Tabish Guahan has over 25 years of corporate, private equity, and entrepreneurial experience in general management, organizational turnaround, business development and project financing across the energy and infrastructure space in emerging and frontier markets. He is currently serving as Special Assistant to the Prime Minister of Pakistan (SAPM) on Power in an honorary capacity.

Mr. Gauhar is the Founder of Oasis Energy connecting different pools of institutional capital with investment opportunities in the infrastructure space across Africa and Asia. He has served as advisor to Mubadala Infrastructure Partner, A.P. Moller Capital, and on the Board of several private and publicly listed companies over the years. During his tenure as Partner & Global Head of Energy Infrastructure at The Abraaj Group between 2006 and 2015, Mr. Gauhar was a senior member of the team that raised and fully deployed a $2 billon general-purpose infrastructure fund across the emerging markets; led the launch of a $500 million energy focused fund; and served as Country Manager with $1 billion of assets under management, including as CEO and Chairman of K-Electric Limited.

Prior to Abraaj, he was the Regional CFO at AES Corporation, and Head of Business Development for Middle East. Mr. Gauhar has also served in various positions at Exxon Chemical and International Power (now Engie Energy International) between 1993 and 1999. He has a First-Class Honors degree in Electrical Engineering from King’s College London (Chevening/ICI Scholar), and an MBA in Finance from the Institute of Business Administration (IBA), Pakistan.

BR Research sat down with Tabish Gauhar and discussed the status of reforms in the power sector and government’s plan to address the circular debt. Following is an edited excerpt of the conversation.

BR Research: How essential are the targeted subsidies in the energy sector?

Tabish Gauhar: Electricity as an essential service should be provided to every citizen. But at what prices? This is the real issue we have been facing for the past many years. The general multilateral view is that while the poorest segment of the population should be protected, everyone else should be charged the true cost of service. I have a different viewpoint: there is no doubt that the poorest should be subsidized like consumers below 300 units of electricity are being given. But what about those consuming above 300 units? The objective should be to reduce the cost of power generation so that electricity is affordable for everyone while providing targeted subsidy to the poorest segment of the population. At a high price of electricity, you cannot achieve increased consumption or wealth creation or even compete with your neighbors and peers in the region.

BRR: Coming to the IPPs, where do we stand on the implementation of the renegotiated contracts?

TG: Negotiations have started to convert MoUs into amended and legally binding contracts. The issue now is around payment. The government has to pay Rs450 billion dues of the IPPs out of which around Rs100 billion can be offset against what they owe to PSO, OGDCL and other government entities as well as compensate for Late Payment Surcharge (LPS). What we propose to them is a standard formula - pari passu for all the power plants. However, what they want is differential treatment based on e.g. aging, power policy, government versus private ownership etc.

The reason why we have resorted to the simplest approach of treating everyone equal is to avoid unwanted peculiarities and distortions. What we have offered them is one third payment of the net due with the remaining to be paid over the next two to three years in the shape of promissory notes from the State Bank of Pakistan.

Some IPPs could be a buyout opportunity for us. HUBCO is a good example. Khalid Mansoor of HUBCO along with his legal team has proposed the federal government to buy it out at Rs65 billion. The government owes Rs260 billion next year as capacity payments for the next seven years to HUBCO that operated at only one percent of its capacity the entire year. So, buying it out is a tempting idea.

But I have floated another proposal to them where we have offered to provide them liquidity of Rs65 billion if they convert their two FO units on Thar coal for generating 600 MW for K-Electric; and also install the water desalination plant to provide 300 million gallons per day water to Karachi. It will be a win-win situation for everyone as HUBCO has already signed an MoU with K-Electric for providing 600 MW, and the government will be able to offload its liability of Rs260 billion by just paying Rs65 billion. Also, it will reduce the burden on us to provide electricity to K-Electric. HUBCO management liked the idea; let’s see how this progresses forward.

