Flawed power sector strategy

The government is focusing on wrong policy initiatives due to which the circular debt is ever increasing. In fact the recoveries of past years have been shown as increased collection when the regulator adjusted and allowed prior year adjustments in the distribution tariff. The wrong focus is on the generation cost and rewriting of the contracts whereas the actual malaise lies in the transmission and distribution systems and their attendant problems of corruption, inefficiency and mismanagement. By this strategy we are alienating investment and crucially the foreign direct investment by frequently raising immature objections and implausible arguments. One such argument making rounds is of the capacity payments which are seen as inimical and pariah. However, the reality is quite the opposite. Capacity payments are payments required to pay the lenders, operators and equity investors. These are the payments which cannot be deferred and cannot be linked to operations of the power plant. Without these payments no equity investor or lender will be willing to invest in a project. Such payments are recognised globally and have been in vogue in Pakistan since 1990s. All these payments are recoverable from the consumers and the Government is cost neutral provided it is efficient and transparent. The consumer tariff is designed in a manner with high rates at the peak time and lower rates at the off peaks. The higher rates of the electricity tariff at the peak times are used to pay capacity payments to the power plants which are required to be despatched in high demand period.

The problem is that distribution companies are not recovering the billed units. Various reasons have been attributed in the shape of theft, technical and operational losses. However, in reality these largely occur in connivance with the employees of the distribution companies. Various laws were promulgated drafted by the undersigned as for instance amendments in the Criminal Procedure Code and Pakistan Penal Code for the criminalization of electricity theft to eradicate corruption. It stipulated special electricity offences, complaint mechanism and designation of special courts but to no avail and effect as cat is guarding the milk. Hence by not recovering enough money we could not pay the generators and now we are asking the investors and lenders to renegotiate the terms and conditions of the power purchase agreements. Since we are so good at passing the buck, not willing or ready to correct ourselves and blaming others we are opening new avenues for creating disputes and jeopardising new investments.

It has been suggested to the Prime Minister to renegotiate the power purchase agreements, even under the CPEC framework, so that the loan term is extended from ten (10) years to twenty (20) years and the delayed payment rate is reduced from LIBOR/KIBOR plus 4.5% to 2%. What the Prime Minister has not been explained that by these measures the generation tariff will reduce apparently but the real actual benefits will not accrue as the pot at the distribution and collection continues to leak and is porous. Furthermore, extension in the term of the loan will result in increased lending costs for over a longer period of time and resultantly effective higher tariff. In any case, the average tariff over a period of thirty (30) years concession term will remain the same irrespective of extension in the loan period as the tariff in any case shall reduce substantially in the interest of the consumers, after the expiry of ten (10) years loan period. We are only looking at the cosmetic changes with no desire to change the fundamentals. The reduction in the delayed payment rate is in our control. If the power purchaser does not delay the payments, this charge will not be applicable. By seeking reduction we are admitting that we are not going to correct ourselves and will continue to delay the payments and then blame the generators for the high cost of electricity generation which cost can be reduced if more supplies of electricity are delivered and recovered from the consumers untainted by the corruption, leakages and losses.

On top of this we are not looking at the administrative and regulatory costs associated with such changes and the dent on the business confidence as well as raising of risk premium in future ventures. Again the edict does not take cognizance of concerns of lenders and investors who may not share the same perspective and may have different risk rating and premium when the loan repayment period is increased from ten (10) to twenty (20) years and the delayed payment rate is reduced. Already the projects are bedeviled with environmental rigmaroles, policy inconsistencies, tax anomalies, dispute mechanism, adverse interpretation of incentives and concessions, lack of clarity on the contractual framework etc. Although the projects in question include Government to Government (G2G) under the CPEC, the terms and conditions of the agreements are commercially negotiated keeping in view the policy incentives and concessions given by the Government of Pakistan which cannot be changed to the detriment of the investors and lenders and which brought in massive foreign investment in Pakistan that eliminated the curse of load shedding that had bedeviled Pakistan over a period of one decade from Year 2007 to Year 2018. Such investment led to achievement of growth rate of over 7% and stability in the economic indicators of Pakistan.

As if this was not enough, instead of focusing on the correction of fundamentals in the transmission and distribution systems, the power mandarins are hell bent on bringing competitive market measures which are bound to fail in presence of long term contracts, an unsustainable circular debt, financial insolvency and market participants being public sector companies that are driven not by any profit motive but by their limited vision of not allowing the private companies to invest and operate. A singular example is the orchestrated failure of net metering which would allow the electricity consumers including households to install their own sources of electricity at the affordable rates. Another prime example is the wheeling of the electricity arrangements. Business to Business (B2B) electricity generation, transmission and consumption is not being allowed and inefficiencies of the public service system are being portrayed as cost of service to be paid by the private sector. Major investments are being stalled on wrong premises with impunity. Such policies are bound to fail but by then we all would have paid phenomenal costs. The need of the hour is to fully debate and deliberate the issues from the legal, financial and technical aspects both; in short and long-term perspective to get sound substantive advice rather than through trigger happy officials with knee jerk reactions.

(The writer is practicing barrister with specialization in energy, regulatory, financial and corporate laws)