EDITORIAL: Prime Minister Shehbaz Sharif has again directed the relevant authorities to speed up the process of privatisation of electricity distribution companies (Discos), a call echoed repeatedly by Finance Minister Muhammad Aurangzeb as well.
The rationale employed by the two men is that the private sector operates much more efficiently than the state sector and this decision would, in time, ensure the steady erosion of the 2.6 trillion-rupees circular debt. This rationale sadly may not be relevant due to four prevailing factors.
First, the investment climate, domestic or international, does not seem to be conducive to investment in this country - domestic apparent due to the 54 percent decline in private sector credit between July-5 April 2024 compared to the comparable period of the year before, a trend that continues as July-June 2023 witnessed a 98.2 percent decline from the year before.
And while the Special Investment Facilitation Council (SIFC) established on 17 June 2023 has succeeded in getting significant pledges from friendly countries yet to date the non-binding Memoranda of Understanding have not been converted into contractual agreements.
Independent economists are also expressing their concerns about the pledges that may be made by the Pakistan authorities to translate MoUs into contractual obligations by extending sovereign guarantees (on the same pattern as allowed to investments under the umbrella of China Pakistan Economic Corridor with Pakistan struggling to meet its financial obligations) that are already maximised as a percentage of GDP allowed by parliament and lending agencies. Economies undergoing an impasse, as is the case with Pakistan, find it extremely challenging to attract investment.
Secondly, it is relevant to note that Discos whose privatisation has been fast-tracked by the current dispensation were identified four to five years ago but the process was stalled as there was resistance by the workers of these Discos with the opposition parties jumping in support of workers.
At the present moment, the country’s politics is subjected to extreme divisiveness with the ruling party leadership hurling insults at every forum against the opposition while the latter claims massive rigging during the 8 February general elections by pointing out the lack of synchronicity between Form 45 and its aggregate Form 47. And if one adds the element of the recent surfacing of the government-judiciary clash and previous court judgments with respect to privatisation then the hesitation of foreign investors to convert their pledges into binding contracts should be expected.
Thirdly, care has to be taken that the privatised Disco that would be operating as a monopoly does not raise the tariffs to levels that envisage windfall profits as monopolies operating in the private sector are tempted to do which should have brought the discourse to the final and perhaps the most disturbing aspect of this directive – an aspect that fails to take note of a long time government policy that continues to undermine the success of K-Electric privatisation to this day, success defined as not receiving any monetary support from the federal government: the budgeted tariff equalization subsidy.
When Wapda was the only distribution company in the country the concept of uniform tariff throughout the country may have had political relevance though never economic relevance as supply costs varied from one region to another.
Wapda’s distribution network was unbundled as per donor conditions more than 17 years ago and 12 Discos were established – all but K-Electric government owned. However, to this day K-Electric is the recipient of the tariff equalization subsidy budgeted at 171 billion rupees for the current year (an amount that is over and above the arrears budgeted at 127 billion rupees) against the disbursement of 173 billion rupees in the revised estimates of last year.
It is therefore critical for the government to take a decision on whether it intends to continue to extend a tariff equalization subsidy to privatised units or not. Last but not least, simply putting a Disco up for sale is not the answer and one can only hope that better sense prevails and specialists rather than generalists are consulted prior to proceeding with the privatisation process.
Copyright Business Recorder, 2024