Lahore University of Management Sciences (LUMS)
Project Proposal
IDENTIFIC ATION OF BOTTLENECKS IN PAKISTAN·S ENERGY SECTOR AND FORMULATION OF APPROPRI ATE STRATEGIES TO ADDRESS EACH
Wärtsilä
Pakistan Private Limited
9/24/2010 Presented by: 1. 2. 3. 4. 5.
Azm Dar Hajra Asad Taimoor Ali
Shaheryar Rafi Ahmed Ijaz Kaul
MBA 2011
TABLE OF CONTENTS PROPOSAL FOR THE PROJECT .................................................................................................. 3 FACULTY SUPERVISOR/ADVISOR .......................................................... Error! Bookmark not defined. IMPORTANCE OF THIS PROJECT FOR US ................................................... Error! Bookmark not defined. WHAT MEMBERS CAN CONTRIBUTE TO THIS PROJECT .......................................................................... 3 GROUP MEMBERS PROFILES .................................................................................................... 6 COMPETENCY AND RESPONSIBILITY MATRIX .................................................................................... 9
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Dated: 24th September, 2010
To,
Mr. Ghazanfar Mirza, Managing Director. Mr. Jahanzeb Khaliq Toor,
Coordinator Business Support. Wartsila Pakistan Private Limited
Pr oposal for the Project Identification of bottlenecks in Pakistan·s Energy Sector and formulation of appropriate strategies to address each.
This is to request y ou that we as a group of five students from LUMS are interested to take the above mentioned project as our final year project that is planned to be finished by May, 2011. The group members include: 1. 2. 3. 4.
Azm Dar Hajra Asad Taimoor Ali
Shaheryar Rafi 5. Ahmed Ijaz Kaul
An Introduction of Energy Sector in Pakistan Pakistan·s energy sector faces a financial crisis that has stemmed from weak governance, political interference in decision-making, poor staff morale, and disregard of prudent business practices. The worsening problems in these areas have had a major impact on the financial performance of the utilities and have hindered the effectivene ss and sustainability of the energy sector. Weak governance has resulted in inefficient uti lity operations, power theft, reduced billing and collection, and nonpayment of arrears. These practices have affected the poor segment of the population more than the affluent and contributed to the financial crisis in the sector. The absence of an immediate policy response for the energy sector would have serious economic repercussions. The country is facing worst energy crisis that is affecting economy negatively in many subtle ways. This is happening despite availability of sufficient water in dams, decrease in oil prices in global market and the facility of importing oil worth $6.0bn provided by Saudi Arabia on deferred payments. The real cause lies somewhere else: fiscal crisis faced by energy sector whose circular debt has shot up to Rs400.0bn primarily because of non-payment of outstanding dues by public sector consumers of different sorts that includes provincial and federal governments departments.
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Energy crisis have persisted because of three fault lines. One, the cost of furnace oil has surged up and government in the pa st remained reluctant to pass it on to the consumers for reasons that were primarily p olitically expeditious. C onsequently, the issue of petroleum price differential has persisted between the government, fuel supply companies and IPPs.
Methodology of our Research We will first analyze the entire industry in terms of its competitiveness by using frameworks like Porter·s 5 f orces model and Porter·s Diamond. After that we will analyse it in terms of the strength s and weaknesses and opportunities and threats which are foreseeable in the future. By c ombining the data from all these analysis tools, we will gain a holistic picture of the energy business in Pakistan and apply diagnostic tools to generate a strategy for Wartsila to overcome the issues. In all of this, the involvement and viewpoints of various stakeholders like government, regulatory bodies, consumer advocacy groups and private sector will be taken on board and their concerns and issues will be addressed in our report.
Initial Findings In the brief time that we have researched for this project, we have found out that by nature energy sector money matters are ´circularµ in structure. IPPs generate power with sovereign guarantees given by the government about purchasing power and making payment to them by the public sector p ower companies who purchase power from them for onward distribution to different sort of consumers. Fuel supply c ompanies are to supply fuel to IPPs but they t oo have to be paid their dues on ti me to enable them to keep supply line intact. The consumers are billed to make payments for the energy they consume. In case the circle involving the four stakeholders runs efficient ly, there should be a bsolutely no difficulty to provide electricity to all sorts of consumers. What we need i s fiscal management by the government and use of energy efficient ly by the consumers and industry and finally the generation of power and its distribution network should be made efficient. The government should take the following measures: (a) Outstanding bills of c onsumers of all sorts should be realised within four months through monthly installments. Outstanding bills of public sector enterprises, provincial and federal governments, should be deducted at source. (b) Austerity measures decided by the federal government should be i mplemented in letter and spirit to reduce the over consumption of electricity. (c) Government should take measures to reduce the cost of furnace oil for production of comparatively less costly electricity as an incentive for timely payment of bills by big consumers. (d)Theft of electricity and line losses should be reduced from 40.0 per cent to a lower percentage. (e)Government needs to review its policy of paying-off the circular debt by floating TFCs that create liquidity crunch for commercial banks. Instead, the power sector should be made self-reliant and selfsustaining.
