Opinion: Power sector: Economics and politics

WEB DESK: Prime Minister Nawaz Sharif convinced beyond a shadow of doubt that he would win the March 2018 elections by a landslide if his administration succeeds in meeting the energy shortfall is personally monitoring the pace of power sector projects and has set up a monitoring committee to wield the whip as and when required.

He has summarily dismissed a civilian Wapda chairman and replaced him with a retired army man – no doubt assuming that discipline and an iron hand is all that is required to complete energy projects.

Sadly this is not always the case. Nawaz Sharif would do well to heed the comments of his Water and Power Minister Khawaja Asif made a year ago when he stated on the electronic media with reference to the Nandipur project that there “is a difference between building roads, metro bus routes and power plants”; implying that advancing the scheduled completion time required for power projects, unlike in road or Metrobus projects, would compromise their effectivity. Khawaja Asif was made to eat his words and thenceforth began a spirited dense of the Nandipur project cost as well as its contribution to the national grid in the Senate and at all other forums.

A month or so ago, Secretary Ministry of Water and Power while briefing the Public Accounts Committee under the chairmanship of the Leader of the Opposition Khursheed Shah made two extremely disturbing admissions: first, that the national exchequer incurred a massive loss of 375 billion rupees due to power theft and, second, the Nandipur power plant was producing expensive electricity at 11 cents per unit.

These admissions reflect the failure of the Water and Power Ministry (i) to improve governance, a critical component of the International Monetary Fund’s (IMF) time bound structural benchmarks under the 6.64 billion dollar Extended Fund Facility (EFF), (ii) to undertake a cost benefit analysis which would determine whether any project’s cost can be justified in terms of its quantified expected benefits, and clearly Nandipur is not, and (iii) to compel the Ministry of Finance to reduce instead of increase reliance on taxing the energy sector to meet its budgeted revenue targets – an approach based on ease of collection rather than on the ability to pay principle.

However, the press release uploaded by the Fund on its website subsequent to the last review under the Extended Fund Facility (EFF) notes the following with respect to energy sector reforms: “all indicative targets and structural benchmarks were met, except for the delayed notification of multi-year tariffs for three power distribution companies… Regulatory reforms and improved energy sector performance have slowed the accumulation of arrears and begun to reduce outages… to consolidate and reinforce the gains achieved in the last three years, the economic reform agenda needs to continue after the program ends.

In this context, it will be important to… complete the energy sector reforms….continued progress with these reforms will be critical to reinforce the authorities’ achievements under this IMF-supported program”. The foregoing reflects the Fund staff’s modus operandi with respect to the EFF: terming its reform agenda (reflected in indicative and structural benchmarks in each quarterly review) appropriate thereby reflecting its own performance favourably; and as the programme is scheduled to end by the end of this month defending subsequent criticism of the programme modalities as well as the actual performance on the ground as the failure of the government to provide (i) accurate data (endorsed by the Fund in all its quarterly reviews); and (ii) failure of the authorities to continue the reform agenda.

Energy sector performance, so claim relevant federal ministers and Fund staff, has improved with higher generation, revenue based outages (defined as higher load shedding and/or complete shutdown of a feeder where a certain high percentage of bills are not cleared) leading to reduced load shedding in comparison to the Zardari led years. The question is was the energy sector reform programme under the Extended Fund Facility (EFF) which required a consensus between the Fund staff and the government, in the interest of the people of this country? Six points need to be emphasised.

First, in the energy sector at least there are simply too many influential cooks who are spoiling the broth. Shahbaz Sharif, the Prime Minister’s brother and the man many credit for the PML-N majority in the centre, had requested his brother for the position of federal minister for water and power. Having been denied the position he nonetheless remains actively engaged in the sector as he, together with the party’s senior leadership, maintains that ending load shedding by the end of their tenure would guarantee re-election in 2018.

Federal Minister Khawaja Asif, a weak and non performing minister though close to the prime minister who has used him for making remarks against the establishment and members of the opposition, publicly ridiculed Shahbaz Sharif as noted above on the Nandipur project (on which he was forced to backtrack); and more recently the Ministry has opposed Punjab’s request for approval to set up coal plants on imported coal.

