Reforming the power sector: undoing the neoliberal mindset

ARTICLE: "Pakistan has continued to suffer from inadequate capacity and other constraints, leading to large and frequent blackouts. At the heart of the impasse is the so-called "circular debt" crisis, whereby distribution utilities struggling to collect revenues and meet regulatory targets for transmission and distribution losses default on their payments to generators, and the sector is periodically bailed out by the government once losses accumulate to intolerable levels, at high cost to the exchequer. In the meantime, little has been done to accelerate access to electricity to the significant share of unserved population in rural areas." - 'Learning from power sector reform: the case of Pakistan' by Robert Bacon (2019)

The above highlights some of the core issues plaguing power sector in Pakistan. At the same time, there has been little effort to move towards clean, green sources of energy, like the ones adopted by the country in the 1960s in the shape of building dams for producing hydroelectricity. The recent announcement of the government to actively pursue construction of Diamer-Bhasha dam is indeed a welcome step; yet given a very large population, and the energy needs, a lot more needs to be done. Moving towards clean energy with least carbon footprint is all the more important in view of the fact that Pakistan is among those top-ten countries to be affected most by the fast approaching existential threat of climate change; which also has an established link with being a major factor in the causation of pandemics.

Another problem with the approach for reform in the power sector is that the policymakers still put a lot of weight on the 1990s model, when it is quite clear from numerous experience, that unlike the 1990s model, which was built on standard neoliberal economic theory - liberalize, reduce government controls, and regulate the private sector less - that preferred one-size-fits-all kind of policies to a 'context-specific' policies such as the quality of overall economic institutions, and regulation. With regard to the 1990s model, a recent World Bank Group report (2020) Rethinking power sector reform in the developing world cited a (2006) article Reforming power markets in developing countries, which pointed out that "By the early 2000s, it had become clear that the model was not universally applicable in practice".

According to the same Report, one of the findings reached from the study of the 1990s model was that "Private sector participation in power transmission and distribution delivered good outcomes in favourable settings; elsewhere, it was susceptible to reversal". In the context of Pakistan, the only privatized company in the shape of Karachi Electric Supply Company (now known as K-Electric or KE) the results have been less than satisfactory over the years, given the overall weak economic institutions, regulatory environment, and markets. The report points out: "Customers, in particular, often bear the brunt of tariff hikes associated with privatization, without always seeing an immediate impact on the quality of service, and this can sometimes lead to public disaffection (as in the Pakistani city of Karachi...)".

Hence, without the 'favourable settings' privatization is unlikely to outdo the public sector entities. In fact, the report recommends that rather than being fixated on privatizing, the findings of the performance of the 1990s reform model suggest that "Greater emphasis should be placed on building institutional capacity for power sector planning and associated implementation". Under the neoliberal mindset of the 1990s model, government had no more role than to regulate the private sector, which in turn should be left to the markets. However, significant market imperfections in developing countries could not produce correct price signals, or create the environment of competition needed in market.

The missing context-specific nature of policy could, therefore, hardly see the important role of 'central panning function' in developing countries like Pakistan, which in turn meant that given the short-term profit-minded nature of the private sector, and limited reform of public sector due to little importance given to central planning function, proper investments in infrastructure, and focus on governance and incentive structures, and market reform, could not take place.

The report highlights in this regard the following: "Central planning functions were overlooked or downplayed. Indeed, in some countries, the planning function traditionally housed in national power utilities or line ministries fell through the cracks as power sector reform processes worked to unbundle the incumbent utilities and to build technical capacity in regulatory agencies operating outside of line ministries. In practice, power markets proved difficult to establish in all but a handful of developing countries; even there, price signals have not provided an adequate basis for investment decisions."

Lack of planning in the public sector, and weak facilitating environment and regulations in developing countries like Pakistan meant that "There are also some privatized utilities facing difficult operating environments (such as in the Pakistani city of Karachi or the Indian state of Odisha) that perform no better than some of the worst public utilities." And when planning did take place, it was mostly done in a neoliberal way of one-size-fits-all kind of way. Hence, the report points out: "Although the 1990s power sector reform blueprint has demonstrated its ability to deliver in certain country contexts, the results have been quite disappointing in other settings. Moreover, some countries that adopted only limited reforms have achieved outcomes at least as good as those achieved by countries that went further with the reform agenda. These findings make the case for a more pluralistic approach to power sector reform going forward, recognizing that there is more than one route to success."

(The writer holds PhD in Economics degree from the University of Barcelona, and previously worked at International Monetary Fund).

He tweets@omerjaved7

Copyright Business Recorder, 2020