EDITORIAL: Lending agencies insist that power sector reforms must ensure full-cost recovery, an economically viable policy, that administration after administration has defined as raising tariffs, which, in turn, has not only led to persistently high inflation but also a rise in input costs of industrial units making our products uncompetitive in the world market.
Pakistani administrations on the other hand have favoured and are considering other measures to deal with the crises prevailing in the sector: (i) wiping out circular debt by further borrowing - 480 billion rupees circular debt was wiped out of one set of books to be placed in another in 2013; and (ii) the Khan administration successfully renegotiated contracts with the Independent Power Producers (IPPs) that had favoured the producers particularly with reference to capacity payments and repatriation of profits; however, the success of this was limited as IPPs established under the China Pakistan Economic Corridor (CPEC) have so far refused to renegotiate on the grounds that other countries would demand similar deals and instead offered other alternative monetary benefits.
Post-April 2022, the government has been considering two options: the provincialization of distribution companies which raises the spectre of the capacity of a province to run a distribution company, though one would have assumed hiring sector experts should not pose too much of a problem, an example being the revenue boards set up by provinces for collecting sales tax on services that, according to most analysts, have less leakages than are prevalent in the Federal Board of Revenue (FBR); and privatisation that as per the decision taken by the apex committee meeting of the Special Investment Facilitation Council (SIFC) and endorsed by the incumbent Finance Minister Muhammad Aurangzeb as the preferred option.
Business Recorder would support the privatisation policy but after careful consideration of revisiting three major policies of the existing privatisation strategy. First and foremost, it is unlikely that any private sector would be willing to purchase a Disco that does not allow it to operate within a continuing monopoly setting.
While economists warn against selling to a private sector monopolist who would up the tariffs to maximise profits which, no doubt, implies making the power sector regulator to set tariffs redundant, yet it is patently evident that a competitive electricity market would negate any attraction the private sector may have to enter the market today as the existing power distribution network would remain a dominant feature that would favour whosoever controls it but there are effective ways to deal with this aspect.
It is relevant to note that in 2020 Nepra approved a Competitive Trading Bilateral Contract Market that envisages giving the option to bulk consumers (1MW or above) to purchase directly from the producer by taking away the trading function of Discos though progress in this regard has been sluggish. Needless to add, this proposal is targeted to reduce inefficiencies and corruption rampant in our state-operated national grid.
Second, under consideration is a wheeling charge proposed by the Cabinet Committee on Energy during the previous tenure of the Shehbaz Sharif-led government for transmission of electricity from a Disco to the consumer – a system that is antiquated and requires a massive investment for improvement. This charge too would act as a deterrent to a prospective private sector purchaser to invest in the up-gradation of the existing structure.
And finally, the privatised K-Electric example shows that there is a need for the decision-makers to consider whether an annual subsidy to implement the policy of tariff equalization and cross-subsidy between tariffs of different categories of consumers will continue.
What should be equally concerning to the decision-makers is that the tariff equalization policy has been the reason behind large annual subsidies to state-operated Discos/Gencos (budgeted at 150 billion rupees in the current year - a target that may be overshot, given that it was 225 billion rupees in the revised estimates of the year before) and 55 billion rupees to AJK. IPPs are budgeted to receive 310.075 billion rupees in the current year and total subsidy to Wapda/Pepco is budgeted at 579.075 billion rupees.
Evidently, the overarching objective to privatise is to improve efficiency, end corruption and the budgeted subsidies; however, if the government is to continue paying a subsidy at the taxpayers’ expense that would defeat the purpose of privatisation.
And at the same time to develop an interest in the sale of Discos requires providing the private sector a fertile ground to operate with requisite protections to the consumers as well as the operator and also not strangling the private operator under political compulsions. These are difficult choices and require careful thinking before embarking on a policy that may haunt the stakeholders in future.
Copyright Business Recorder, 2024
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