Secondly, the Finance Minister is mainly responsible for high tariffs due to heavy taxation on electricity (including 17 percent General Sales Tax and 3.5 percent excise duty) accounting for the most expensive energy in the region. This in turn has negatively impacted on our exports. Taxes as high as 35 percent are payable on an electricity bill amounting to 1000 to 1500 rupees for commercial/industrial consumers, which in all probability are passed on to the end-consumers – a bill amount which implies small neighbourhood shops/micro-enterprises; and sadly in true Dar style the rate declines to 28.5 percent for those with a higher bill – between 1500 to 3000 rupees per month. RNLG tariff, after the deal was signed with Qatargas which still has not been placed on the website more than six months after it was signed as promised by Shahid Khaqan Abbasi was set at 5.5259 rupees per unit in June 2016, which not surprisingly is 40 paisa higher than domestic gas at 5.1247 rupees per unit or around 8 percent higher.

Thirdly, PML-N government, like its predecessors, agreed to undertake energy sector reforms that have become standard normal if access to programme lending is the overarching objective. Such a programme, if past and ongoing multilateral programmes are taken into account, focus on full cost recovery of utilities that are publicly owned, an objective that can be supported from an economic point of view, and to ensure performance supports privatization. Thus it came as no surprise that the IMF under the EFF compelled the government to ensure full cost recovery and urged privatization of energy sector subsectors particularly distribution companies. What the Fund failed to take note of was the fact that (i) the privatised K-electric continues to receive large subsidies from the federal government – a fact which challenges the very basic principle behind privatization; and (ii) failed to take account of the possibility of the abuse of the monopoly power by the private sector. Reports however indicate that the Prime Minister has put privatization of discos on hold though the reason may have more to do with union resistance.

Fourthly, the Fund has ignored the decision of the government to launch extremely expensive and ill advised generation plants reliant overwhelmingly on fossil-fuel based power generation accounting for per kilowatt-hour (kWh) tariff which is double that prevalent in other countries. Needless to add setting up coal plants away from the source of coal, an inexplicable decision given the lack of infrastructure and serious health hazards that this decision entails, as well as setting a tariff for different sources of energy at well above the international rate are examples of poor decisions and some examples are as follows: a company from Qatar is installing a power plant at Port Qasim for supply at 8.5 cents per kilowatt hour while a plant reliant on the same source of input in Mexico would supply at 4 cents per KWH; Thar power will cost 12 cents an hour, the 1500 MW coal capacity pursued under the China Pakistan Economic Corridor will cost 8.5 cents an hour, while Bahawalpur solar plant is projected to cost 15 cents an hour. Nandipur’s tariff is 11 cents per hour as mentioned above and unfortunately the focus of the Chief Minister of Punjab on this project was to highlight the inefficiency and/or corruption of the PPP-led coalition government and not to undertake an informed cost benefit analysis of the project.

Fifthly, stock of receivables increased from 207 billion rupees in 2013 (what the government inherited) to 300 billion rupees by June 2016. Dar’s decision to eliminate around 400 billion rupee circular debt on the second last day of 2013 by borrowing accounts for the payment of an additional 43 paisa per unit per consumer. In other words the rise in stock of receivables is a source of serious concern though one would assume that the Fund’s focus on reducing flows is a step in the right direction. Total circular debt however is a whopping 684 billion rupees.

And finally, as acknowledged by the Secretary in the PAC the national exchequer and not the energy sub sectors incurred a massive loss of 375 billion rupees. In other words, it was part of the budget and explains why each year the government has excluded this from the budget deficit as a one off.

To add insult to injury the regulator Nepra in June this year rejected the Water and Power Ministry’s request for review of transmission and distribution losses, actual revenue loss, prior year adjustment and integrated plan.

The EFF was flawed with respect to the energy sector reforms because of lack of information by the Fund staff, a flaw that sadly continues to be compounded by the Sharif administration. The argument that there would be no shortage of energy which would ensure PML-N’s electoral win in 2018 may not be as much of a vote gainer as believed if our exports continue to be out-priced prompting the government to borrow more and the rise in domestic energy price raises the cost of doing business and further shrinks the disposable income.

Source: Business Recorder