EDITORIAL: The federal cabinet intends to overhaul the power sector, ostensibly through some drastic measures such as installation of advanced metering infrastructure and low-cost solar energy projects. The objective is to undertake a thorough examination of the existing electricity generation and distribution system.
However, the government, in its naiveté, is ignoring the presence of elephant in the room, i.e., mis-governance and lack of competence of Discos and missing coordination between the generation and distribution systems that results in violation of merit order. In short, nothing can work unless the Discos are truly empowered and allowed to act independently.
The sector needs to be deregulated in letter and spirit. The government is playing to the gallery and trying to justify the projects it is implementing or seeking to implement. Before delving into the need and efficacy of advanced metering and solar energy, the government needs to take real actions to lower the losses and in turn reduce the burden of inefficiencies on consumers.
In the past, too, there had been repeated efforts (on paper) to improve the governance of boards and management of Discos. However, irrespective of who in power, all these efforts were in vain. And these would remain futile unless the control is withdrawn from the hands of ministry of energy.
How ironic it is that certain government officers are dealing with highly technical and complex issues of power without any prior hands-on experience or knowledge of the said subject.
How things can improve when the anchors of change are not ready to relinquish control? Successive governments have used (or abused) the energy sector for their political gains by taking decisions that have resulted in unabated rise of circular debt. In the past 15 years, the total cost of inefficiencies in the power sector is estimated at a whopping Rs 9.4 trillion.
This includes the stock of circular debt at Rs 2.3 trillion, the government budgetary support of Rs 4.9 trillion in the last 15 fiscal years and the borrowing cost of budgetary support which (assuming the average borrowing cost at 8 percent) is computed at Rs 2.4 trillion.
These numbers are mind-boggling, to say the least. The sector alone can drag the economy down to an abyss unless it is resolved. And for that to happen, nothing short of deregulation and privatisation will work and privatisation of K-Electric is a strong case in point. Before the transfer of business or service from public to private ownership and control, K-Electric was rated as one of the worst Discos.
However, consequently an independent management with a fully empowered board of directors accountable to the shareholders did the trick. Numbers don’t lie. According to KE’s latest annual report, the company has invested $4.1 billion in the power value chain since privatisation. With over 12,500 PMTs (pole mounted transformers) converted into ABCs (aerial bundled cables) their fuel efficiency has improved by 29 percent since sell-off.
And the most important number is the reduction in transmission and distribution (T&D) losses which have reduced from 34.2 percent to 15.3 percent. In simple words, since privatisation, KE has doubled the consumers and the volume of energy and halved the T&D losses.
The performance of other Discos is nowhere close to it. And whenever there is talk about privatisation of Discos in Islamabad, the bureaucrats oppose it. They attempt to portray KE negatively by highlighting the theoretical risk of a natural monopoly of generation, transmission, and distribution. They don’t recognise the ground realities.
Had K-Electric not been privatised, Karachi’s power sector would have been a complete mess. K-Electric’s success is a lesson to be learnt. Privatisation has demonstrated the success in Karachi. And if that can happen in a complex city of teeming millions, the rest of the country can certainly gain from such measures.
The idea is not to undermine the efficacy of solar and advanced net metering. But the government needs to take the proverbial ‘take the bull by the horns’ and address the crux of the problem. For starters, it should make the boards of directors of the Discos truly empowered with an enticing incentive structure based on Key Performance Indicators (KPIs) for the management and their boards of directors so that they have their skin in the game and have something to look forward to.
In other words, there should be clear mapping of KPIs and the management (and board) to be compensated on improvement through performance bonuses. The processes of deregulation and privatisation should run concurrently, not consecutively.
Copyright Business Recorder, 2022