Sedative Electricity Reforms

The current electricity strategy pursued by the Government under the garb of reforms is not in the best interest of the sector. With rising electricity tariffs, which are almost unstoppable now, the entire sector is neither consumer friendly nor investment attractive for the next phase of the power sector – transmission and distribution. The reform process is in a sedative mode. It continues to suppress symptomatic pain (by suppressing circular debt here and there) without addressing the actual disease.

The structure of the electricity industry in Pakistan started with WAPDA. Under WAPDA were ten distribution companies, a transmission company and four generation companies, with an aim to privatize them later. This seemingly happy model did not last long and quickly became a subsidy driven model instead, thanks to the mismanagement, politicization and the lack of focus on the operational parameters of electricity generation and distribution. When the world switched to smart metering and energy efficient labeling, Pakistan treaded the path of AT&C losses of well-above 40%.

The alternative was continuation of deeply sedative reforms which targeted both financial and organization restructuring. In the realm of financial reforms, for instance, circular debt took priority. A rigorous circular debt capping plan exercise was undertaken. Excel models were made and published and detailed reports focusing on tariffs and regulatory scenarios were created. Through rigorous planning, it was believed that circular debt will be brought under control. The results, however, show a completely stark picture altogether. Since the beginning of 2014 when the first circular debt capping plan was published, the circular debt itself has grown by five times, reaching an improbable two and a half trillion mark in the matter of a few years. The pace of circular debt accumulation has never stopped, and it continues to rise by Rs. 20 billion per month. So much so for all the circular debt capping exercises.

On the institutional front, none of the reforms really brought any efficiencies. Starting from the early 2000’s, entities such as the PPIB and AEDB were created. Seemingly one-stop shops, their purpose was to facilitate investors through a single-window framework, easing investors’ entry into Pakistan’s power sector business. Investors were given comfort that all they produce will be sold to a single buyer – essentially to the Government of Pakistan. To make the scheme attractive, investors were awarded high returns on equity, pegged by dollarized returns and sovereign guarantees. For the time being, investments flew in, and the mirage of reforms worked well, albeit only to haunt the end consumers in the long run with steep tariff increases. Today no new power sector investments are in the pipeline. Investors who bought the Pakistan power sector story are looking to repatriate profits – only to be told by the State Bank of Pakistan, that they can’t repatriate all their dollars at once. Today, liquidity issues remain at the forefront and transition to a clean, renewable based future remains elusive.    

The Curse of a Single Buyer Model

The only real reform in the sector is the correction of an obsolete and outmoded single buyer model, which prospers on corruption, evasive deal making, and inefficiencies. It starts where all generating companies (Gencos) are required to sell their produce to CPPA. This implies that even if Gencos are willing to enter into spot markets, or enter into short-term contracts through wheeling, they generally can’t because of this market structure. Their only choice is to sell their entire produce to the CPPA alone. Gencos don’t bear the market risk and instead rely on long-term power purchase agreements (PPAs). Since Gencos must sell all their produce to CPPA, the DISCOs, in turn, must also buy all the power from the CPPA alone. Consequently, the one who suffers the most is the consumer as it must source all its requirements from DISCO of his area. No matter how inefficient the DISCO is and how poorly it runs and manages its operations, consumers have little choice to shop around for alternate suppliers.

Thus, the industry structure continues to be in a typical command-and-control mode, unencumbered by competition and consumer choice. In this chain of gothic monopolies, public as well as IPPs, all prices are typically determined on a ‘cost plus’ basis either through negotiations  (such as in the aftermath of the IPP Commission report) or through NEPRA proceedings. This constitutes a perfect recipe for delivering high-cost power to the consumer, year in and year out. Will tariffs ever go down? The simple answer is no. There are no competing forces that can ever deliver lower tariffs. No innovation to propel the costs downwards and no incentives to deliver operational efficiencies. 

In this entire scenario, the circular debt is only a symptom. At the distribution level, the prevailing tariff structure coupled with the high transmission and distribution losses do not permit adequate cost recovery by DISCOs who persistently default on their payment obligations to CPPA. The use of CPPA acts as a free banker for DISCOs, and continues to carry large unpaid bills (circular debt) on their behalf. Essentially, the ten distribution companies are virtually bankrupt entities that allow only to accumulate unsustainable losses year after year without any clear road map as to when and by whom all these losses will be wiped out. This after all is the only real reform waiting to happen.

At best, the Pakistani power market is in a debt trap. The Government, one after the another, has accumulated overdue payables of more than Rs 2,500 billion that continue to mount steadily, besides a large contingent liability burden of state backed guarantees. The debt trap can only be addressed through either steep tariff increases (a relatively easier decision), massive improvements in operational efficiencies (in reducing T&D losses and improving recoveries) or through decisions to privatize and open the market to multi-buyer and multi-seller models. Evidently, the sector needs real reform, one that goes beyond a typical lip service. The time for giving sedatives is receding fast.

Khurram Lalani
Khurram heads a development consulting firm Resources Future and is an energy and climate finance expert.

3 COMMENTS

  1. So if you are living in the area of Hyderabad or surrounding and you are using the electricity services provided by HESCO and you did not know the method to check online hesco bill then you neet not to worry at all. Because we are here to help you.

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