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Resolving the problems of outstanding bills is the key to end the circular debt i ssue, and to generate maximum power generation to end electricity outages that have adversely affected normal life and all sectors of the economy. On the c onsumption side, the government has controlled prices and provided appropriate subsidies to keep energy affordable to the population and to encourage the use of cleaner domestic fuels (e.g., using compressed natural gas for vehicles). While the social intentions of the government are good, the resulting patchwork of price and tariff c ontrols and crosssubsidies, tax breaks and tax burdens, and untargeted subsidies have resulted in a lack of transparency in the energy sector, an erosion of fi scal discipline in the sector, an increased financial burden on the government, and the encouragement of behavior that wastes instead of conserves energy. These problems are aggravated by the ¶cycle of debt· between state enterprises, where debts are swapped back and forth instead of actual funds to cover energy sales. While many participants in the discussion focused only on the capacity of government institutions, the capabilities of the private sector, local governments, and NGOs were also seen as in need of improvement. Some of the observations made were: The private sector lacks knowledge on how to improve its energy efficiency and reduce energy c osts. The private sector lacks the skills to analyze what is the most efficient power system to purchase and operate, as well as lacking the knowledge to explore options under existing government policies to sell captive power back to the utility or to invest in power generation facilities such as small hydro or wind facilities that could produce power that the local utility would transmit to the industrial user. Local governments lack the capacity to monitor the energy u se of community facilities, and to identify opportunitie s to conserve energy. Communities and NGOs lack knowledge about renewable energy systems and suppliers, and how they might partner with governments, donors, and the private sector to bring energy services to remote populations in a cost-effective and sustainable fashion (e.g., using livestock wastes to produce biogas, using crop seeds or wastes to produce biofuels). Consumers of energy products and services, along with journalists and community leaders, do not understand that the costs of these services must be covered by the consumer.
The Energy Mix is of crucial importance to the Energy Supply chain. A proper balance between multiple indigenous sources, as well as forms, sources and modalities of energy i mport, must be f ormulated to ensure an affordable and sustainable energy basket. Unfortunately in Pakistan, there has been no attention paid to this crucial aspect of energy planning and the government has relied on quick and short term fixes rather than the solutions than long term and sustainable.
The energy infrastructure bottlenecks and shallow financial services industry are key constraints that raise the cost of doing business in Pakistan. The absence of re liable infrastructure , coupled with rising cost of energy products, affects companies· bottom lines and increases production costs. Industries are not investing in energy efficiency as it directly competes with production. There is no available financing dedicated for energy efficiency. Banks do not have the capacity to undertake due diligence
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on such projects. Enforcement of standards is generally weak in Pakistan. There are existing quality standards for lighting and some electrical appliances, but these do not adequately cover all main product categories, types, or sizes, nor are they properly enforced. Quality and performance standards need to be harmonized with international standards.
Energy efficiency is the short-term solution to the energy crisis. It reduce s shortages by minimizing power and gas rationing and forced outages. Public financing and policy incentives will encourage businesses to invest in clean technology and savings practice. Lack of progress on reforms, a deterioration in the macroeconomic situation, weaknesses in financial management and institutional ineffectivene ss are potential macro level risk factors. These are mitigated by a commitment of the present Government to continue with these reforms, the IMFsupported economic stabilization program, and the ongoing and planned measures to improve transparency and accountability of financial management systems. Improving energy efficiency and energy c onservation, in general, leads to a cleaner and better environment. Electricity production, particularly from fossil fuels, has far reaching environmental impacts. Consequently, energy efficiency is closely related to environmental benefits. What
Members can contribute to this Project
All the five members have got well diversified professional experiences before joining the MBA program at LUMS. Mr. Azm and Mr. Ahmed have got experience in their own distribution fa mily businesses. M s. Hajra has got f oreign education experience before polishing her professional skills in HR. Mr. Tai moor has got project management professional experience of 3 years at Etisalat. Mr. Sheheryar was coordinating the software projects in a firm and looking at his immense interest in finance he joined the MBA for finance majors.
