EDITORIAL: Prime Minster Shehbaz Sharif has formed a committee to find legal ways to create space for participation by the private sector in power distribution companies (Discos).
One cannot emphasise enough on the need for privatisation and deregulation of Discos. And it is a welcome move that the government is considering reducing legal bottlenecks.
However, more important is the commercial viability and what is in for the private sector investors. The only private company in the power distribution sector is K-Electric. Its performance since privatisation stands out in terms of reduction of losses and improvement in services. The T&D losses have reduced from 34.2 percent in 2005 at the time of privatisation to 15.3 percent, more than half.
This doesn’t happen without major investment in the system: the company invested $4.1 billion in the value chain since privatisation to achieve this result.
The company has been able to digitise and innovate on its own while other Discos under the government control cannot do the same despite loans from multilaterals. For example, K-Electric has already automated the meter- reading equipment installed on its pole-mounted transformers, whereas IESCO (Islamabad Electric Supply Company) is undertaking an Asian Development Bank-funded project just now. Case studies on K-Electric’s success were done by Harvard Business School.
Seeing that a good company cannot pay any return to its shareholders is hardly an attraction for potential investors for acquiring a stake in other Discos. The fundamental problem in Discos is that they cannot recover the full cost of generation from the consumers as the government sets tariffs which are mostly lower than the cost.
The gap is filled by the government in the form of subsidies. However, the proceeds do not come in time and that creates cash-flow problems for Discos. To cover such gaps, Discos have to borrow.
Since these are state-owned entities, they borrow against the sovereign cover. The real problem is for the private sector. The model is not sustainable. It needs to be fixed.
Having said that, there are inefficiencies in Discos’ own operations. They don’t invest enough in the transmission system to lower the line losses. Then the recovery of some Discos is abysmally low against what is being billed.
These are somehow covered through cross- subsidies and the rest becomes part of the power circular debt. The need is to wean good Discos away from the bad based on their T&D losses and recovery. There are four bad Discos -– Peshawar, Quetta, Hyderabad and Sukkur.
These should be kept separate and work on privatisation (or participation of private investors) needs to be done in the remaining five better performing Discos. Let the private sector have confidence in the system.
Let the private sector make returns for the shareholders before bringing the bad ones into the equation. The private sector’s involvement is based on the premise of making these Discos efficient.
For that the private players have to invest in the transmission system to ensure uninterrupted supply to bulk buyers. They must work on innovation and digitisation. They should hire good people in the commercial team to increase the number of customers.
The private sector would only do that if there were returns to be made for those investments. Seeing the nil returns to KE shareholders, many would shy from participating in similar ventures. The government has to devise a system to ensure it.
The government needs to do away with the cross-subsidy model. Discos should price their supply based on actual cost. And the good ones should not take the brunt of the losses of bad ones as in the current model bad and good performers are rewarded alike; the good Discos in certain cases have to repent for the sins committed by the bad ones.
Copyright Business Recorder, 2023