EDITORIAL: Nothing is more important than fixing the energy circular debt problem in Pakistan. Increasing tariff would not suffice in the absence of better governance at the distribution end. Moreover, incentive to steal would increase with the rise in tariff. The key is to put the distribution and transmission in order. For that, the management and control of Discos must be removed from Islamabad’s control.
Wapda was unbundled and distribution companies (Discos) were formed in late 1990s; but in essence these are even today controlled – administratively and financially – by the federal government. With guarantees and subsidies by the federal government, the issue is too complex to have a plain vanilla privatisation model. Now the World Bank (WB) has come up with a policy prescription to hand Discos over to the private sector with equity injection and without any cash impact, layoffs, or government asset transfers.
This has been described as ‘Pakistan Model’. This shall be done by tendering concessions to the Discos for 20 years by giving rights to private sector to run Discos against buying shares without transfer of assets. The government will continue to own Discos’ assets including any new assets to be created by the private sector player. The key being that the concessionaires must control the boards of directors of Discos.
The concession model is proposed for eight out of 10 discos. The remaining two – Quetta Electric Supply Company (Qesco) and Tribal Area Electric Supply Company (Tesco) are thought to be too risky in terms of securing revenue through tariffs. Instead, a five-year performance-based management contract is proposed for these two Discos. The private sector will receive a fee for management of these companies and it will be incentivized for improvement in specific performance areas, i.e., to get the chunk from improvement in distribution losses or uptick in recovery.
The model for these two poor performing and problematic Discos is on similar lines to what Special Assistant to Prime Minister Tabish Gauhar had argued in an interview with Business Recorder in December 2020: “I have floated a public-private partnership model for Discos at the provincial government level because technology can only go so far. You need local administration to have skin in the game.” His idea was for private sector operator with management contract (through a bidding process) without selling equity by sharing a certain portion of revenue for every percentage decrease in T&D losses with the private sector operator as an incentive to improve. He wanted to start with Discos in Punjab – these are better managed, and the provincial issues are relatively simpler to deal with. “Once this model is applied to the Discos in the next three years, the next step would be to privatise them,” he had added.
A similar argument has been presented by former Federal Board of Revenue (FBR) chairman Shabbar Zaidi in an article published in Business Recorder last week. He argued that replication of ‘Managing Agency’ model was the case in Pakistan prior to the 1970s. Shabbar argued that Discos are too dependent on government for financial viability. No party will show interest without sovereign guarantees. And we have seen the adverse implications of sovereign guarantee-based IPPs model.
Business Recorder is of the considered view that the WB’s ‘Pakistan Model’ is a little too ambitious and impractical in view of certain ground realities. Provinces, other than Punjab, would never agree to such models as some of them may want hydro electricity at low cost while others may demand a similar treatment for nuclear. Then provincial rights over depleting domestic gas reserves may well be another issue. And in Balochistan, law and order is tricky. In other words, it may open a can of worms or the proverbial Pandora’s box that may lead the issue into a different direction. It is best that the WB plan of performance-based management contract proposed for the two poorly performing Discos is applied to all initially. Privatisation or 20-year concession model could be too complicated and counter-productive in the event of a tussle between the private party and different layers of governments.
It is important to study the KE privatisation case before deciding the fate of rest of the Discos in the country. There is no doubt that the T&D losses in this power entity have reduced from around 40 percent to 15 percent after privatisation. Moreover, there is improvement in recovery from 80 percent to 95 percent. But lately, the deal of transferring assets to private hands is in limbo. There are stakes of federal, provincial, and public sector entities in the energy chain.
Without delving into the debate of who is right, the bottom line is that people of Karachi are suffering. The government cannot afford to delineate a similar fate for other Discos. It is better to tread the path with care.
Copyright Business Recorder, 2021
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