjustments in the cost of fuel.

IX. ESTIIYATED 7Iz.CIAI RESULTS OF TEE PROJECT

Estimated FutjLre rnis

43. A statement of the estimated annual income of the Company forthe Period 1955 to 1960 is given in Annex IV. This statement is basedon the assumotion that no further investment will be made during thisperiod after commletion of this project. The figures show that theCompanyls operations will be quite profitable and will allow substantialaccruals to surolus after Payment of a, dividend of 7% on share capital.Interest on lon7-term debt is estimated to be covered 3.2 times by netincome from operations in 1957. This coverage will increase to 4.2 timesin 1960.

Cash Position

44. A forecast of the Companyts receipts and expenditures for theperiod 1955 to 1960 is given in Annex V. These estimates show considerablenet cash accruals amPounting to approximately Rs. 42 million ($12.7 million)during the Period after taking into account all exoenditures on the project,debt service payments and an annual dividend of 7$.

45. Actually there is little prospect that c-sh accruals of thismagnitude will develop durinFh this poeriod. It will be necessary that theCompany underteke further investment in generating and distribution faci-lities during this time. Howriever, the schedule on wihich such additionswill be made and their cost is not presently available and, therefore,cannot be taken into account in this analysis. The projection does indicate,however, that substantial cash will be available from operations for purposesof reinvestment.

46. According to the Comnany, no taxes will have to be paid during theperiod 1955/1960 because of special depreciation allowances permitted by thetaxation law covering new canital investments. The Com-nany, how%ever, ismaking annual allocations to a reserve for future taxation. These alloca-tions, which will total to about Rs. 19 million ($5.7 million) during theperiod 1955/1960 are reflected in the large cash balances shown in theforecast. A large part of this reserve should be available for investmentin new expansion.

Future Financinl Position of the Comnn

47. The estimated financial position of the Corpany at the end of 1956,upon completion of the project, is shornq in the pro forma balance sheet inAnnex VI. By that time, total assets of the Comncany are estirmated to amountto Rs. 100 million ($30.2 million). This figure includes Rs. 93 million($28.1 million) for net fixed assets after deducting a reserve for de-preciation of Ps. 18.7 ($5.7 million). NTet current assets are estimatedat Rs. 6.8 mlllion ($2 million). Total canitalization will have increasedto Rs. 93.5 million ($28.2 million) of which long-term debt will amount toabout 52$ as followls:

Estim-nted Canitalizntion End 1956 X/

(in millions of Purees) %

Share Capital 35.-Surplus and Tree Reserves 44.6 48

Long-term Debts:Proposed IERD Loan 45.6Government Loan 1.6PIFCO Loan 1.7 2 9

Total Capitalization 93.5 100

/ Based on the Compnny s plans to prepay during 1955/195e approximatelyRs. 10 million long-term debt from the sale proceeds of an equivalentamount of shares.

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The above debt/equity ratio is satisfactory,r. By l960 total indebtednesswould only represent 395 of total canitalization. These calculationsassume that no additional financing for investment purposes other thanthat required for the project will be undertaken during the period.This, as already mentioned, is not realistic since it is certain thatadditional investmnents must be made in order to meet the power require-ments of the area. Part of these new investments may have to be fi-nanced by the incurring of additional debt. The Company, however, hasagreed that it will maintain a debt/equity ratio of not higher than65/35.

Debt Service

48. Annual debt service, including amortization, on the proposedIBRD loan wfould amount to $1,425,000 on the assumption that the loan isfor a term of 15 years including two years of grace, and at an interestrate of 4-3/45 per annum.

49. Total annual debt service on the proposed IBRD loan and theoutstanding Rupee debts would amol7nt to about Rs. 5.5 million in 1957and to about Rs. 5.2 million thereafter. After 1962, total debt servicewould decrease to Es. 4.7 million. Total debt service wiould be coveredby net income from operations (before depreciation and interest payments)about 2.4 times in 1957, and after 1959 more than 3 times.

X. SECURITY

50. The Coapany has the following long-term debts outstanding:

(a) A 4i issue of first mortgage debentures amountingto Rs. 3,173,00C ($950,000). This issue iwas sub-scribed by the general public during the period1946 through 1950. The debentures mature onAugust 1, 1963, but are redeemable on or afterAugust 1, 1955. The Company plans to pay offthis loan by the end of 1956.

(b) A second mortgage 4-1/2% loan of Rs. 2,400,000($725,000) obtained from the Pakistan IndustrialFinance Corporation (PIFCO). This loan will bepaid off in 7 annual installments, the lastpayment being in 1961.

(G) A 4% Government of Pakistan loan of Rs. 5 million($1.5 million) secured by a third mortgage andcharge on the Companyts properties obtained intwo installments in September 1953. A second 4loan of Rs. 5 million was obtained from theGovernment in April 1954 which w,ill be securedby a fourth mortgage and charge. Both loans arerepayable in 1957. The Company plans to prepaythese loans during 1956 and 1957 from the proceedsof sale of shares.

