Pakistan’s power industry, need for ‘naya’ reforms

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Tahir Rizavi

MISALIGNED and reactive policies have perhaps been the greatest woes for Pakistan’s power sector. Be it the 1994 and 2002 Power Policies which rightly incentivized the generation business, but failed to build consumer protection mechanism over the years based on past learnings, or more recently, the proposed changes to the sector landscape without effective consultation and impact analysis potentially benefiting only a handful at the cost of masses; the sector calls for holistic and comprehensive reforms, rather urgently! Revelations made in a 278-page inquiry report on the Power Sector issued last year has unarguably raised many eyebrows. The report questions blind continuation of policies, despite realization in the late 90s , which enabled Independent Power Producers (IPP) to continue to make billions over the last two decades and locked the Government of Pakistan into expensive deals.
The only positive side of these expensive contracts is that the current situation with respect to availability of power generation is a marked improvement from the past. A closer and deeper analysis into the sector reckons that the real, and perhaps much bigger problems lie in the Transmission & Distribution (T&D) segment requiring immediate intervention. Lack of policy incentives to attract private investment, regulatory uncertainty and inconsistency along with governance issues have marred the T&D business. As a result, the sector continues to suffer from network constraints and high AT&C losses which translate into distraught consumers faced with unreliable power supply and regular upward revisions in tariff. During the last 18 months, consumer-end tariff for DISCOs has been revised upwards thrice, an average increase of 14% and another increase is on the corner. Despite significant capacity addition on the generation front, we still have load-shedding in many parts of the country, and around 1/4th of the country’s population lacks access to grid electricity.
Clearly, the issue is not just about incentives given to the generation segment resulting in high and lucrative returns for IPPs, rather compounding the injury are inadequate incentives in T&D, and the over-regulation of these segments which has led to most of the players either under-performing or not being adequately rewarded or compensated for doing well. Based on the available information, seven out of 10 state-owned DISCOs had cumulative losses of over PKR 200 Billion in FY 2018 alone.
Calling for policy and regulatory reforms, the Asian Development Bank has also recognized that Pakistan’s power sector needs major overhauling, highlighting inadequate tariff and the existing subsidy model to be among the underlying causes of continuous piling up of circular debt. Further, according to the ADB, while Pakistan has made significant efforts in recent years to expand its electricity generation capacity, the country is yet to overcome the challenge of inefficiencies, distortions and uneven reform progress in the sector.
With such pressing challenges faced by the T&D segment, one fails to comprehend how the recently proposed reforms towards an open market model and exclusion of standard costs and cross subsidy from wheeling charges, are in the interest of sector at large. These appear to be misaligned with the state of power sector today and look to incentivize certain high-end consumers leaving the cost of these challenges to be borne by the masses. If these imported reforms are allowed to be implemented, these would have a catastrophic impact on the already fragile power sector of Pakistan. This poses a serious threat to the country’s stability by accelerating further the continuous increase in circular debt which has already reached alarming levels of around PKR 2,300 Billion.
Ergo, instead of blindly following the reforms initiated in 2015, the need of the day is to have independent holistic review of reforms’ agenda, whether they would help address these challenges or aggravate the same. Power sector representatives believe that in view of the surplus availability of power, such reforms are counter-productive and not need of the hour. With surplus power available, all stakeholders should align to strengthen the T&D segment as without fixing the T&D segment there will be no improvement in the overall context of the sector which is already crippled by circular debt. If DISCOs continue losing money and their good consumers are allowed to leave this will further hamper their ability to invest in power infrastructure, eventually culminating in further increase in losses of these public sector entities and a threat to reliable supply of power. The need of the hour is to incentivize greater utilization of national grid instead of allowing consumers to choose their suppliers, privatise DISCOs and provide a multi-year cost reflective tariff with targets for improvement and phase out subsidy from power tariff to targeted cash support programs.
Lastly, for the sustainability of the sector, the role of regulator is of paramount importance. Regulators in developed countries issue detailed consultation papers which make it easy for the general public to understand and also give an insight that how upcoming reforms are going to impact the society at large. However, speaking of the local power sector, there is definitely room for a lot of improvement to strengthen the stakeholder consultation process, and NEPRA must make strides towards ensuring effective stakeholder consultation, recognizing the peculiarities of the local power sector and balancing the interest of all stakeholders. Let us hope that sanity prevails and instead of continuation of past agenda of providing incentives to a few, understanding the intricacies of the local power sector, reforms are modified and directed in the best interest of the nation.
—The writer is researcher with an interest in the power sector policies that affect the economic outlook of the country.

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