Energy experts of Asian Development Bank (ADB) have observed that Pakistan's power distribution sector is facing three major challenges: the system reliability prevents continuous supply; high distribution losses and severe financial shortcomings.
In an update Energy Project Reports, the ADB team leader, R. Stroem, Principal Energy Specialist, Central and West Asia Department (CWRD) said that the system is unable to meet the current demand, and is already falling behind power generation expansion targets.
To enable the increased generating capacity to support the government's economic growth targets, the power distribution system (in addition to the power transmission system) must be strengthened to meet current system requirements and fulfil demand and to keep pace with the increasing customer demand, he added.
ADB team observed that the power distribution system is negatively impacted by ageing, overloading, and poor maintenance. It is unreliable and at times there is load shedding and delivery of supplies outside statutory voltage limits. The system needs immediate rehabilitation, augmentation, and expansion to meet customers' demand and system security requirements. Ensuring the safe and reliable distribution of electricity will be a major challenge for Pakistan.
R. Stroem said that the financial weaknesses affecting the power distribution sector are severely impacting the financial sustainability of Discos and the power sector in general. The financial shortfall in distribution is the primary cause of circular debt problems in Pakistan. There is an urgency to resolve the financial weaknesses to ensure (i) elimination of the circular debt, (ii) reduction in the requirements for subsidies, and (iii) development of financially sustainable Discos.
Focusing on the future investment requirements of Discos, it would be difficult to secure financing if the current financial parameters and procedures continue.
Commenting over the "Financial Issues", R. Stroem said that the financial sustainability of the power sector is dependent on timely and accurate (i) submission of tariff applications by the Discos; (ii) execution of the tariff determination by Nepra; (iii) notification of the tariff determination by the government; (iv) metering, billing, and collection by the Discos; (v) payment of subsidy allocations by the government; (vi) payment from Discos to the Central Power Purchasing Agency (CPPA) for electricity purchased; (vii) payment from Discos to NTDC for transmission charges; and (viii) settlement of purchases and sale of electricity by CPPA, which has recently been established and is preparing to take up this role.
The current regime allows Discos to retain only that portion of income that is agreed as necessary to cover their routine operating costs (primarily salaries). The remainder is transferred to Wapda for onward disbursement to power producers and NTDC. The current tariff levels result in shortfall of funds that impact on both the Discos and NTDC, he added.
Principal energy specialist said that the government has determined that the single buyer function presently licensed to NTDC will be handed to an independent agency, CPPA. Tariff determinations made for CPPA and agreements with generation companies and IPPs, have been revised to reflect CPPA as the single buyer.
When CPPA comes into effect, it is expected that the Discos will achieve a further degree of autonomy by the establishment of an escrow account for each Discos, into which all revenues will be paid. CPPA will have first call on each escrow account to settle energy purchased accounts and the balance will be under the control of the Disco.
Despite the power purchase cost increases, end user electricity tariffs have not been increased correspondingly and the Discos profitability has suffered. During the year ended 30 June 2006, only one Disco (Lahore Electric Supply Company [Lesco]) recorded a small profit. In February 2007, Nepra issued determinations on tariff petitions submitted by the Discos in 2005.
The determinations allowed significant tariff increases for all Discos. However, all Discos appealed against the decisions on the basis that the assumptions used by Nepra in the tariff formula should be adjusted based on current data and plans. Hearings with Nepra were held in May 2007; in each case, Nepra has reached a determination, but these had not been announced at the time of the appraisal mission.
In the meantime, he further said that the government has issued a tariff determination that sets out tariffs applicable from 24 February 2007 payable by customers. The rates set out are consistent across all Discos. These rates are lower than those originally determined by Nepra but the notification confirms that the difference between the relevant rates determined by Nepra and the rates charged from customers shall be paid by the government.
The timely payment of these tariff subsidies by the government is crucial for the financial independence of the Discos. The government budgeted Rs 57 billion for power sector subsidies in FY2007. The tariff formula allows a pass-through of power costs (subject to an adjustment for allowed losses), recovery of operating and maintenance costs (including depreciation) and a return on investment.
Under the formula, the Discos have the potential to earn reasonable profits in the future provided that realistic and achievable assumptions are adopted by Nepra. The time lag between raising customer tariffs in line with power purchase costs has meant that Discos have been unable to pay NTDC for the full cost of power purchased and a large outstanding balance remains due. At the year ended 30 June 2006, the total balance due from all Discos (excluding Karachi Electric Supply Company [KESC]) was Rs 128.6 billion.