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51. The pronosed IERD loan w.'ould rank ahead of security for theloans granted by the P iYCO and the Government. The debentures securedby the first mortgage are in bearer form and are held by the generalpublic. It would be difficult and time consuming to obtain consentsto a change in the terms of the indenture to permit a Bank loan to havea senior position. Also in view;r of the fact that the amount outstandingis relatively small (Rs. 3,173,000), it is recommended that the Bankaccept security ranking after the first mortgage debentures. Even ifno prepayment would take place, this issue after completion of theproject would not represent more than 3.34p of the net book value of theCompanyt s assets.

XI. CONCOLUS I OTS AD REC0OlvIDATIONS

52. This project represents an essential step in the expansion ofgenerating and distribution facilities of the Karachi Electric SupplyCorporation, including substantial imnrovements of existing facilities.The market for nower in the Karachi area will be such as to utilizethe proposed facilities fully within a short time after completion.The estimated cost of the project is considered to be reasonable. Theorganization is adequate to cuerate an enterprise of this size effectively.The project is sound.

53. It is recommended that a loan equivalent to $13.8 million re-presenting the foreign exchange reouirements of the project fromJanuary 1, 1954 be made to the Com,nany. Eased on the useful life of theequipment, a term of 15 years would be appropriate. A grace period of2 years on amortization payments is indicated on the basis of the con-struction schedule.

54. The loan :-would be secured by a mortgage and charge rankingabove existing loans granted by PIFCO and the Government but subordinateto a first mortgage issue of Es. 3,173,000 now held by the public.

Annex II

TEE YKARACI ELECTRIC SUPPLY CORP. LTD.

COT1E.TSED I1TOOTCIE C- T.TT`S

(in millions of Ru.pees)

1948 _1942 1950 1951 1952 1953 1954 a/

1. KWHts sold (in millions) 28.1 32.5 40.2 48.- 57-. 67. _852

2. Gross R.evenues 4.12 4.69 o 660o 10.?4 12.80

3. Operating Elpenses lJ 3.03 3.24 4.12 5.18 6.22 6.57 7.104. Depreciation .39 .59 .70 .82 1.17 1.46 2.275. Provision for taxes .c4 °7 _.6 .<6 .o6 .61 1.66. Total Operating Expenses 3.46 3.90 4.88 6.c6 7.45 8.64 10.73

7. lNet Operating Income .66 .79 .82 .48 .35 1.60 2.07

8. Interest charges .14 .16 .19 .19 .28 .27 .27

9. Yet Profit ?52 ., 1. L 1 . Q 8Q

^/ Provisional figures.~/ Includes imaneging Agentis Go=iission.

Annex III

Anticipated Power Development and Operating Schedule fcr Pzwer Stationg(Prepared by Messrs. Brian Colquhoun and Partners)

January i9%h-95

MEGAWATTS OF PLANT IN POATER STATIONS Total M.D. Short Per centInstalled Reserved (a) Available Tbj 1\' Antici- or cf 2i.D.

YEAR X11 'usB "fcrf "tAr" $IBj? "(2" "D" "A" "B" "C" Availalle pated Excess Supplied

1954 22 - - 3.5 _ _ 5 18.5 - - 23.5 49.8 -26,1 47%1955 22 - - 3.5 - - 5 18.5 _ - 23.5 54.5 -31.0 43%1956 (c) 22 O - 8 0 - 7 14 20 - 49 63.0 -11.0 2%1557 22 30 - 8 0 - 5 14 30 - 49 660c -17., 74%1958(d) 22 3C 60 8 0 31.5 5 14 30 20.5 77.5 72.6 / 4.9 -cc%1959(e) 19 30 (0 5 0 31.5 5 14 30 23.5 77.5 70.4 - 3.5 91960(f) 24 3C 60 10 0 31.5 5 14 ;O 28.5 77.5 84.7 - 7.2 91%1961(g) 24 CC 60 15 0 33 5 9 6c 27 101 91.5 / 9.5 1001962 24 6C 60 15 0 33 5 9 6Z 27 101 98.8 / 2.2 i0C%1963(h) 20 60 60 1C 0 33 5 19 6C 27 1C2 106.7 - 4.7 96%1964 2C 60 60 10 0 33 5 1C 60 27 102 115.2 -13.2 88/O1965(i)(j) 20 60 9C 15 34.5 - 65 55.5 120.5 122.1 - 1.6 99%1966 20 6C 90 15 3).5 - 65 55.5 120.5 129.5 - 9.0 9 3%1967 20 60 90 15 34.5 - 65 55.5 ltO.5 137.2 -16.7 '

1968(j) 2D 60 12C 15 36 - 65 84 149 145.5 f 3.5 1CO%1969 20 60 120 15 36 - 65 )4 149 152.7 3-7 98%1970 20 60 1 2- 15 36 - 65 8)4 119 160.4 -11.4 93%0

Notes:(a) "Reserved" means "lunder maintenance or standby, plus allowance fcr internal demand."(b) Generating capacity cf Diesel Station (indicated by "D").(c) "B" Station, with two 15-10i sets, ccmmissicned at end of 1955.(d) "C" Station, with tw-c .3-1;M sets, co:mmissioned in 1958.(e) No. 2 set in "All Station (de-rated at 3h2h) scrapped in 1959.(f) New No. 2 set cf 5 MW rating installed in "A" Station in 1(g) Extension of "B" Station, with tvwrc 15-Miv sets, ccmmissioned in 1961.(h) No. 1 set in "AA" Station (4 MDV) scrapped in 1963.(i) Diesel Station finally shut dovim in 1565.(j) Extension ef "C" Station, vith two C-IV. sets, ccmmissioned in 1565 and 1863.

