The privatisation of distribution companies (Discos) has consistently been part of the power sector's Master Plan. Not only does the measure attract foreign direct investment into the country, it stands to accelerate efforts to bridge the gap between demand and supply affecting the country. A robust electricity supply infrastructure is the bedrock for a country's future progress.
Underpinning this growth is the tariff offered to Discos, which serves as a key factor to attract private sector investment. The case of Fesco's privatisation is a clear example of this, where international and local investors were reluctant to enter the market because of an unviable tariff, despite the involvement of a consortium of international experts. Pakistan's distribution tariff regime does not offer robust features to encourage long-term investment in the power distribution sector. In fact, it impedes efforts for privatization by detracting foreign capital and preventing the market from becoming more efficient. We have to understand that distribution is the most complex business in the power sector value chain, carrying higher risks than generation and transmission. In principle, this should entitle it to higher returns. Instead, the regulator has based its tariff determination on numerous occasions on a set of unrealistic conditions such as ensuring 100% recovery from its customers. Similarly, targets for lowering T&D losses do not reflect the difficulties on the ground. Lower provisions against risks make it difficult to attract private investment in the distribution business.
By comparison, Independent Power Producers (IPPs) and transmission projects around the country are guaranteed attractive dollar-based returns on their investments. Since the state is the power purchaser in these projects, all the commercial obligations and risks are covered by a sovereign guarantee.
Globally, performance-based tariff approach is seen as a means to strengthen utility operations via incentives based on attaining specific objectives. This approach is followed in developed markets such as the US and Europe. Even in Indian markets, similar principles are adopted for tariff making. The only case to analyze, a private sector utility's performance in the local scenario is K-Electric, whose privatisation and turnaround success testifies the strength of the model. The performance-based tariff awarded to the company was one of the most advanced structures, providing incentives for investment and improving operational efficiencies. The tariff was developed in consultation with leading international experts and set a strong precedent for other DISCOs to potentially follow. Instead of building upon the success and extending the same model, NEPRA in its most recent determination of K-Electric tariff has adopted a regressive approach and applied a flawed tariff model to a functioning, profitable entity.
It needs to be kept in mind that this tariff model applied in other Discos is one of the leading causes of recurring circular debt in the country. With such tariff model the vision of establishing a competitive functioning power utility market will not be achieved. Instead the power utility sector of Pakistan needs a strong level playing field and an investment-friendly regulatory environment which ensures operational efficiencies and high quality of services that benefit the consumers in the short- and long-term.
(The views expressed in this article are not necessarily those of the newspaper)