Functioning of the Team:- The tea m will work in a SMT (Self Managed Team) structure for the data analysis and other project workings. Having said that, project will be conducted under the supervision of skillful and competent management at Wartsila and the faculty advisor who has got vast professional and academic experience of sector analysis and strategy formulation. The team will be directly reporting to the Wartsila Management and the Advisor and taking assignments from the Wartsila Management. Changes can be done as per the requirements of Wartsila Management at any time. Group Members Profiles Azm Dar Qualification: Candidate for LUMS MBA 2011, Bachelors in Business Administration from Bahria
University, Islamabad. Experience: Worked two years with his own services business and part time with father·s business of distribution of medical equipment. Future Ambitions: Bringing my father·s business of medical equipment business to new heights. Value Addition of This Project: I have experience of running my own marketing business right after the undergraduate studies. Moreover I have been playing active role in my father·s medical equipment distribution business. I have secured the top position in marketing course in both the sections so I believe picking up this consumer behavior and marketing research based project will further polish my
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business skills which will eventually help me in making better decision for my future business endeavors. I have also been the MBA 2011 cricket team captain so words like team work and motivation are not new to me. For my excellent academic performance I have been given the opportunity to go to Denmark Copen Hagen Business School to widen my academic and learning experience for the whole third semester. I wi ll be joining back in the fourth semester of LUMS MBA in December.
Hajra Asad
Qualification: Candidate for LUMS MBA 2011, Bachelors in Business Administration from University of Colorado, U.S.A. Experience: Worked in the HR Department of LUMS for two years. Future Ambitions: Working at a managerial position in the HR Department of an MNC. Value Addition of this Project: This project will enable me t o diversify my experience and enhance my soft skills that are critically required by HR Professionals. I strongly believe that professionals should not be working in silos and should be aware of other business functions as well. Working on the analysis of an industry structure will enhance my skills as an HR Professional to make strategic analysis taking into account the forces affecting the competitiveness of an industry. Energy sector being the backbone of the Pakistani economy requires a deeper understanding by a professional working in this country. Females in Pakistan are traditionally working in a few fields of this economy. This tradition needs to be broken and females need to enter all available sectors given the opportunity. Being a part of this project will help me learn the business while contributing the knowledge I have gained at the business schools I have been to.
Taimoor Ali
Qualification: Candidate for LUMS MBA 2011, Bachelors in Information Technology from National University of Sciences and Technology (NUST). Experience: Worked for 3 Years with Etisalat in PTCL as a project coordinator for implementation of ERP-SAP system. Future Ambitions: Starting off my own consultancy firm. Value Addition of this Project: this project will help be understand the new business dimension of mass merchandising in Pakistan. Effective utilization of resources and efficient cost structure via Own Brands can help stream line the business in an environment where the c ountry in going through economic downturn. Changing consumer behaviors will help figure out innovative way to reach out to the consumers. MAKRO is providing an excellent platform for the business student to understand the consumer behavior of local consumer markets in households that can help revolutionize the business in Pakistan. Once tapped, the field of Own Brand can pr ovide sustainable pr ofits to businesses in a winwin situation where consumer will also benefit from the economies of scale and lower costs. This project will add value t o my analytical skills which will second my academic knowledge as something practical attached with my academic skills.
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Shaheryar Rafi
Qualification: Candidate for LUMS MBA 2011, B.Sc. Computer Sciences (FAST Lahore). Experience: Three years of experience in IT working with Thomson Reuters. Future Ambitions: Management of Financial Institutions at highest management levels. Value Addition of this Project: Possessing excellent analytical ability and drawing holistic view of the situation before forming a strategy are the qualities with which people know me from. I have got three years of experience in IT working with Thomson Reuters. My experience in software development has enabled me to be a successful team player and a leader while managing cross functional teams comprising business & financial analysts and software engineers. Recently, I was involved in the designing of the Supply Chain Management system for a specialty chemical manufacturer and distributor, keeping in view the long term financial and strategic goals of the company. This project will help me polish my skills towards the financial as well as marketing aspect of the business. As a business student I need to know all the functions of the business and while learning I will be contributing towards the financial aspects of this project for all the number crunching.
Ahmed Ijaz Kaul
Qualification: Candidate for LUMS MBA 2011, B.Sc. Economics from University of London (External Program). Experience: Managed Sigma Distributors for two years. Future Ambitions: Expanding the di stribution business and horizontally integrating the business. Value Addition of this Project: I have worked for two years at my own distribution company and we are the distributors of Unilever Pakistan and Nestle Pakistan in Lahore city. I have always wanted to work in a challenging environment where I can app ly the skills I have acquired during my studies. This project is an ideal platform for me to learn about the energy sector in Pakistan and enhancing my skills in the field of strategic analysis. As a keen observer of the current political situation in Pakistan, in my opinion this sector ha s such an important role t o play in our economy that knowledge of this sector i s critical for any individual who wants to work in the higher management levels.
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Competency and Responsibility Matrix
Azm Saeed Dar
Hajra Asad
Sheheryar Rafi
Taimoor Ali
Ahmed Kaul
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Ijaz
Market Surveys
Meetings with Clients
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Financial Analysis
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Data Analysis
Report Making
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Presentati on
of Term Reference s
Competitive Analysis
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