Annex IV

TEE KrAAGHEI LECTRIC SUPPLY CORP. LTD.

FORECAST OF O:-:,S;G PESULTS

(in millions of Rupees)

15 1956 1957 121 1959 1960

1. M(Mts sold. (in millions) 96.7 149.3 18329 191.3 18 2o6.-

2. Oross Revenues 14.46 22.o5 26.69 27.50 28.58 29.28

3. Operating E2Menzes a/ 7.05 9.57 10.15 9.81 10.14 9.874. Managing Agent s Com-nission .37 .60 .65 .73 78 .845. Depreciation b/ 2.77 4.16 5.61 5.61 5.61 5.616. Provision for future taxation 1.46 2.62 2.76 3.52 4.12 4.847. Other provisions .08 .12 .12 .13 .13 i48. Total Cost of Operations 11.73 17.07 19.29 19.80 ?0.78 21.,0

9. Net Income from OCerations 2.73 4.98 7.40 7.70 7.80 8.08

10. Less: Interest Payments .47 .59 2.33 2.22 2.07 19211. Net Profit 2.26 4. 2 5.07 5. 4 8L5. 1jj6

12. Distribution of Profits:

aY Payment of Dividend 1.90 2.31 2.45 2.45 Z.45 2.45b) Bonus to Staff .25 .30 .30 .30 .30 .30c) Accrual to Surplus .11 1.78 2.32 2.73 2.98 3.41

a/ Assumes the use of Sui gas as fuel starting in 1956.b/ Based. on Depreciation rate of 55 per annum of cost.

Annex V

THE KARACHI ELECTRIC SUPPLY CORP. LTD.FORECAST OF RECEIPTS AND EXPENDITURES

(in millions of Rup2es) -

RECEIPTS 1955 1956 1957 1958 1959 196017 Net Profit 243W 439 6.16

2. Depreciation allovwances 2.77 4.16 5.61 5.61 5.61 5.613. Provision for future taxation 1/ 1.-46 2.62 2.76 3.52 4.12 a4 C2n

4. Cash Receipts from Operations 6.1T9 11.17 13-44 14.61 15.46 16.615. Receipts from Borro-;,ming

a) l!ithdrawals prcpc.3ed IBRD Loan 32.46 13213b) National Bank of Pakistan (short term) 19.96

6,. Prcposed sale of capital stock 5.83 5.-7. Other receipts (service connections) 2.- 1.558. Tctal Receipts 66.71 30.85 13.44 14.61 15.46 16.61

EXPF: ,T1 TURiES9. Construction Program: /

a) Foreign currency expenditures 3/ 21.0C 13.13b) Local currency expenditures 4L/ 14.09 3.34

10. Repayment of Debts: (principal) 35.18 16,47a) Propcsed IERD Loan 1.2t 2.63 2.77 2.92b) Other long term Icans 2.,0 9.95 1.92 .35 .35 .35c) National Bank of Pakistan (short term) 23.47

11. Dividend Payments 1i.O 2.31 2.45 2.45 2.45 2.4512. Bonus to Staff .25 .3° .0 .,0 .,0 .3C

13. Tctal Expenditures 63.10 29.C3 5.95 5.73 5.87 6.02

14, Net annual cash accrual 3.61 1.82 7.49 8.88 9.59 10.5915. Cash accrual - cumulative 3.61 5,43 12.92 21.80 31.39 41.98

1/ According to Company no payment cf taxes due during period 1955/196I. (See para.46 of this report.)*g/ Includes expenditures for service cennections to be refunded by customers. (See item 7.)3/ Includes interest cn IBRD loan capitalized during constructior,2J Includes capitalization of part cf interest cn local borrowing during ccnstruction.

Annex VI

TEE EAACI ECT1:RIC STTPPLY CORP. LTD.

PRO FORMA FAI,ATCE Sl=-7T

(as of December 31, 1956)

Rupees(illions)

ASSETS

Fixed Assets 111.81Less: Reserve for Depreciation 18.73

Net Book Value 93.08

Net Current Assets 6.85Miscellaneous .6o

100.53

CAPITAL, -4.1_ 7.7 1.7 1D LIA IJIT ::S

Share Canital 35.0Surolus and Reserves °

Equity 44.54

Long Term Debts:a) Proposed IBRD Loan 45.59b) Governiment Loan 1.57c) Pakistan Industrial Finarce Corp. 1.75 48.91

Reserve for Future Taxation 6.78Reserve for Emnloyeets Wfelfare, etc. _ f30

10.GO53