September Issue 2015

By | Economy | Published 4 years ago

When it first assumed power in 2013 the PML-N government cavalierly promised to pay off the circular debt that has long plagued the energy sector of Pakistan. Over two years it has sunk about 750 billion rupees into keeping this promise, but as of last month, the debt still hovers at above 280 billion rupees, and power outages continue across the country.

Like previous governments, the PML-N continues to announce new projects and provide deadlines when load-shedding will finally be brought to an end. Yet the national grid system consistently seems to fall short of peak demand by 5,000-6,000 MWs.

It’s not like we can’t produce it. The capacity is there, only the generation isn’t. The reasons? Poor recoveries, transmission losses, wrong fuel mix (too much reliance on expensive furnace oil), among a whole host of structural problems (rural electrification in Pakistan, for instance, is higher than in countries with much larger power infrastructures, like India), take your pick.

The newest of PML-N’s project announcements is supply-side privatisation. The state run power supply companies — FESCO, LESCO and IESCO — are to be sold by 2016. The rest are to be privatised on a rolling basis.

Only, on the surface of things, FESCO posts annual profits in the region of 3 billion rupees. Its line losses are reported at 9.6 per cent to the NEPRA-approved allowance of 10 per cent, and the company claims the highest rate of bill recovery at 99.6 per cent.

The only reason FESCO isn’t a cash cow for the state right now is that energy prices aren’t rationalised. The federal government oversees FESCO and the federal government also pumps a tariff differential subsidy into it, to keep the unit cost to consumers lower than what FESCO wants to charge (in relation to their cost of purchase and supply).

This subsidy is precisely the point of contention, standing at a staggering 250 billion rupees mark, the reduction of which  – along with privatisation – is one of the major conditions set by the IMF to continue releasing money for energy projects.

But therein lies the problem — price rationalisation and subsidy reduction seem to have more to do with politics than ownership. The government has been roundly panned for levying equalisation surcharges. It has also been summoned to court over them.

The private model is to redirect electricity and investment to high bill paying areas, making the most influential the least likely to complain. But improvement in distribution in selective areas does not mean improvements have been made in the company’s infrastructure to keep pace with the overall rising demand.

This decision has been decades in the making.

Ever since the first rumblings in the 1970s about WAPDA getting too big and unruly, ever since governments started shying away from hydropower projects deemed too expensive and politically complicated (like the Kalabagh Dam), ever since international donors started pushing private power producers, our energy sector has been on a one-way course.

The Private Power Policy of 1994, signed off by Benazir Bhutto, encompassed this new paradigm of power sector growth coming from private money. But power sector investments are always risky and linked to many other concerns, like the supply of fuel, a consistent tariff, overall economic and exchange rate stability.

The risk mitigation for private investment meant many concessions on the part of the government in what came to be largely maligned in terms of agreement. Like the long term, high tariff, fuel-ensured IPP agreements.

Yet when Nawaz Sharif came into power from 1997 to 1999, despite being a vocal critic of the above himself, he
continued with the same advice from the same international donors and passed legislation breaking up WAPDA’s power wing into generation, transmission and supply companies (GENCOs, NTDC, DISCOs) and eventually a regulator and an overseer (NEPRA, PEPCO).

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General Musharraf’s martial law regime would eventually tow the same line, signing off on new IPPs, despite early plans for state-run hydropower and coal-based power projects.

Zardari’s government also looked for private investment solutions, and as per the National Power Policy of 2013, cleaning up DISCOs, improving billing and technical losses and profitability and making them attractive to private investment, was one of the biggest priorities.

Many different regimes, many different personalities. Yet similar decisions in the energy sector.

This is what economics terms as ‘path dependency,’ and perhaps the only compelling argument for privatisation now is the (however limited) virtues of sticking to a plan.

The plan was always for the DISCOs (supply companies) to become autonomous, with their own CEO and board of directors and attracting private investment. Our current system is still one of transition, where private producers are invited to sell costly electricity to inefficient distributors rife with ill-suited bureaucratic appointments. It makes little sense to stick to what prevails, at least.

It also seems impossible now to roll back the clock and go back to a more centralised form of state-owned electricity generation and provision. That boat seems to have sailed long ago, both for international donors and our own beleaguered governments. The financial capacity to self-fund is simply not there.

There is staunch opposition to privatisation of course. The WAPDA worker’s union has held fiery strikes and demonstrations in Faisalabad. This isn’t just a case of labour looking out for itself, they make some fair arguments. For one, that the transmission/distribution infrastructure is so inadequate that it doesn’t matter who’s running the show. It’s all going to get choked at the grassroots.

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Even after privatisation, the government will have to finance and take many steps to actually resolve the electricity crisis. We simply have to move away from furnace oil to something cheaper, and our baseline production cannot be from renewable resources either, as Tarbela has shown time and time again, it’s not precisely reliable. That only leaves gas.

Or, the alternative, to make coal more feasible. Most of the expected Chinese investment has already turned away from the 6,600 MW Gadani Power Park project because the government was unable to offer any infrastructure to transport coal in such large quantities from the port. The existing railroads can’t cope with the quantities required.

Legislative changes need to be made to help with billing and recoveries — billions of rupees are lost every year in the tariff tussle between supply companies, the regulator and the eventual bill that gets to the consumers. Long-standing stay orders cost the federal government money.

At least in this regard the CPPA, the authority that processes power purchases and payments, has been separated from NTDC recently. An autonomous CPPA should ensure less tariff wrangling and better terms for buyers and sellers.

While privatisation looks like an inevitability, it will do little to address the structural problems of Pakistan’s power sector unless accompanied by more of these reforms and capacity-building. Just handing over utilities to private entities doesn’t solve such enormous problems.

Other developing countries who’ve experimented with privatisation as a panacea, and a way of absolving the state of responsibilities, have not met with much success, Nigeria being a prime example. It’s the large scale structural reforms which will make the difference, of which supply side privatisation is just one component, and only useful if the other components are functional.

This article was originally published in Newsline’s September 2015 issue.