Discos: the tug-of-war is anything but respectable

The power sector circular debt is growing unabated despite successive increases in power tariffs and much-hyped theft reduction campaign by the power ministry. The tariffs, meanwhile, are likely to keep on increasing. The private sector is demanding direct power wheeling, but the government is asking too many charges to cover stranded cost and cross subsidy.

The government is desperate to show improvement. The solution is simple plain vanilla privatisation. Proof is in the pudding (privatisation of KE).

However, the government is thinking of giving long-term concessions to good performing discos (mainly in Punjab) while mulling over options to form Performance Monitoring Units (PMUs) in high loss-making discos, which are to be headed by serving brigadiers and skeleton support staff by other agencies.

The apparent idea is to nudge the existing staff in discos that are in high losses and are intimidated by the local elite. The pilot is to start from HESCO (Hyderabad Electric Supply company). That is not a wise move. The government is not moving in the right direction.

Any reform that increases the involvement of government (including military) is not a good idea. The idea should be to lessen the involvement of government and state agencies in the electricity selling and distribution business. Sooner it is done, better it is.

One cannot deny the short-term gains by running those power theft drives and campaigns. These are band-aid solutions.

According to the Power Secretary, Rs61 billion is being saved due to recovery improvement and theft reduction in the last three months, mainly in the good performing discos, and now the idea is to have presence of military officers and agencies in poor performing discos to nudge them for better performance.

The involvement of the military in improving discos governance is nothing new. The government has done this in the past and there was limited success.

In the case of KE, before privatisation, the military was asked to be part of the implementation team in reducing losses and the MD was a serving brigadier. That had yielded results, as the recovery of KE improved in that time. But it plateaued soon, and the corruption elements revived, even with the presence of military.

The real and sustained gains in KE came after a few years of privatisation. The private entity first cleaned the system and inducted better human resources. Then the private shareholders invested in the entity by improving the infrastructure and other elements and transformed the KE, which used to be in the league of bad distribution companies.

There is no need to reinvent the wheel. The idea is to replicate the success of KE in the rest of the country. And there is no harm in improving recovery and reducing the theft before giving it into the private hands- especially in worse performing discos where the private sector is not keen to buy as it is. However, it’s a no brainer to immediately work on the privatization of better discos.

But, seemingly, the government’s idea is to give the distribution and selling businesses on concessions for ten years or more to the private sector. This may not work, as the private players are more interested in buying assets.

However, the government wants to keep some control and assets in its hands, as this would let bureaucracy keep its stronghold. This should be revisited.

The private sector will bring in best human resources and systems. It invests to improve network quality and works on selling new connections – like any good utility company in the world.

The private sector must incur capex which to yield in years to come. If it only gets concession and to share gain on improvement, the private player may position like this and not invest for long term.

For example, KE is pledging investment of Rs600-700 billion over the next seven years. The company is only doing it as it owns the assets but such investments cannot flow in when the private sector does not have serious skin in the game.

The board of directors may remain compromised, and incentives may be limited for improvement. Then if someone invests in that entity, it would expect to have renewal of concession after the expiry of initial contract.

However, seeing the experience of giving Karachi port container terminals concession to Abu Dhabi Ports where PICT (previous concessionaire) had the first right of refusal, the new investor may shy away from getting concessions in other areas.

The utility business is not of strategic a nature as seaports, and it should be completely put in the hands of private players where the role of the government should only be to regulate. Else, the power sector competitiveness may remain a pipe dream.

Copyright Business Recorder, 2023