Energy sector reforms: Earnest intentions for structural changes necessary – IV

Our fiscal space is wafer thin. The economy is starting to pull back from a precipice. The International Monetary Fund (IMF) Staff-Level Agreement (SLA) is around the corner and has rightly placed special focus on the energy sector. Yet, core structural measures to increase the revenue base requires political will.

Circular debt, conservation, austerity committees and suggestion to issue dividends are all diversionary thinking; imposing surcharge and increasing tariff to limit growth of circular debt, transferring Discos to provinces are all short-term measures that do not take the “bull by the horn”. Distortions will persist.

Energy sector reforms — I

Reengineering of Pakistan’s energy sector needs deep, extensive restructuring, deregulated competitive environment to deliver energy at a reasonable cost for achieving a sustained 7-9% GDP growth over the next three decades.

The outstanding domestic debt of the loss-making Public Sector Enterprises (PSEs) soared to Rs. 1,879 billion during the 1Q fiscal year FY231 and their liability in recent years is between 8-12% of GDP.

Instead of a big bang approach, a sustained effort by an effective empowered leadership team is required to manage the State Owned Enterprises (SOEs) based on principle of working for profit and are not to be bailed out beyond 3 years.

K-Electric (KE) took 15 years of focus, spines of steel with the will of the team to achieve over 50% reduction in losses, deliverance of reliable power and improvements in customer service.

The transformed KE is now looking to compete in the distribution segment by having surprisingly applied for an unbundled (non exclusive) license and initiating a vision of achieving 30% generation through renewables and investment of Rs. 484bn by 2030. The Lesson: Turnaround requires time, patience, and endurance.s

Energy sector reforms – II: low-hanging fruit rotting

Over various stages of our history, efforts for reorganizing/transforming SOEs has had limited success. The Pakistan Tehreek-e-Insaf (PTI)-led wealth fund concept, Ishrat Hussain’s effort to restructure bureaucracy, concept of a “CPEC” and “Reko Diq Authority” or Corporate and Industrial Restructuring Corporation CIRC) which cleaned the balance sheets of HBL,UBL, NDFC, IDBP and ADBP for privatization including half-hearted privatization process due NAB/FIA and intent of having empowered non-political autonomous boards, signing of performance contracts with boards and agreeing on KPIs with CEOs selected on merit through boards has also failed as strings were really controlled by the parent Ministry.

An alternate approach would be to revive PIDC (Pakistan Industrial Development Corporation) to manage commercial assets and to hold shareholding of the government in SOEs, followed by aggressive transformation by merger, consolidation of roles with reduction in departments and companies and undertaking strategic investments (e.g., lowering losses, infrastructure investments, energy conservation, encouraging new approaches).

With the Foreign Investment (Promotion and Protection) Bill, 2022 in place, the goal would also be to ensure ease of doing business, encouraging FDI while restructuring SOEs and their assets/debts under Public Private Partnership (P3P) mandate while learning from “Sarmaya-e-Pakistan Limited2 concept that aimed to facilitate this transition but lost its direction due to lack of preparedness and political will to see it through to its logical end.

Energy sector reforms: Low-hanging fruit rotting – III

For fixing governance of energy sector, an alternate approach could be built by refining the following sector wise restructuring concept:

a) PIDC be a holding corporation with subsidiary companies under various divisions e.g., Refining and Mining (Refinery, Petrochem etc.), Supply chain (OMCs. E&P, GASDISCOs, DISCOs, Transmission, Generation, Energy Mix Planning/Sourcing/Trading etc.), Infrastructure and Engineering (Terminals, NLC, FWO, Pipelines, Railways, Fuel Storage, NESPAK etc.),Manufacturing (HMC, Moghalpura Workshop, PSM etc.), Aviation (Airports, PIA etc.), Tourism (PIDC, Rest houses etc.), Regional Energy Integration.

i. All GOP shares in businesses are transferred to PIDC with conversion of all debt to equity.

ii. Minimum 25% float in PSX be phased in over 3-5 years upon induction of a professional leadership team from across the globe with board members being domain experts with no membership of bureaucracy or political inductees.

Both must be given protection from vindictive laws, be accountable to senior most cabinet minister reporting to a parliamentary committee of experienced Senators and MNAs with impeccable credentials.

iii. Over next 6-10 years, induction of private sector/reputable foreign players in each of the subsidiary companies through a transparent bidding process for the balance 26% be undertaken to reduce the administrative role and financial support of GOP.

iv. In parallel, strengthening of contract adjudication process and regulators including their financial independence is to be assured including market deregulation needs to take place. As PIDC is restructured, policy facilitation is required to ensure sustainability.

For one, moving regulatory functions from the two divisions of MoE has been initiated but there is a need to balance provincial autonomy with focus to improving ease of business and establishing provincial regulators; depending on how the country wishes to manage its energy.

(To be continued)

Copyright Business Recorder, 2023