body, the National Electric Power Regulatory Authority (Nepra), was also established. A supervisory company, known as the Pakistan Electric Power Company (Pepco), was formed to initially hold the shares for the corporatised companies.
The next step of reforms entailed the privatisation of these corporatised entities. Wapda would not invest in power generation, except in large hydro projects. Private investment would be invited for new generation capacity. Additionally, a 500 KV transmission line was to be constructed in the private sector and an area electricity board together with two generation projects Kot Addu (1,600 MW) and Jamshoro (800 MW) were to be privatised.
The World Bank spearheaded the work on policy formulation and implementation and approved several loans. In 1985, the first proposal for the establishment of an independent power project (IPP) for 1,292 MW was submitted by a Saudi investor. The project came to be known as the Hub Power Company (Hubco). It was the largest private sector project at the time. A consortium of several dozen international commercial banks arranged its financing. The World Bank established an energy development fund (EDF) where numerous export development agencies also contributed resources in addition to a $250 million partial risk guarantee for Pakistan. The government took five years to give its first approval (1990) to the project while the subsequent documentation took another five years to complete (1995).
A major push to induct the private sector came under the second Benazir government, which introduced the 1994 energy policy that attracted considerable investments. This laid the groundwork for agreements for power purchase (PPA), fuel supplies (FSA) and government assurances during implementation (IA), which were hailed as best international practice. An upfront tariff of six cents/kwh was given and investors invited on a first-come-first-served basis. Projects worth 3,400 MW (excluding Hubco) were signed. Initially, there was some overshooting of the required capacity and there was surplus power in 1998. The government erred in disregarding arguments for spacing private investment and bringing some kind of competitive bidding.
There was a massive backlash from the politicians as well as those who saw their displacement after the arrival of private power. Soon, the entire process was politicised and after the removal of the Benazir government, both officials and investors faced accusations of corruption and notices for cancellation/renegotiations.
Foreign investors awoke to a rude shock of the risks associated with large investments. Curiously, nearly all projects survived without effectively conceding any reduction in tariff: A 10-percent average tariff reduction was compensated by an extension in the power purchase agreement from 20 years to 30 years. Indeed, these plants became the mainstay of power supply during early 2000, as old capacity was worn out and new foreign investment stopped after the IPP experience. The dispute was resolved when we faced a major economic crisis after nuclear tests and a subsequent rush to the Paris Club.
The problems that unravelled in the power sector were the high cost of new generation, which came to fruition simultaneously as compared with the old Wapda mix, and the government’s decision not to pass on the increased cost to consumers. This is the classic risk in carrying out reforms. Policymakers would like to have their cake and eat it too. The shortage would be removed through private investments that would initially be costlier because of capacity payments, which largely comprise debt-servicing. But the higher costs have to either be passed on to consumers or borne in the budget.
In 2000, the share of IPPs in Wapda’s power generation was 46 percent and by 2001 the payments to IPPs reached 50 percent of operating costs. Despite the 60 percent increase in the nominal tariff between 1996 and 2001, tariffs declined in real terms whereas the IPP payments were dollar-indexed and the year 1998 saw major devaluation after the freezing of foreign currency accounts. The problems in collections and system losses worsened as the other components of reforms were suspended after the painful experience with IPPs. Wapda, which was a source of remitting profits as non-tax revenues, soon ended up being a leading recipient of subsidies from the budget.
Future investments in the power sector were suspended for nearly a decade and the ugly monster of loadshedding once again started rearing its head.
To be continued
The writer is a former finance secretary. Email: waqarmkngmail.com