Economic reforms: Part - VI

We have argued that circular debt (CD), paid (Rs400 billion but requiring inter-DISCO adjustment) and un-paid (Rs400 billion), is posing a threat to the power sector and fiscal finances. Much of it is due to self-inflicted wounds suffered while implementing half-backed and half-hearted reforms. One often wonders how the country has ended up in such a mess on this critical sector of our economy.

Before the reforms process was initiated in the early 1990s, the fundamental problem of the country was dearth of investment to add new generation capacity and allied infrastructure. Governance issues within Wapda were limited, and so were the issues of system losses and non-payment of bills. In the hindsight, misled by our exuberance, we over-committed (relative to our capacity) to fully privatise the sector. Down the line, we added expensive private power, but refused to adjust final tariffs to reflect higher costs. Even before the private sector would be functional, we put the regulator in place, which ended up regulating the government and imposing a pricing framework that further compounded gaps between costs and revenues.

We took nearly 15 years in achieving corporatisation of Wapda entities and another 10 years to establish a clearing house (Central Power Purchasing Authority (CPPA)) that replaced the make-shift arrangement under the National Transmission and Dispatch Company (NTDC). The efficiency of the entire system was compromised as employees saw their jobs threatened, and new talent was hard to attract. A former senior ministry official once remarked that rising losses and declining recoveries were such that only 65 percent of power produced was recovered in revenues. What’s more, there are major issues of non-recovery and billing disputes between federal and provincial governments or with AJK and Fata; these issues occasionally create considerable tensions among bodies.

This is an unsustainable state of affairs. There is no long-term plan that can guide where the system is headed, say in next 10 years, even though partial efforts are always underway in almost all sub-sectors. Such efforts are not capable to fundamentally alter the decaying state of the sector.

A CD Settlement plan was formulated as part of lenders’ requirements aimed only at capping accumulation of CD. This was done under the most optimistic assumptions of: (a) Nepra accepting lower recovery rates (100 percent assumed by Nepra); (b) higher losses (than allowed by Nepra); (c) continuing surcharge to service the existing debt; and (d) 5 percent divestment of three DISCOs and GENCOs would only halve the CD to Rs400 billion in the next five years. If these assumptions fail, which is most likely in the absence of a larger reforms agenda, then the situation would continue to aggravate.

There is an urgent need to formulate a comprehensive plan to reinvigorate a sector so vital for the smooth functioning of the economy and sustainability of fiscal finances. We offer a few suggestions that may form a part of such a plan:

First, until such time that an alternative organisation/ownership of DISCOs and GENCOs is evolved, the ECC/CCI should issue a policy directive to Nepra to determine a unified average tariff for the entire country that recovers all costs incurred by DISCOs. After reorganisation (as outlined below) Nepra would determine differential tariffs, which should be implemented as well.

Second, the government may provide a five-year subsidy plan on a diminishing basis starting with 0.5 percent of GDP (at present Rs180 billion) and gradually declining to 0.2 percent of GDP, only for the low-income groups. Subsidy for a given group should not exceed 50 percent of tariff.

Third, all DISCOs (except TESCO that caters for Fata) should be removed from the ownership/control of the federal government in any of the following three ways: (a) transfer the ownership to provincial governments free of cost with continuation of federal government subsidy as stipulated above; (b) strategic sale to a private investor; and (c) management contracts with a group of private investors that should include local governments.

Fourth, GENCOs (not Wapda hydel, but including KAPCO and the recently constructed LNG-based power plants and Nandipur) should be privatised through strategic sale, which would be quite simple and easy as the private sector now has extensive experience of owning and managing generation units.

Fifth, the NTDC would remain under federal ownership and serve as the backbone to support generation and distribution purely on a commercial basis.

Sixth, the federal government would take the responsibility of settling (on a one-off basis) the entire CD (as on the date of transfers) in accordance with the terms of the loans. However, the liabilities on the books of DISCOs would be serviced by either new owners or managers;

Finally, to facilitate investments in the sector, the federal government would continue to provide sovereign guarantee against the counter-guarantees of the provincial governments should the ownership be transferred to provincial governments.

The above elements of the plan would remove CD, ensure sustainable operations and attract future investments, since tariffs would be set at cost recovery levels and sovereign guarantees would be available. At a time when significant new capacity, beyond immediate needs, is being added to the national grid, the transition to a new organisation would be lot easier compared to a state of capacity shortages.

The preferred course for DISCOs, in our view, is to transfer their ownership to the provincial governments or to award management contracts with local authorities and business groups. We must realise that a service that is supplied at the household level throughout the country cannot be efficiently delivered while administered from Islamabad. In the last decade or so, standards of governance have steeply declined alongside growing federal-provincial differences in sharing responsibility for the poor state of affairs.

To be continued

The writer is a former finance secretary. Email: waqarmkn@gmail.com