KAPCO’s PPA is expiring in June 2021. KAPCO plant’s location in Muzaffargarh is strategic and necessary for system stability. Plus, the plant runs on all three fuels: gas, furnace oil and diesel and had a much higher load factor of 42 percent during the year. We have offered them a hybrid model for the next 5-7 years with both take-or-pay and take-and-pay mode, plus we have allowed wheeling. We have more negotiations lined up, but this is the progress so far and we have time until June next year to finalize things.

The biggest elephant in the room in this IPP discussion however are those under CPEC project. Lucky has sent us a good, revised proposal which talks about Rs200 billion worth of savings over the term of the contract. I would say that Mohammed Ali Tabba has stepped up as the first IPP to make an unofficial and unilateral offer that the government is reviewing right now.

It is time for banks to step up too. Our next discussion in this IPP issue is going to be with the banks on extending their front loading and debt tenor and decreasing their margins. These will address the immediate cash flow problems.

I don’t think that the debt side of the renegotiation will happen before February 12, which is our deadline for converting our MoUs into legally binding contracts. However, I believe that by June 2021, we would have progress on both the equity and the debt side.

This is what we have in the bucket list in terms of renegotiating the PPAs to reduce the circular debt. Renegotiating the CPEC projects will require renegotiating at geopolitical level, which has not started yet. Prime Minister is very clear that this needs to be done.

BRR: Let’s talk about the DISCO reforms.

TG: There are two views on it. First, everyone agrees that reforms are necessary. However, the other view is that the DISCOs even on the priority list won’t get privatized at least in the next three years.

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. However, we face a political resistance here. In our three-year plan we are proposing that the federal government will keep 51 percent ownership while the provincial government will have 49 percent stake.

And then we will have a private sector operator to whom we wont sell equity but only the management contract – selected through bidding. For every percentage decrease in T&D loss or increase in revenue, the contractor will share an ‘x’ percentage in revenue. That is the model that I want to test in at least two DISCOs next year if I get a nod from the cabinet. My intention is to start with Punjab. This is the only model that I believe will give provinces a sense of ownership as well as responsibilities– all other measures are cosmetic. Once this model is applied to the DISCOs in the next three years, the next step would be to privatize them. In parallel, you continue to do what needs to be done in terms of governance and board setup.

BRR: What is the progress on Nepra Act?

TG: Nepra Act is stuck in the parliament’s standing committee for two fundamental reasons: One is the automaticity principle that it gives to pricing be it for the monthly charge, quarterly charge, annual rebasing etc. The second is the carte blanche it gives the government to impose surcharges as long as they are related to the power sector.

Is the executive in any emerging market willing to seep control on the pricing of an essential service like electricity? Does the executive have the right to impose any surcharge? Both these principles are correct as per the book. The principle of automaticity as well as World Bank and the IMF say that the executive should be in the business of deducing prices by controlling inflation, having a better energy mix, prioritizing power in gas consumption policy etc. and the tariff determined should be completely passed onto the consumers.

Also, it is the right of the executive to impose surcharge. But both these decisions are difficult from the political perspective. NEPRA is also now playing an active role to protect the consumer and the industry, which is resulting in some tension between the two – which I believe is a fundamental and a healthy debate between the policy/executive side and the regulator side around the Nepra Act.

While there is always a focus on passing on the cost to the consumer, very little insistence is on controlling costs. In my view, if there is an extra cost, we have to pass it on. But at the same time, we have to work to reduce the existing cost for example, though efficiency and performance and addressing cost of generation, leakages in the transmission and distribution system etc. because these are all getting added to the tariff.

BRR: What’s the update on the IMF programme front?

TG: I believe there should be a holistic plan for the power sector for the next three years that is credible, sustainable, financeable, and actionable and reduces circular debt over the three-year period. We can then sell it to the Prime Minister and the cabinet and then eventually to the IMF. We have had the same discussion with Dr. Hafeez Sheikh, who is confident that the IMF will come again. Though part of it has to do with the global pandemic, generally the multilaterals are frustrated with the pace of our reforms. Reforms are in our own interest because that would unleash the capital flows in the country; the challenge is to come up with a plan which would be part and parcel of the IMF earlier prescription. We are having such discussion in bits and pieces, but a comprehensive discussion is the need of the hour.

