DISCOs - reform or sell-off?

ARTICLE: The electricity distribution companies, or DISCOs, are an important part of the equation that represents the power sector. The recent hackles over the performance of K-Electric, as well as the deteriorating situation in the power sector, have again ignited discussion about the performance of public sector-led DISCOs and whether to go for their wholesale privatization or go for reforms first?

Away from the media glare and scrutiny, there is a whole story that needs to be told, involving the evolution of DISCOs and the current impediments that they face. It's important to consider this historical perspective and on-ground situation in order to gain a proper understanding of the issue at hand.

At the time of Pakistan's inception, every city had a separate electricity distribution company, oldest being KESC that was founded in 1913. Distributed grid system was done away with the establishment of WAPDA, in turn leading to formation of seven major electricity regions with their own boards. These boards used to have good representation from chambers of commerce, politicians, etc. It might surprise readers to learn that earlier, before the World Bank advocated 'unbundling' kicked in, the legal umbrella provided to entities controlling these regions (mostly through colonial era laws) resulted in them performing relatively efficiently.

For example, to tackle issues like electricity theft, officials had the power to confiscate movable properties of defaulters and attach it to government revenue, leading to better results. Similarly, the Telegraph Act of 1835 empowered laying lines for public good, which was later done away with. With unbundling in 1996, the legal umbrella to take such steps was taken away. Power Wing was unbundled from WAPDA, leading to formation of DISCOs whose results have been mixed till now.

When it came to corporatization, there was race to be elected as member of boards. PEPCO took charge then. Today, there is said to be not a single member on boards who is a known professional specializing in electricity or power sector. When powers were taken away from PEPCO (its now a lame-duck), Power Division was given the responsibility, whilst there being no professional of power sector in their human capital composition. Another recurring issue is the non-security of tenure of professionals. As soon as a professional gets to terms with problems of a DISCO, he or she is changed to another position. As a result, political interference has increased given the decline of governance standards in the power sector.

Since 2007, power sector has pretty much been in a crisis mode. Out of the approximately 135 facets to deal with, companies are exclusively emphasizing upon revenue collection or reducing arrears rather than other important facets like uninterrupted power supply. Analysts also believe that in terms of 'better' performing companies, the 'better' performance is a mirage when seen in context of unit consumption of electricity and nominal rupee losses. It's not noticed because we count losses in percentages, and don't take into account the gas-guzzling nature of 'good' performing DISCOs.

Similarly, there is some disconnect between DISCOS and NEPRA. Ideally, people from both these should serve in each other's institutions to get good experience but that does not happen.

To get an idea of what's wrong with DISCOs, NDPL in Delhi serves as an example. Its top officials have ready access to the chief minister and the organization is staffed with only professional people for its working. There is nothing like that in Pakistan where recruitment of even minor level technical staff has now to be approved by power division. Recruitment has been made so difficult that it's becoming difficult to recruit young, capable people to replace older, retiring staff despite the fact that the system has expanded manifold since 2000. As a result, the staff required to efficiently run the system is absent.

In essence, we can term the present working of the power sector as half-blinds leading complete blinds. It's the overall adverse environment which the DISCOs face that makes life difficult for them. For example, law and order situation is less than satisfactory in some parts of the country. Installing meters in high loss areas of DISCOs like QESCO and SEPCO would probably lead to another law and order problem, with the end result that billing is done on guesstimates of average use. Arguably, though, the most important aspect in all this debate is the lack of professionalism within these DISCOs, and unwanted political and bureaucratic interference in its management, that remains the core issue.

In such a situation, wholesale privatization may be out of question since government would find it difficult to find a buyer. Therefore, the only option left maybe to go for reforms first and then think of privatization. One model, based on Turkish experience, could be to privatize commercial activities and keep the assets (like distribution assets) instead of complete privatization. Perhaps an ideal situation would be that DISCOs should restrict their activities to wire business and asset management, and bring in second-tier businessmen to manage other aspects. We've also got to do away with Mr. Dar's revenue-based model, because there is little incentive to make an effort for improvement since it's easy to cut off electricity where there are problems rather than make an effort to improve system plus make recoveries.

(Note: The above stated notes are taken from PIDEs webinar titled 'Reforming DISCOs', available on social media. The writer is a Research Fellow at PIDE, who tweets at ShahidMohmand79)

Copyright Business Recorder, 2020