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Overwhelmed by power

Islamabad

August 10, 2020

A friend while treating a close relative echoed a concern -- that too much emotion may interfere with performance or clinical decision-making. True as that may be, diagnosing the ills of power sector in Pakistan can’t be but emotional. The repercussions of an ailing power sector are far and beyond comprehension. It deeply affects every strata from the more fortunate to the vulnerable, from a child preparing for his exams to a doctor performing her surgery. It has the potential to grind industry to a halt, adversely impact economic growth and make cost of doing business an impediment to the future prosperity of this nation.

Half of the solution is usually in diagnosing the problem. Power sector problems or rather problems are exceptionally complex, highly multi-dimensional and involve a host of stakeholders -- diagnosing them is more than half of the solution. The sector is engulfed with structural and governance issues the likes of which no other sector has seen in the country. The tragedy is that they have gotten overshadowed by the trendy debate about “circular debt” which itself is a term convoluting the Rs2,200 billion for what it actually is. Let us attempt to unmask in simple terms and in order of some priority, the impeding issues of power sector.

The fundamental issue is a lack of a functioning electricity market. The system is functioning on a single buyer -- unfortunately the state, and multi-sellers, including the government-owned generating companies, the GENCOs fuelled by gas and Heavy Fuel Oil (HFO), government owned hydel and nuclear plants and a host of 78 Independent Power Producers operating on gas, diesel and HFO. A Central Power Purchasing Authority, again a state organization, has made some progress albeit inconsequential. What should have emerged as a multi-buyer multi-seller market, unfortunately, remains to be a state guaranteed payment system with a constrained capacity to run an efficient system.

The regulatory regime, however little effective it could have been, lacks teeth. As opposed to regulating the private sector, it is or not regulating the public sector including the 10 DISCOs and a large part of the government-owned generation and distribution system. Since the regulator is itself in a nascent stage, the regulatory oversight toils to find its vision of the depth and breadth needed for effective regulation.

Policy-making ability of the Ministry of Power remains weak at best. Limited sectoral expertise assists the ever-changing bureaucracy. Organizations like Private Power and Infrastructure Board provide some support for new projects, but a lot more wisdom and foresight is needed to change the eco-system. Overwhelming indulgence by the ministry, however, remains a necessity at times to keep the system afloat. DISCOs, since the time of conversion from area electric boards, continue to operate as traditional government organizations. They adhere to government rules in all facets of engagement even to the extent of framing their human resource manuals as per government prescriptions. While ignoring the reality -- all of them are registered as corporate entities under the Companies Law of 2016.

Finding smart leaders for DISCOs has met with resistance and attempts to do so have remained unsuccessful. Even if there is success of installing someone, she/he lasts for a short time due to internal opposition, media onslaught due to higher remuneration and eventually corruption watchdogs making their stay short but not so sweet. Eventually, many power sector entities run for eon years on an acting charge, many a times, placed with bureaucracy of the ministry. The National Transmission Distribution Company carrying the 20,000 or so MW throughout Pakistan is a technically-sound organization, but managerially weak. Electricity transmission system is years behind. Upgrades remain behind schedule for years, as capital expenditure spending covering line up-gradation remains inadequate and thus system losses mount as years go by. In a nutshell, commercial orientation has found little favour with these organizations. Attempts to privatize are a distant dream and the K-Electric’s privatization has also not played out favorably or been done diligently. The K-Electric is seen as a private sector monopoly unable to fulfill the requirements of Pakistan’s commercial hub.

Contracts between the State and private power sector producers at all stages beginning from power policy of 1984, the 2002 policy, and subsequently under the 2015 policy have been guided by expediency. Power shortages compelled immediate solutions. Contracts have been less diligently negotiated from the consumer’s perspective by the government functionaries. Subsequently, renegotiations with the private sector are a desire but remain impractical as the contracts are laden with state guarantees.

Circular debt appears to have taken center stage from its start, almost a decade ago. It has little circular connotation about it but is predominantly the system inefficiency and incapacity showing up in accumulation of payables. The accumulated payables are around Rs 2,200 billion ($13 billion) – Rs1,200 in direct payables to power sector producers and another Rs1,003 billion parked in a special purpose vehicle -- Power Holding Private Limited. The flow or leakage has traditionally varied from a low of Rs10 billion to a high of Rs42 billion per month. Currently, it appears to be hovering around its monthly high accumulation, due to a host of unresolved policy and structural issues. A key issue but considered less pressing due to its insolvability is what is owed to the government through the DISCOs a whopping amount of Rs1,178 billion ($7 billion) as of early 2020.

The consumer interest is lost in translation, as consumer is least represented in the decision matrix. However, the lower end customer, consuming up to 300 units is protected from onslaught of high tariffs. A substantial subsidy ensures a pass through of a considerably lower tariff to 70 percent of domestic consumers compared to the average determined tariff of Rs15.32. The subsidy has traditionally remained under-budgeted or increased during the year as new tariff sets in after the budget is passed. The budgeted subsidy of Rs150 billion for FY21 is likely to be fall short from a need of around Rs350 billion, cetris paribus. However, once a new tariff is determined, it is likely to increase the average determined from Rs15.32 by a couple of rupees, raising the shortfall of subsidy. Either the budget FY21 takes a hit or the payables of power sector swell.

Any effort to rehabilitate the power sector is only likely to see the light of day if realities of where the sector is poised, are deliberated clearly and understood by all stakeholders. The distress is real and lingering. If one was to consider even part of the issues needing correction, one is likely to be overwhelmed by the task at hand.

The writer has served as Adviser, Ministry of Finance, Government of Pakistan.

Email: [email protected]; Tweets @KhaqanNajeeb