BRR: Could you shed some light on the key parts of the plan that you are working on?

TG: There are a few clear points that should be part of the circular debt management plan. IPP renegotiation will be one of them. Second is the DISCO reforms. Third is the demand growth via industrial support, electrification, etc. Fourth is shutting down our inefficient old generating plants. Then comes the staggering capacity additions in the next wo years to buy some breathing space. K-Electric issue must also be resolved, which adds to the circular debt. Then there are smaller issues like complete solarization of tube wells in Balochistan and disconnection from the grid which also has political repercussions.

Another way is privatization of some assets, e.g. we are working on a proposal of debt restructuring of the two 1200MW RLNG plants, because I believe that equity selling is not feasible at this time due to many reasons including Covid. Getting the public debt of the two RLNG plants refinanced through local banks will create fiscal space in the power sector. Another proposal I have is a receivable-for-equity swap between companies like PSO and some GENCO. Of course, at the end there is tariff increase. So, there are series of steps that need to be taken; there is no magic wand or one solution to address the circular debt crisis.

BRR: Talking about increasing the demand, how do you plan to do that?

TG: One way to do it is what the government has already done – announcing the industrial support package, and we are hopeful that the numbers would show positive results in a month or two. We are all hoping that this would lift GDP growth, which should increase electricity demand in tandem. Historically, our electricity growth to GDP ratio stands at less than one – around 0.75. Normally in emerging markets, it is on average 1.2, which means for every one percent increase in GDP, the electricity consumption goes up by 1.2 percent. De-industrialization and captive power are two major reasons for this low ratio in Pakistan.

Another way to increase demand via electricity is to migrate captive power plants using gas to the national grid. This also makes sense because we are scarce on gas now, but we have enough electricity to meet the energy needs. Gas as feedstock or raw material cannot be replaced. But when it comes to energy source, we can give cheaper electricity to industries, but we cannot afford to give cheaper gas for electricity generation. The gas pricing signal for non-process has not happened yet, but it needs to be done for a scarce resource. 80 percent of the captive power plants are connected to the national grid as backup.

On the domestic side, we need to remove the peak and off-peak distinction to spur demand for electrification. All this boils down to reducing the cost of power generation. Only then we can increase demand for electricity.

BRR: One of the steps you took in your stint at K Electric was distributed load shedding, which is now being followed around the country. However, the Supreme Court has taken notice of it. What is your view on it?

TG: I was the architect of that policy which then became a national policy. However, I oppose it now. Though it sends the right signal to consumers, it cannot be a permanent policy 10 years later. We all know that it is a form of collective punishment and a clear but temporary policy toolkit for us. I have no hesitation in saying that it cannot be a permanent feature. The distribution companies need to work harder, smarter, and employ technology. Do we have the political will to zero-in on the actual defaulters and thieves? That remains to be tested. I would also say that I’m in favor of revoking this policy.

BRR: For transparency, why can’t we digitize the whole meter reading process?

TG: From smart grid to automatic metering to AMI, the technology is available. It’s a question of cost: who installs it and who pays for it. The ADB’s Project, Advanced Metering Infrastructure (AMI) for two DISCOs: LESCO and IESCO worth $400-500 million has become controversial because of its high cost. What I believe is workable is to restrict advanced metering to the PMT level. This essentially narrows down the 2000 consumer circle of a grid to 200-250 consumers on a PMT. Going below PMT level become ridiculously expensive. A Chinese proposal through CPEC, which is close to what ADB proposes is to recover the cost through a surcharge in the tariff. Another option practiced worldwide is sharing the loss reduction. But at the end, it depends on the cost.