Govt mulls over privatising power companies

ISLAMABAD: Irked by circular debt and line losses issues, the interim government is exploring two options - privatization of power generation (Gencos) and distribution companies (Discos) or transfer their management control to private entities for 20 to 25 years.

This strategic shift in policy direction can be attributed to the pressing issue of the power sector’s circular debt, which has ballooned to over Rs2.3 trillion, posing a severe threat to the sector’s sustainability. Consequently, the government is shifting its stance, distancing itself from direct involvement in business operations.

Remarkably, the circular debt in the gas sector has surpassed that of the power sector, amassing a total of Rs2.8 trillion, including Rs2.1 trillion principal amount and up to Rs700 billion in late payment surcharges. When combined, the circular debts of the gas (Rs2.8 trillion) and power sectors (Rs2.3 trillion) amount to a staggering Rs5.1 trillion (equivalent to over $17 billion).

Caretaker Minister for Energy, Muhammad Ali, provided a briefing to journalists, during which he disclosed that in addition to the 10 state-run distribution companies (Discos), the government is considering the transfer of four power generation plants under a long-term concession agreement. This agreement would entrust management responsibilities to private entities for a potential period of up to 25 years, allowing for investments and infrastructure enhancements. “We are also in discussion with the World Bank’s International Finance Corporation (IFC) for long-term concession agreements,” he added.

Among the power generators under consideration are the RLNG-fired 1,230 MW Haveli Bahadur Shah and 1,223 MW Balloki power plants. Also on the list are the Guddu Power plant (747MW) under GENCO-II and the Nandipur Power plant (425MW) under GENCO-III.

The energy minister highlighted the existence of three options, which encompass handing over power distribution companies to their respective provincial governments, complete privatization, or the delegation of management to private investors through a long-term agreement. Currently, the latter two options are under discussion with the Privatisation Commission, with plans to seek cabinet approval for the chosen model.

The minister stressed ongoing efforts to enhance the management of these Discos, noting that their boards’ restructuring is already in progress. However, the government is determined not to delay privatization or management transfer until these improvements fully materialize.

After privatization or management handover to the private sector, uniform tariffs might no longer be obligatory. Different companies could potentially adopt varying tariff structures with more efficient companies offering lower rates. He cited the example of Karachi Electric, a utility that was privatized years ago, yet still receives government subsidies to maintain uniform tariffs. Privatizing state-run companies would alleviate the government’s financial burden, reducing the need for subsidies and losses.

The minister stressed the evaluation of board members, emphasizing the need for the requisite skills and balanced boards.

Responding to queries, Muhammad Ali mentioned the government’s consideration of public listing for companies but noted that only profitable entities would be listed. He underlined the importance of continuity in private sector management and the potential for economic growth, job creation and increased tax revenues through privatization.

Responding to questions about the availability of gas for consumers during the upcoming winter, the minister indicated it would be similar to the previous year. On the matter of gas load-shedding, he confirmed that it would be implemented, and added, “Yes, like the previous year.”

He also stated that the government plans to raise gas tariffs, with nearly 60 percent of the population, mostly low-income domestic consumers facing potential monthly increase of up to Rs500. Meanwhile, affluent consumers in higher consumption brackets are expected to bear even larger hikes in their gas tariffs.

Regarding government-independent power producer (IPP) agreements, Muhammad Ali stated that international investments preclude changes to these agreements, necessitating their continued adherence. “We will honor them,” he said.

The minister also discussed strategies for reducing circular debt in the gas and power sectors in the short term. These include interventions to lower costs, prolonging loan tenors, boosting local power generation, particularly from Thar-based coal, and upgrading the North-South transmission line. The Central Power Purchasing Agency (CPPA) has been tasked with developing a bulk energy market in six months to facilitate the trade of electricity of 1 MW or above.

The energy minister highlighted that the gas sector was experiencing annual losses of Rs350 billion, a concerning trend diverging from the power sector. He emphasized the daily increase in the gas sector’s circular debt stands at approximately Rs1 billion.

With local gas production dwindling, Pakistan’s reliance on imported gas has surged. Muhammad Ali pointed out that the procurement of liquefied natural gas (LNG) at $13, while selling it to domestic and other consumers at $2.5 per million British thermal units (mmbtu), has resulted in substantial losses, contributing to the mounting circular debt in the gas sector.