State of the power sector

The Secretary, Ministry of Water and Power, has asked in his recent article the question: Pakistan's power sector going up or down, or nowhere? As expected, his answer is that the power sector is progressing by leaps and bounds and by 2018 we will have a power system which is 'modern, efficient and resilient'.
Indicators of progress in the sector quoted by him include decline in power blackouts, reduction in losses, increase in payment collection rates, and reduction in energy subsidies. Apparently, power load shedding has been eliminated from industry. The level of circular debt has been capped. Ongoing projects will add 12000MWs of generation capacity. Simultaneously, more than 90% of the distribution system will be made constraint free by 2018. As the ultimate certificate of good performance, he quotes the favorable reviews of developments in the power sector by the IMF.
This statement by the Secretary should ideally have come after the publication of the State of Industry report by Nepra for 2015-16. This is a report of outstanding quality and highlights with the help of detailed statistics the performance of the power sector in an objective manner. Attempts to reduce the autonomy of Nepra must also be resisted.
The first attempt should be to evaluate, three years down the road, implementation of reforms committed in the power sector by the PML (N) in its manifesto. The primary aim of the party in 2013 was to ensure energy security, through continuous availability and affordability, following the assumption of power.
The manifesto demonstrated an in-depth and clear diagnosis of problems in the power sector and identification of reforms required for implementation. The steps proposed included setting up of a Ministry of Energy and Natural Resources through the merger of Ministries of Water and Power and Petroleum and Natural Resources; corporatization and privatization of DISCOs, ending of cross-subsidy among DISCOs; introduction of prepaid billing system to improve the billing system; corporatization of each Genco and subsequent privatization; permanent elimination of circular debt; diversion of gas to power generation; importing gas though pipelines; development of Thar coal field; decentralizing and creating a wholesale market for electricity; developing renewable energy sources and so on. An appraisal of the implementation process of these steps indicates an uneven performance. Many of the reforms committed to have not yet been undertaken or completed.
How then has there been such a remarkable recovery in the sector according to the Secretary in the absence of wide-ranging reforms? The unfortunate conclusion is that many of the Secretary's claims may be somewhat overstated. There is need to more dispassionately study the developments in the sector.
First, transmission and distribution losses have apparently been reduced to 17.9% in 2015-16. According to the Pakistan Economic Survey, these losses were actually lower in 2014-15 at 16.2%. Billing losses may have come down somewhat, but it is unacceptable that arrears in recovery have exceeded 50% of the annual billing in many Discos.
Second, the claim is made that the circular debt has been capped at Rs 348 billion. This is in conflict with the statement by the IMF that it has reached 2% of GDP, over 600 billion. The Fund has emphasized on the need to reduce this debt, possibly by receipts from privatisation within the sector. Otherwise, the liquidity position of the sector may worsen and create bottlenecks. For example, receivables of PSO have reached Rs 252 billion and are beginning to impair its ability to finance imports of fuel, as happened in early 2015.
Third, the tariff differential subsidy has been reduced from Rs 350 billion in 2012-13 to Rs 171 billion in 2015-16. This has certainly reduced the pressure on budget. However, this has been achieved more by a large increase in power tariffs of over 30% on average than through efficiency gains. This tariff increase was a prior condition for funding to start from IMF in September 2013.
Fuel costs have fallen substantially for the last two years. Despite this, a big tariff rationalization surcharge of Rs 3 or more per kwh was levied in June 2015. This has neutralized the benefit of negative fuel charges adjustments. A high industrial tariff continues to be a key factor affecting competitiveness of our exports.
Fourth, there are, no doubt, ambitious plans for expansion of power generation capacity, especially as part of the CPEC. The Planning Commission reports 17 power projects under implementation, of which nine are coal-based. However, only five projects have achieved financial close and eight are still at the planning stage. At this rate, it appears unlikely that 6000MW or more will be added to the system in 2017.
Fifth, the Secretary is optimistic about the removal of the constraint of transmission and distribution before the commissioning of most generation projects. A reference is made to some negative observations by Nepra in this regard. According to the regulatory agency's recent visit report only 47% of the inter-connection arrangements for the Neelam-Jehlum project have been put in place despite the completion date of June 2016. Similar problems have been highlighted in the case of the Quaid-e-Azam Solar Park and Thar coal based projects.
An examination of Pepco/ NTDC projects for transmission and distribution in the Federal PSDP also highlights the slow pace of implementation. There are altogether 139 on-going and 26 new projects. The total required outlay on these projects is Rs 757 billion. The allocation for 2016-17 is Rs 136 billion. Therefore, on the average, these projects will require more than five years to complete. As of end-November 2016, only 20% of the annual allocation has been released.
There are some other concerns. Only $ 313 million of power generating machinery has been imported in the first four months of 2016-17, according to the SBP. The foreign investment in the power sector during this period is only $ 140 million. The remainder of imports has been financed through borrowing or a drawdown of reserves. The disappointment, in particular, is that Chinese foreign direct investment in Pakistan during this period has fallen by 47%.
Another concern is that industrial power load shedding has probably not been eliminated throughout the country as claimed. Over 85% of the incremental supply since 2012-13 to industry has gone to the four Punjab Discos, viz., GEPCO, FESCO, LESCO and MEPCO. The other Discos have increased supply only marginally to industry or even reduced it.
Overall, it is far too early for the Secretary to declare victory. There is a need to pursue with extra vigor the reforms in the sector committed to by the PML (N) Government. Also, the implementation of CPEC and other projects of the power sector in the Federal PSDP must not be delayed due to lack of resources or institutional capacity.
We all pray and hope that, as promised by the Secretary, the power sector will be part of the engine of fast growth by end 2017. Also, that power load shedding will be part of history, much to the relief of the common man.
(The writer is Professor Emeritus and former Federal Minister)