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Tuesday, September 25, 2007

Battle emerges at KPLC over bonuses for foreign managers

Source: “Business Daily”

Fifteen months ago, after a decade of struggling to get Kenyan CEOs fix Kenya Power & Lighting Company, the Government and the World Bank gave up and hired three expatriates from Canada to do the job.

The deal was simple and measurable. The Canadian managers, seconded from Manitoba Hydro International, had six targets to meet in exchange for a Sh30 million annual performance bonus.

This was in addition to the management fee that the Government and the World Bank have declined to make public despite KPLC being both publicly listed and owned by the taxpayers.

Of the six targets, the most pressing was cutting the volume of annual electricity losses — estimated to be worth between Sh2 billion to Sh5 billion— to 15 per cent of all power sold.

Other targets included connecting 120,000 new customers to the national grid annually, which has so far been achieved; reducing power outages from 11,735 incidents per month to 3,000, reducing the number of days the company is owed money from an average of 90 to 60 days, reducing the customer response time to breakdowns to one hour and generally improve customer service and corporate governance.

A consortium of donors led by the World Bank lent Kenya Sh10 billion in an extensive loan that financed the costs of the Canadian firm and meeting all these targets.

One year down the line — and halfway through the contract — the Government is embroiled in a major disagreement with the expatriate managers over how much of the performance bonus should be paid out.

The expatriates say they have met the targets and are entitled to the entire Sh30 million inducement. But the Government insists that the foreign managers have not lived up to expectations and only deserve a bonus of up to Sh20 million.

Board members friendly to the Government who spoke to Business Daily say that the foreign managers have not met all the targets, particularly reducing system losses and power outages.

Energy ministry permanent secretary Patrick Nyoike said on September 3 that system losses currently stand at 19.2 per cent against a target of 17 per cent. Though he sits on the KPLC board, he did not respond to requests for an interview for this article.

KPLC general manager Don Priestman, who heads the expatriate team, could not provide a specific number for outages, but he claimed they have “fallen dramatically.”

A difference of Sh10 million may appear small among partners in a Sh10 billion turnaround plan, but this squabble underscores a major shift in the relationship between a foreign government and an international contractor.

If the contractor accepts a Sh20 million bonus, it implies they have not fully met the job targets and may give those in government who are pressing for the termination of the contract ended before it fully matures a chance to make their point.

Sources who declined to be named revealed that the political mood at the Ministry of Energy favours an end to the management contract at KPLC.

Among KPLC’s management ranks, the presence of the foreign managers has been a major lightning rod of internal corporate politics with some claiming that part of the gains that the company has made was the result of a strategy that was crafted before the foreign managers arrived.

The dispute also highlights a tenuous relationship that exists in the World Bank model of providing development aid where it is both involved in writing the cheques, husbanding a client’s strategy and sometimes controlling the methods of execution.

The World Bank, which is the key financier of the turn around deal, is also digging in for a fight, insisting that the bonus payment should not pose a problem.

“Payment of bonus/or penalties is based on whether the agreed targets were achieved or not,” the World Bank said in a statement. “In this case the baseline figures were agreed upon and performance of Manitoba Hydro over the last year is known. Therefore computation of the bonus should not be an issue.”

The management contractor is already threatening to quit the job nine months into their contract “insisting he has done an excellent job” and full bonus payment should be made.

Mr Priestman, however refused to discuss the issue, saying its premature to comment as negations over the payment are on going.

“The matter is being discussed at the board level, but our measure of performance is excellent since KPLC is in better shape than it was earlier,” Mr Priestman said the on telephone.

A clear sign that the Manitoba Hydro management team is not prepared to cede ground in their quest to get the full bonus payment.

Manitoba Hydro’s brief was to upgrade the transmission system to make it more efficient and cut back losses. This was to be done through a $153 million (Sh10 billion) Distribution System Reinforcement and Upgrade component of the Energy Sector Recovery Project.

Though the Manitoba team has managed to beat the connection target, the level of outages and those of system losses have put them at logger heads with government friendly board members, who reckon that they are way off the targets.

The ghost of transmission losses that has continued to dog KPLC over the past decade appears to have remained almost stagnant since July last year, official figures show.

In June 2006, the losses stood at 19.6 per cent and the Canadian team was meant to bring it down to 16 per cent by the end of June 2008.

This has translated into losses running into billions of shillings as the power firm shoulders any losses above the 15 per cent mark.

The company has attributed the growing leakages to two main factors. First, there is the KPLC’s ageing power transmission grid, which stems from the long periods of under investment in the transmission system. Then there is power theft that comes in the form of illegal connections to the national power grid.

Mr Priestman added a new twist to the scenario, saying that the rapid power expansion project that KPLC has pursued over the past year has exposed it to additional power losses.

“While we have reduced losses from the old transmission, we are facing additional losses from the expanded transmission system,” said Mr Priestman.

The power firm has embarked on a programme to upgrade 23, 000 kilometres of the distribution network at a cost of Sh10.7 billion.

Industry observers, however, reckon that the upgrade project has been slowed down by stringent procurement rules guiding state firms.

In recent years, theft and vandalism of transmission lines and transformers has rising buoyed by high prices for the equipment in the black market. Debate on system losses comes at a time when the country is staring at an energy crisis as the power reserve limit-the difference between demand and supply for power-has sunk to record levels.

Last week, KenGen—the principal supplier of electricity to KPLC—disclosed that a growing demand for electricity had pushed the reserve limit to 11 per cent of operational capacity, against an optimum level of 15 per cent set by the electricity regulator to prevent unforeseen shortages.

The country’s effective capacity stands at 1, 143 megawatts compared to peak demand of 1, 010 megawatts, leaving the country with a reserve of 133 megawatts compared the required reserve of 172 megawatts.

KenGen, which produces 80 per cent of the total electricity generated in the country, is this week expected to kick off the search for a financial adviser on how to structure a Sh30 billion bond to fast track the construction of mega power plants.

On power outages, a source at the ministry of energy said KPLC was yet to move within the set targets.

This could not be independently verified as KPLC could not provide the latest data on the level of outages. “I don’t have the figures with me here but they have dramatically come down,” Mr Priestman said.

The issue of targets is the latest in a series of disagreements between the Manitoba team and the Government, sending the relationship between the two partners to record lows.

Besides the targets, the Manitoba management team and the government were on the collision path on who should be the mover of the rural electrification programme.

The KPLC management reckons that the rural electrification drive is not a core part of their mandate at the power firm and that their active participation in the drive would jeopardize their quest to meet their core target.

A move that saw the World Bank enter the fray in support of the Manitoba team.

This saw the Government hurriedly set up the Rural Electrification Authority (REA) to drive the rural electrification project to the chagrin of the World Bank, who argued caution in managing the transition phase.

“In particular, there has to be careful management of the procurement of materials and organization of human resources so that implementation of the extensive rural electrification program does not jeopardize achievement of the agreed targets under the original KPLC management contract with Manitoba Hydro,” said the bank.

Already, Mr Zachary Ayieko, the immediate former managing director at KPLC and whose relationship with the Manitoba team was said to be frosty, is the chief executive at REA.

The Manitoba Hydro management team includes Shahid Muhammad, the deputy general manager in charge of Distribution and Customer Services, and Mack Kast, the deputy general manager in charge of Finance and Corporate services.

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