Lahore University

of Management
Sciences (LUMS)

Project Proposal

IDENTIFICATION OF BOTTLENECKS IN PAKISTAN’S ENERGY SECTOR AND FORMULATION OF

APPROPRIATE STRATEGIES TO ADDRESS EACH

Wärtsilä Pakistan Private Limited

 
9/24/2010
Presented by:
Azm Dar
Hajra Asad
Taimoor Ali
Shaheryar Rafi
Ahmed Ijaz Kaul
 Lahore University of Management Sciences (LUMS)
MBA 2011

TABLE OF CONTENTS

PROPOSAL FOR THE PROJECT............................................................................................... 3

FACULTY SUPERVISOR/ADVISOR............................................................................................. 3

IMPORTANCE OF THIS PROJECT FOR US.....................................................................................3

WHAT MEMBERS CAN CONTRIBUTE TO THIS PROJECT ........................................................................4

GROUP MEMBERS PROFILES................................................................................................. 6

COMPETENCY AND RESPONSIBILITY MATRIX..................................................................................8

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 Lahore University of Management Sciences (LUMS)
MBA 2011

To, Dated: 24th September, 2010

Mr. Ghazanfar Mirza,

Managing Director.

Mr. Jahanzeb Khaliq Toor,

Coordinator Business Support.

Wartsila Pakistan Private Limited

Proposal for the Project

Identification of bottlenecks in Pakistan’s Energy Sector and formulation of appropriate strategies to address
each.

This is to request you 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. Azm Dar
2. Hajra Asad
3. Taimoor Ali
4. 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 effectiveness and sustainability of the energy sector. Weak governance
has resulted in inefficient utility 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 past remained reluctant to pass it on to the consumers for reasons that were
primarily politically expeditious. Consequently, 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 forces model and Porter’s Diamond. After that we will analyse it in terms of the strengths
and weaknesses and opportunities and threats which are foreseeable in the future. By combining 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 “circular” in structure. IPPs generate power with sovereign guarantees given
by the government about purchasing power and making payment to them  by the public sector power
companies who purchase power from them for onward distribution to different sort of consumers. Fuel
supply companies are to supply fuel to IPPs but they too have to be paid their dues on time 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 efficiently, there should be absolutely
no difficulty to provide electricity to all sorts of consumers.
What we need is fiscal management by the government and use of energy efficiently 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 consumers 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 implemented 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 self-
sustaining.

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Resolving the problems of outstanding bills is the key to end the circular debt issue, and to generate
maximum power generation to end electricity outages that have adversely affected normal life and all
sectors of the economy.

On the consumption 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 controls and crosssubsidies, tax breaks and tax burdens, and
untargeted subsidies have resulted in a lack of transparency in the energy sector, an erosion of fiscal
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 costs.

• 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 use of community facilities, and to
identify opportunities 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 import, must be formulated 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 reliable 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 reduces 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 ineffectiveness are potential macro level risk factors. These are
mitigated by a commitment of the present Government to continue with these reforms, the IMF-
supported economic stabilization program, and the ongoing and planned measures to improve
transparency and accountability of financial management systems.

Improving energy efficiency and energy conservation, 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 family businesses. Ms.
Hajra has got foreign education experience before polishing her professional skills in HR. Mr. Taimoor
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 team 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 will 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 to 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 country 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 provide sustainable profits to businesses in a win-
win situation where consumer will also benefit from the economies of scale and lower costs. This
project will add value to 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 distribution 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 apply 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 has such an important role to play in our economy that knowledge of this sector is
critical for any individual who wants to work in the higher management levels.

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 Lahore University of Management Sciences (LUMS)
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Competency and Responsibility Matrix

Ahmed Ijaz
Azm Saeed Dar Hajra Asad Sheheryar Rafi Taimoor Ali
Kaul

Market Surveys
√ √ √ √ √

Meetings with
Clients √ √ √

Financial
Analysis
√ √ √

Data Analysis
√ √

Report Making √ √ √

Presentation
√ √ √ √ √

Term of
References √ √ √ √

Competitive
Analysis √ √ √

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