This represents a significant financial burden for the sector, which has yet to be resolved, ADB team highlighted. R. Stroem said that Discos currently have satisfactory accounting capacities and established accredited external audit processes in accordance with international audit standards. They have also developed sufficient in-house functions and systems to handle payments, billings, and collections.
Accounting systems are well developed but continue to rely on significant manual processes. Several Discos are actively pursuing computerisation of accounting systems to improve control and efficiency in financial management. However, financial management, which would benefit from some external assistance in capacity building, is in need of strengthening in some Discos.
Commenting over the "Governance Matters", R. Stroem, ADB energy specialist said, as the unbundling transition period is coming to an end and Discos are building capacity to enable their independence from Wapda, the corporate governance structure of their boards of directors needs to be in accordance with best international practice.
Currently, each board consists of a chair, three members from the private sector, and three officials representing the owner and the government. The nomination of the board members is made by chair of Pakistan Electric Power Company (Pepco) in accordance with a presidential directive.
A situation where the same individual holds positions on several boards of directors is counterproductive to the government's power sector policy and in contradiction with corporate governance principles. For example, the chair of NTDC and another director concurrently hold seats in Wapda and Pepco.
There is an inherent conflict of interest if a Disco board member also sits on the board of Wapda or another company that holds transmission and/or generation assets. Such conflicts of interest would make it difficult for individuals to exercise their fiduciary duties and carry out their oversight role, he added.
Commenting over the "Private Sector Participation", he said that Pakistan government is acutely aware of the need for private sector participation in the power sector. In 2002, it set out a policy for power generation projects that provided a clear set of incentives, along with a regulatory regime, to attract private capital.
Pakistan has been successful in attracting private sector investment and is working to improve the enabling environment. The 15 commissioned IPPs make up about 4,000 MW of generating capacity, he added. In line with overall power sector policies, R. Stroem said that the power distribution sub-sector promotes private sector economic activities by making available power through distribution of electricity from the IPPs.
A robust distribution system is the anchor for private sector investments in power distribution companies. Through substantial investments in the distribution system, the government will be able to establish an environment conducive to private sector investments. At the same time, it will remove concerns about the ability to distribute power from IPPs and ensure a continuous supply of electricity to end customers.
Two of the Discos, namely Faisalabad Electric Supply Company (Fesco) and Peshawar Electric Supply Company (Pesco), are currently being prepared for privatisation by the Privatisation Commission. The private sector is showing strong interest in the two companies, but is uncomfortable with the surrounding environment, as it negatively impacts the operations and financial performance of the companies.
Through power distribution enhancement investment programme, R. Stroem said that ADB will assist the government to strengthen the environment for private sector investments in the power sector, by making further improvements to the enabling conditions for power distribution and providing financial security for the funding of power distribution facilities that would ensure distribution of electricity from IPPs.
The government is considering additional privatisation in the power distribution sector with details to be decided after Fesco has been privatised. In addition to privatisation, the private sector is envisioned to participate in the MFF in the form of equipment suppliers, civil works contractors, and consultants in a wide variety of areas covering technical design of subprojects, environmental and social impact assessment and financial services.
The facility would allow any privatised Disco to continue its participation in the facility on the same terms and conditions as the non-privatised Discos, he added. R. Stroem said that the major sources of external assistance to the power sector are ADB, the government of Japan and the World Bank. Together, they provide more than half of the official external assistance. ADB has supported both KESC and the Water and Power Development Authority (Wapda), while the World Bank has mainly provided assistance to Wapda.
Pakistan's development partners have been working together to evolve a strategy for the privatisation of the power sector. ADB, the World Bank, and the government have prepared a policy matrix, with a clear delineation of the division of labour between ADB and the World Bank. The Canadian International Development Agency has supported Wapda to rehabilitate the Warsak Hydroelectric Power Station.
It has also provided assistance to strengthen the capacity of the Ministry of Petroleum and Natural Resources to develop and implement sound policies and regulatory frameworks to encourage private sector investment and to enforce effective conservation and environmental regulations. The Canadian International Development Agency (Cida) also supports public and private companies to develop and manage hydrocarbon resources.
The government of Germany is supporting a hydropower promotion programme and a grid station in Ghakkar for power transmission from Ghazi Barotha. The government of Japan is also considering assistance for energy efficiency enhancement through improvements to the national grid, the load dispatch system, and area-specific electrification, R. Stroem concluded.
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