Why Discos’ privatisation can never happen

Pakistan’s power sector has undergone various reforms in a bid to make the market more liberalized and introduce competition.

Privatization of DISCOs continues to remain a contentious issue and an area of focus, but the process seems like a distant dream, heavily influenced by recent regulatory decisions and overarching systemic issues within the power corridors.

Due to recent changes in the Nepra Act followed by licences issued by Nepra, the Discos are required to be “unbundled” into distribution and supply businesses looking after technical and commercial operations, respectively.

The technical side looks after the operations and maintenance of its network, bringing efficiency through T&D loss reduction and rehabilitation of the network. The supply side has the tasks to issue, collect bills and deal with complaints and to ensure prudent power procurement.

While, both Supply and Network are distinct businesses with separate licence regime and are required to be legally unbundled, power regulator, Nepra, while determining tariff considers it as one.

The only segregation it does is to break the O&M expense into two segments. It is assumed, that the Supply part will be done “as an act of goodwill without any return” as Nepra denied IESCO and other Discos an allowance for retail margin. In its determination dated 14th March of this year, the regulator disregarded the supply margin to IESCO, stating that the margins allowed to the network operations should suffice.

It needs to be understood that Supply business faces the most daunting task in power sector, i.e., to ensure recovery of bills. Not only does the tariff disregard an allowance for recovery loss (target based incentive) to allow the Supply business to recover its cost but it also disallows any margin to the Supply business.

Essentially, the tariff requires the Licensee to take the most difficult job of power sector and suffer losses. In this operating environment and unrealistic business model, how would the Government be able to privatise Discos. The idea to privatize DISCOs is to improve collections and bring in efficiency.

How it is expected that an investor would come in just to stem losses with nothing in return? Take for example KE, which, as per Nepra state of industry report, met its T&D loss benchmark in FY 2023, yet it posted a loss of over PKR 30 billion in the same year.

Prudence demands that for any investment in this sector the DISCOs need to be allowed a realistic Recovery loss allowance linked to an improvement curve along with an appropriate retail margin. As per power minister, Discos’ inefficiency cost the Government over PKR 500 billion. This gap was around PKR 200 billion a few years back and if let unattended will continue to widen.

Also expectation that this number will be borne by private investor with expectation of no return cannot be realized in real world. In real world an investor can come in and agree to improve performance to reduce and ultimately eliminate this cost.

But it will demand that such performance targets be reflected in tariff in the form of an allowance and a retail margin be allowed. Do we have the will and competence to change our mindset? We need to act fast as the pace at which the sector is derailing, the Discos’ losses will soon touch PKR 1 trillion annually.

Copyright Business Recorder, 2024