The power sector is one of two sectors whose appallingly dismal performance remains of serious concern to international donor agencies (the other being Federal Board of Revenue). The World Bank has taken the lead in identifying an entire range of reforms for implementation (fully supported by the International Monetary Fund) - reforms that the PPP-led coalition government failed to implement under the 2008 Stand-By Arrangement (SBA) thereby leading to its suspension while the PML-N government has committed to the very same reforms, which account for the approval of the September 2013 Extended Fund Facility (EFF) of 6.64 billion dollars to Pakistan.
The question is what are these reforms that are so politically challenging that the PPP-led government opted to forego the much needed last two IMF tranche releases under SBA rather than implement them? First and foremost, these reforms urge suspension of untargeted subsidies. In other words the vulnerable alone should be extended a subsidy (or by the incumbent government's definition those who use up to 200 units per month) while higher income groups must pay a tariff premised on full cost recovery. This is economically sound as untargeted subsidies cannot be supported even by a rich economy; however, given the fact that our energy costs include massive sectoral inefficiencies there is an economic downside to withdrawing subsidies: higher energy costs (which compare unfavourably with our international competitors as well as regional countries with whom we have porous borders) raise costs of production, thereby fuelling smuggling and raising domestic prices as well as negatively impacting on our exports.
The inefficiencies in the power sector are numerous the foremost being the circular debt. The third IMF staff review notes that "preliminary analysis including the generation companies suggests that the stock of arrears stands at around 500 billion rupees by end March 2014 (about 2 percent of GDP), of which half is the stock of payables in the power sector and the other half is at Power Sector Holding Company Limited (PSHCL) as a debt instrument - the syndicated term credit finance or STCF." With respect to the 240 billion rupees parked in the STC facility the government committed to the IMF to generate the amount either through a tariff rise, or failing that, to levy a surcharge. The objective: to reduce arrears and interest costs as the accrued debt service continues to add to payables by compelling the hapless consumers to pay for the sector inefficiencies. This proposal when viewed with data recently released in a publication titled World Bank Doing Business Index (DBI) 2014 is highly disturbing. The DBI index maintains that Pakistan's ranking declined from 106 in 2012-13 to 110 during 2013-14. One critical reason: the perception that electricity supply worsened during the first year of the PML-N government by 3 rating points. A better option from an economic point of view would have been for Finance Minister Dar to defer the rise in tariff/cess till next year with the objective of promoting industrial activity (and other productive activities) that would have favourably impacted on growth - an argument that the Fund would have been hard pressed to resist.
Secondly, the transmission system remains obsolete and as Secretary Water and Power recently informed the Senate Standing Committee it cannot sustain a load of more than 15000 MW. Surely the initial focus should have been not on enhancing generation but on improving the distribution/transmission network. As on 28 June 2014 leakages within the system including theft were around 23 percent, however, transmission and distribution losses are noted at 18 percent in the third Letter of Intent (LoI) submitted by the government to the IMF as it claimed that "we envisage reducing losses by one percentage point (to 17 percent)" by the last day of June 2014. The 23 percent losses are more than double the Nepra-approved losses and well above the regional average. The International Energy Agency provides the following data for Pakistan: electric power transmission and distribution losses as a percentage of output was 16.08 in 2010 - its highest value over the past 39 years was 30.41 in 1998 (PML-N was in power at the time), while its lowest value was 16.08 in 2010. Data indicates that losses have actually risen since the PML-N government took over power a year ago.
Thirdly, bill collections remain poor and the government in its third LoI indicated that reduction of losses and improved collections would be effected through capital expenditures and revenue-based load management (shutting off electricity supply to those areas where bills/payables are less than 80 percent). Payables for the power sector were estimated at 270 billion rupees with 90 billion rupees considered as current payables (less than 45 days overdue and not regarded as arrears); out of the remaining 180 billion rupees the government has committed to reducing 100 billion rupees by the end of this fiscal year owed to distribution companies, which would help service remaining payables to generation companies. No doubt tariffs would be raised for the achievement of this objective, which again would have implications on the productive sectors as well as the budgets of householders. The crudely-delivered warnings by the Minister of State for Water and Power Abid Sher Ali have antagonised Sindh and Khyber Pakhtunkhwa provinces, however, the former continues to challenge the bills whereas KPK has cleared its current bills while previous bills require to be rationalised.
The extent of loadshedding can only be explained by the fact that data provided by the Ministry with respect to supply and demand grossly understates demand. A board that had provided accurate supply-demand data was switched off reportedly on the instructions of Nargis Sethi. This enables the government to not only routinely understate demand but also to claim that during the last one year it has enhanced electricity generation through retiring 400 billion rupee circular debt on 30th June 2013, which financially unshackled the sector, thereby generating an additional 1700 MW into the system. This assertion is being challenged by independent analysts and the evolving consensus is that an additional power around 800 MW was released into the system which, given the annual 800 MW rise in demand, led to little change in the number of hours of loadshedding.
The third Letter of Intent submitted to the IMF pledges to privatise discos and gencos as an integral component of the government's reform policy. The objective: to bring efficiencies associated with private sector activity. One would urge the government, however, to look at the California electricity crisis of 2000 and 2001 subsequent to privatisation, which led to severe supply shortages due to (i) market manipulations, (ii) illegal shutdown of pipelines by Texas energy firm Enron, and (iii) capped electricity retail prices.
It is unfortunate that the government continues to rely mainly on the same policies to date that were favoured during the PPP-led coalition government: higher tariffs, lower subsidies by as much as possible without creating socio-economic unrest, flawed data releases and periodic injections to enable the Pakistan State Oil to import fuel as its receivables rise to beyond 150 billion rupees. Or in other words there has been no improvement in governance of this appallingly badly-run sector, which would have held the key to generating the perception that the government is embarked on a well thought out plan to resolve the major deeply-rooted issues that face Pakistan's power sector.