The power strategy revisit

The Sharif administration appears to have shifted its earlier focus on generation to “less splashy reforms including new transmission systems, privatisation and better management,” according to a foreign news agency. One can fully support this shift as, according to the third party audit carried out by the Asian Development Bank on rental power projects during the tenure of the PPP-led coalition government, the country’s generation capacity is close to managed demand. However, the major issue is one of heavy transmission and distribution losses that are well above the regional average.

Former Secretary Water and Power, Nargis Sethi, had stated that the country’s transmission system can carry no more than 15000MW. In addition, poor governance with respect to sustained failure to improve receivables accounts for a circular debt that compromises the liquidity of the sector thereby periodically disabling Pakistan State Oil from opening letters of credit for fuel imports and necessitating unbudgeted Ministry of Finance injections. Thus any effort to improve transmission and distribution losses, the cost of which is passed onto the consumers over and above numerous taxes and surcharges, must be welcomed. High energy costs not only raise costs of production making our products uncompetitive but also the kitchen budget of the middle income and poor.

Clearly some of the ambitious generation projects have been abandoned notably Gadani Power Park envisaging generation of 6600MW from imported coal after much hype was created by the office of the Prime Minister as the location was considered inappropriate. The world over coal-fired power projects are located near the port and/or source of coal to minimize transport costs and associated environmental costs/issues. It is little wonder that the location of Gadani, Balochistan, raised concerns in Sindh as the coal would have had to be transported from Karachi port. Japan International Co-operation Agency undertook a feasibility study to develop two 660MW projects on Lakhra coal, but this project was also shelved in February. While not doubting the Sharif administration’s intent to end the energy crisis once and for all yet there is a need for consultations with relevant experts prior to announcing projects that are later declared unfeasible.

During the two and half years of the incumbent government transmission losses have improved only marginally, by 0.5 percent, and the transmission system can withstand 16000MW (a rise of 1000MW) though managed demand has risen by much more than that; the government therefore would have to make more concerted efforts before it can convince the public that it is indeed ushering in meaningful governance reforms. Receivables too, in spite of Minister of Water and Power and the Minister of State’s claims that electricity is being suspended in all areas where receivables are below par are not declining because of the government’s failure to ensure that government institutions, federal and provincial, clear their dues promptly. Part of the problem associated with rising receivables lies with the power sector that is over-charging government entities to meet the cost of their own inefficiencies (transmission and distribution losses) on the flawed assumption that they would not quibble the bill.

Privatisation plan too has come under criticism. The identification of three profit-making distribution companies for privatisation is being challenged by experts. They cite the example of K-Electric whose privatisation neither led to an end to subsidies nor to higher generation to meet demand and further warn the government that the privatised entities could well act as monopolists, raising price to a level that would maximise their profits, until and unless the government can provide them with competition.

The key rests with improved governance and that is not possible without reforms. It may be recalled that each and every quarterly mandated International Monetary Fund review under the 6.634 billion dollar Extended Fund Facility has identified the power sector as an area of concern and urgent reforms. In the executive summary of the eighth review (the ninth review has not yet been uploaded) two of the five key issues related to the power sector namely (i) addressing arrears in the power sector; and (ii) structural reforms in the energy sector. One would hope that the government’s focus shifts to reforms though the Cabinet Committee on Power headed by the Prime Minister continues to focus on higher generation as that makes a more ‘splashy’ headline than improving governance.

Copyright Business Recorder, 2015