In my earlier article The Gravy Trains of Pakistan (Business Recorder September 1, 2016) I had identified the Public Financial Management System (PFMS) of Pakistan as the fountain head of corruption in Pakistan. This year's budgeted $65 billion will flow through the sticky fingers of the governmental institutions in Pakistan. A hidden off budget component of the PFMS is the elaborate outsourcing activity of the Government of Pakistan (GoP) that revolves around complex contracts, non transparent processes, crony bureaucrats and vested interests. Unfortunately, these activities have become the source of Impoverishment of our people rather than the engine of growth and good governance they were supposed to be.
The outsourcing activities were the center piece of the Cotecna-SGS affair of the Peoples Party travails in the Swiss courts. It was the outsourcing activity embedded in the Independent Power Producers (IPPs) that were the source of Chairman Zardari's Mr Ten Percent epitaph. It were the outsourcing activities of the Rental Power Plants that earned Prime Minister Raja Pervez Ashraf the undisputed title of Raja Rental. His subsequent trial in the Supreme Court of Pakistan was bought on ironically by the allegations initiated by none other than our current Power Czar Khawaja Asif.
The outsourcing business in the energy sector has given birth to a host of "extractive institutions" nurtured by various governments. Such institutions have been so graphically described by Acemoglu and Robinson in their path breaking book, "Why Nations Fail". In Pakistan the power sector extractive chain connects the ruling family to the Power Ministry, to the Private Power Infrastructure Board (PPIB), to the National Electric Power Regulatory Authority (Nepra) and to shady deals, all acting in a blatant disregard for the welfare of the people, the competitiveness of the economy and looming bankruptcy of the external balance of the country.
The power sector touches the life of every individual, business and economic entity in Pakistan. Cheap, reliable and abundant power is the life blood of the economy and the source of economic growth that is critical for creating the jobs for our youth bulge. Creating a power sector that becomes a competitive advantage for our country has to be the top priority of the leadership.
We are currently producing around 102 billion units (Kwh) of power every year. With CPEC programmed to add 17000MW of new capacity and addition of another 100 billion new units of power per year to the national grid. It is critical that the power being inducted into the system should turn around the economy and be the most competitive, environmentally friendly and reliable power available. A single cent excess in the per unit cost of power in the grid would add $1000 million a year to the nation's energy bill. The ultimate victims will be the consumer, the economy and the reserves of the country.
The Sustainable Development Policy Institute (SDPI) in a study on the coal power generation in Pakistan has collated recent cost of coal power generation in South Asia. The study shows that in Bangladesh and India newly created coal power plants tariffs would hover between 3.5 and 5.5 cents per kwh of power. In contrast, Nepra has awarded tariffs averaging around 9 cents per Kwh for CPEC coal based projects and even higher for Thar, solar, and wind projects.
A case in point is the Qatar and Chinese brokered Port Qasim Electric Company 1320 MW coal power project. The project has been given a levelized tariff of 9 cents. A four cents per kwh excess tariff over South Asian competitors will mean that the Qatari and Chinese investors will get a yearly $300m plus bonanza at the expense of Pakistan's households and agricultural, industrial and commercial consumers. This will continue for the life of the contract. The entire CPEC portfolio excess payments could mount to a cool $4 billion a year. Why are we doomed to pay this huge penalty? Is this the cost of incompetence, corruption or are we paying the price of the risk profile of the country?
The upfront Tariff determination formula used by Nepra is central to the investors' decisions. It is based on dozens of parameters and variables which need careful and informed input. A slight excess in each item can in combination mount to a large variation from regional and international benchmarks. Three variables are the most important. The 'Capital Cost' of the Project, the 'Efficiency' of the generation process, and the 'Rate of Return' for debt and equity financing of the projects.
Globally, capital costs of coal power projects are swiftly declining and range from $0.5 million per MW in China to $1.1 million in Europe. In Pakistan, the Port Qasim project has been fixed at $1.5 million per MW for a total capital cost of $1980 million. With Chinese contractors and Chinese technology the bill should have been well under a million dollar per MW and total cost could have been easily deflated by at least around $500 million. This excessive capital cost has a major upward impact on the tariff. The amount of financing of the project increases and has to be repaid through the tariff, secondly the interest payments also get bumped up and they also are collected from the consumer through the tariff.
Furthermore, the tariff payments of these projects are backed by sovereign guarantees of Pakistan leading to an increase in contingent liabilities of the country thereby affecting the credit rating of the country. In spite of the sovereign guarantees the investors rates of returns and bank interest rates particularly the rates on domestic financing allowed in the tariff determination are high and do not reflect the risk reduction due to the sovereign guarantee. This omission leads to higher end tariff than needed.
Finally, efficiency levels allowed in Pakistan are on the lower side resulting in higher fuel costs that are also recovered from the consumer through the tariff. The consumer therefore gets a triple whammy of inflated capital costs, inflated interest costs, and inflated fuel costs. Thus the huge tariff differential between Pakistan and its regional competitors appears to be more due to incompetence and corruption rather than due to the risk profile of Pakistan. The exact determination will one day have to be made in a court of law whenever it takes place.
It is the obligation of all authorities in Pakistan that can halt this pillage to act before we get locked into long-term contracts that will be millstones around our necks for the foreseeable future. The extractive public sector management of the energy sector is ripping-off the people of Pakistan and has to be stopped. With immediate effect the government should ensure that no groundbreaking of new projects takes place unless the regional benchmarks of costs and tariffs are clearly met by Nepra. Secondly, investigations must reveal to the People of Pakistan the identity of the beneficiaries of the largess granted by our extractive institutions for the projects already under implementation. Any wrongdoing has to be identified and punished.
What are the options for solving the power shortages and its exorbitant costs Pakistanis face every day? We have seen the Nandipur fiasco where public sector investment and management has been disastrous for the country. The private sector IPPs have not delivered cheap power and cannot do so going forward. At this stage it would be wise to divert the CPEC investment in coal projects into multipurpose dams. This will give multiple sustainable benefits of both energy security and food security. As far as thermal power business is concerned, it is on the brink of a very disruptive technology phase particularly due to the evolution of solar energy where power tariffs of under four cents per unit are being regularly announced. The traditional IPP model or the State Owned Thermal Power model cannot survive the onslaught of cheap off grid solar power,
The only option is to dismantle the single buyer IPP model of Pakistan based on government guaranteed returns and introduce complete deregulation. This would need creating a competitive environment where various technologies and technology suppliers can operate in a fiercely competitive market place. The role of government should be limited to monitoring, guarding against cartelization and market failure. This would mean providing equal access to all producers to the transmission and distribution networks for a fee and allowing marketing of energy where buyer and supplier interact without interference from the government. Without radical decisive action the mega projects will continue to lead to mega rip-offs. (The writer is a former Finance Minister)