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Opinion

May 11, 2017

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Inefficiency and the power crisis

The promise to end loadshedding in 30 days, six months, a year or even three years appears to be a sustained slogan of the ruling party since the 2013 elections. However, there is always a new timeline at the end.

On average, the power shortfall in the country hovers around 5,000MWs during the year while a considerable portion of the GDP is knocked off by the menace that echoes in every corner of the country: loadshedding.

With the commencement of CPEC, the people of Pakistan were given the hope that the 10,350MWs of priority energy projects and 5,820MWs of actively promoted projects under CPEC will shed away the murk of load-shedding forever. However, the fact to consider is whether generation is the sole elixir of the power sector’s despair?

Understanding the power value chain is vital before we can develop a better understanding of the term ‘loadshedding’. In Pakistan, at the generation side, power-generation entities comprise government-owned Gencos, Wapda hydel power units and independent power producers (IPPs). All the power that is produced is procured by the government through the NTDC or the CPPA.

At the distribution end, 10 state-owned distribution companies – Discos – channel energy purchased from the NTDC to consumers. K-Electric, a vertically integrated entity, also forms part of the power sector while the National Electric Power Regulatory Authority (Nepra), as the regulator, controls all tariff-setting, licensing, standard-setting and investment approval affairs.

Admittedly, the national grid is devoid of the demanded megawatts. But the issue seems to be the anatomy of the power sector more than the capacity. Circular debt continues to haunt the sector every now and then. The drivers of circular debt, as per Section G of the National Power Tariff and Subsidy Power Guidelines 2014 include the difference between the actual cost and the tariff determined by Nepra – which is the distribution company’s loss over and collections under that allowed by Nepra – the delay or non-payment of subsidies by the government and the delayed determination and notification of tariffs.

Tariffs set by Nepra are usually altered by the government. This is done for two reasons. First, to ensure uniformity against the price disparity across the country – ie the lowest Nepra-awarded tariff among all Discos is set as the prevailing tariff with the difference paid by the government as the tariff differential subsidy. Second, the subsidies paid to Discos for certain socially and economically deprived segments, such as agricultural communities or the residents of Fata or AJK residents.

An integral component of Nepra’s tariff-setting mechanism relies on the unrealistic assumption of 100 percent recoveries and line losses of 15.3 percent. Considering the state of distribution infrastructure, the targets are unrealistic. According to the former federal secretary for water and power, “in 2014, the difference between Nepra-assumed recoveries and line and actual losses was around 15 percent (recoveries 88.6 percent against Nepra assumption of 100 percent and the line losses 19.1 percent against Nepra assumed 15.3 percent). Each percentage point costs Rs9 billion to Rs10 billion and it was set to contribute roughly Rs140 billion to the circular debt annually, which would have pushed it from Rs298 billion in December 2014 to Rs572 billion in December 2016, but it actually remained at Rs393 billion on December 31, 2016”.

The government’s efficacy in curbing the delay or non-payment of subsidies by the government can be reflected by the audited financial statements of just one out of the 10 Discos – around Rs7.76 billion – stands as receivable from the government on the balance sheet of Iesco whereas the company registered a net loss of Rs7.74 billion for the year which ended on June 30, 2016.

To ensure the delayed determination and the notification of tariffs does not occur, it is fundamental to analyse the steps which were taken. Global trends are proving the efficacy of the role of corporate governance and increased board independence in efficient oversight, operations and the success of corporate entities. The treasury benches, through amendments in Sections 186 and Section 187 in the Companies Ordinance 2016, slashed the independence of state-owned enterprises boards, such as Discos and Gencos, making the entities more vulnerable to political interference.

Furthermore, the term ‘regulator’ now effectively stands nullified with the PM’s approval of amendments in the Regulation of Generation, Transmission and Distribution of Electric Power Act, 1997 in the latest meeting of the Council of Common Interests. A similar attempt was made by the government in December 2016 as well by bringing regulators under the administrative control of the ministry. However, it was eventually shot down through a court order. One of the agonies of the power sector players remains the delayed notifications of tariff and bureaucratic hurdles in the regulatory mechanism, which increase the cost of business and ultimately thwarts operational efficiencies.

With the government’s farewell to Nepra’s independent oversight over tariff-setting, which direction is the regulator set to sail? Ironically, the establishment of Nepra was part of the Power Sector Reform Programme of 1992, which began during the first government of Nawaz Sharif in 1991.

It is pertinent to mention that the incumbent government has remained fortunate in terms of the low oil prices, which translate into fuel price adjustment in the power sector. Low oil prices have led to a reduction of 46 percent of the power sector’s budget for 2015-16 against the backdrop of the reduced subsidies that the government had to pay. Yet, we stand today on the brink of another circular debt crisis.

Under the current modus operandi, Discos – being the prime node of inflows from the end consumer in the value chain – are subjected to an array of cash flow, governance, regulatory and structural impediments, which adversely affect the liquidity and profitability positions of these distribution entities. This ultimately translates into impediments for generation at the other end. In addition to that are the similar penuries – like the delayed government payments to IPPs – which force them to invoke their sovereign guarantees.

Unless the across-the-board structural inefficiencies in the power sector are addressed, the deadlines set by the government to end loadshedding cannot be met.

 

The writer is a chartered accountant.

Email: [email protected]

Twitter: Shahzad_91

 

 

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