The current discussion on economic issues in government circles as well as business networks seems to be focused upon the host of energy issues being faced by the country. One of the major ones pertains to the distribution companies (DISCOS) and what to do with the constant losses burdening the public finances. For many years, across various governments and consistently advocated in IMF programs, the problem of DISCO losses is to be solved by selling these companies to the private sector.
The question arises – will privatization solve the problem? How does a change in ownership put an end to the perennial issue of financial losses? And why would a private investor venture into a sector where there is no previous example of successful returns for the investor? To be clear, I am not against the role of the private sector. In my opinion, the state is not capable of exercising control over the economy and therefore needs to create many public private partnerships to enhance performance viz its civic responsibilities.
Specifically In the context of the DISCOS, the issue is about the type of change of control/privatization which needs to be undertaken to fix the DISCOS while providing adequate returns for private investors.
Why do DISCOS run perpetual losses?
Before we venture further into the change of ownership discussion, let’s clarify what is the nature of problems with electricity distribution. Anyone who has basic knowledge of DISCO operations understands that the business suffers from a large amount of electricity theft coupled with low recovery rates. Both of these occur mostly in remote areas, city outskirts and urban slums where overall lawlessness is rampant and is caused by decades of economic deprivation and poverty.
According to the NEPRA State of the Industry report 2023, the 4 DISCOS with the largest quantum of Transmission & Distribution (T&D) losses as well as recovery deficits are (not necessarily in any order) Peshawar, Sukkur, Hyderabad and Quetta. If we were to note the respective geographical coverage of these DISCOS, we would see a wide expanse of sparsely populated rural areas or city outskirts. What is common amongst these areas, as well as urban slums, is the inability of the state to provide economic opportunities and hold the population accountable per the laws of the country.
While we do not have access to detailed T&D/recovery performance data, I would imagine the same would be the case with all DISCOS, including K Electric.
Therefore, how are we to deal with the issue of electricity theft? Is it a management or administrative issue or is it largely an economic problem? I would argue it is the latter and any attempt to solve this problem via only administrative measures will not succeed. It’s like saying we will solve the deep-rooted issue of inflation with price controls! Can it ever work?
Is K Electric a relevant model?
A case in point is to look at K Electric which was given into private hands almost 20 years ago. While KE has been successful in improving some aspects (full disclosure – I have been associated with this organization in the past), its T&D and recovery performance (according to NEPRA state of the industry reports) surpasses only the large loss-making DISCOS, and it is almost at par with most of the better-performing DISCOS.
But in the context of the future privatization of DISCOS, the relevant issue is not KE’s performance. Instead, it is the fact that it follows a completely different business model as compared to the state-owned DISCOS.
The pertinent question to be asked, therefore, for our current discussion, is whether the transmission & distribution (T&D) business can be sustained on its own and if the private sector can be attracted to invest in it – if it was owned and run independently of the generation business.
The vertically integrated KE business model has stood against the highly regarded and internationally recommended reforms undertaken by Pakistan in the eventful 90’s decade. Is it a case against those reforms which saw a break up of WAPDA businesses – into GENCOS, NTDC and DISCOS?
One cannot try to answer this question without the perspective of the policymakers who orchestrated those reforms – but surely the financial viability of the transmission and distribution businesses on their own is unproven.
To date, the incentive to invest in T&D business does not exist and future owners will be aware of the same.
Is there a way out?
From the discussion above it is apparent that only a change of ownership of DISCOS may be a case of solving the wrong problem. We cannot improve the financial performance of DISCOS without dealing with the geographically poor and backward areas.
There is ample data available with the DISCOS which will point out the areas where feeders are underperforming in terms of theft and recovery. Instead of accusing the entire area of being thieves and criminals, their capacity to pay needs to be assessed and matched with their electricity needs.
NEPRA, in its State of the Industry reports, recognizes and suggests distributed generation / solar power as a possible way out for outskirts and remote areas. The same applies to urban slums.
Perhaps beneficiaries of the Benazir Income Support program could be identified in these areas and some sort of concession be provided via BISP. State investment in basic infrastructure in these areas could also be given special attention.
Increase Electricity Sales
Once these areas are marked for different types of interventions by the state, the relevant DISCO can proceed to improve the quality of its other business by crafting strategies based on some simple business fundamentals.
DISCOS need to sell the extra capacity in the system. This is what the country is paying for via “take or pay” based electricity generation and it can only be solved by selling/consuming more units of electricity. It is not a complex problem when you think about running any business – building topline sales revenue is a fundamental requirement.
Electricity sales must be a targeted number not different from a small shop owner who knows he has to achieve sales of xxx rupees to meet overheads and generate a profit.
For that to happen, the shop owner can have many avenues; he can look for new customers, have a larger share of his current customers’ business, reduce prices for its large customers etc.
A DISCO is no different; it needs to devise strategies to sell more electricity. If it can sell more to industries at a lower price, it should be allowed to do so. If a customer wants to purchase its electricity requirement from another provider, it must be allowed to do so. Some recommendations on these lines have already been made by various industrial chambers and ought to be considered seriously.
In the recent past, NEPRA has been able to split the “wire” business from the overall “distribution” business as well as move to create a wholesale market. These steps should allow DISCO monopolies to be phased out, and gradually relax the regulator’s hold on electricity pricing. Privatization ought to imply that the state will also do away with price controls and help create a competitive electricity market.
Devolve governance authority and responsibility
Despite the well-intentioned work done periodically by NEPRA and the Ministry of Energy, DISCOS’s performance cannot be improved without accountability to the citizens. Ever since the advent of the 18th amendment, governments across the 4 provinces are increasingly showing more responsive behaviour and there is no reason to think they would not be more mindful of their citizens’ needs for this basic utility.
Therefore, the regulatory and ministerial custody of DISCOS needs to be shifted to provincial and local governments. However, this can only be a gradual process since they currently have limited capability. This learning needs to be expedited -they could learn from the Chinese model of communes where powerful incentives were created within the public sector to improve delivery.
In due course, the current DISCOS will need to be broken up into smaller and more manageable entities which become more receptive to their local consumer.
To conclude, the challenge is to take the required strengths of both – the public sector for regulatory and governance frameworks and the private sector to bring in professionalism, accountability and incentives to make good returns.
The matter of DISCOs privatization needs to be dealt with carefully and ought not to be a simple case of handing over ownership. Unless backed by strong and urgent policy reforms which focus on the separation of high loss/ low recovery areas, creating a competitive electricity market, incentivizing private management and devolution of regulatory and ministerial custody, it is unlikely to succeed.
