Reforms essential for power sector investment

Tahir Rizavi

THE World Bank’s (WB’s) Ease of Doing Business Index ranks countries on metrics including simplicity and transparency of processes and how conducive the regulatory environment is to business operations. According to Ease of Doing Business 2020 Report released earlier this year, reforms carried out in Pakistan during recent years have improved the country’s standing as an investment destination from 136 to 108.

But while Pakistan was the sixth global reformer to strengthen pro-business processes over one year, closer examination reveals that the country’s rankings on Getting Electricity, Registering Property, Paying Taxes and Enforcing Contracts indicators drag down the country’s overall progress and pose impediments to steady foreign direct investment. While low-hanging fruits have been addressed, substantive reforms at provincial and federal levels remain elusive and energy policy and governance continue to be fragmented.

Pakistan’s power generation segment benefitted from foreign and domestic private investment on the back of favourable policies and high returns, allowing the country to leap-frog in terms of supply capability. In contrast the national T&D sector, which (with the exception of K-Electric (KE) – the only private transmission and distribution entity serving Karachi) remained entirely with the Government, has continued to stagnate and suffer from the absence of steady investment. The benefits of privatization-fuelled foreign investment even in the T&D sector are undeniable – while government owned T&D entities continue to pile on losses and exacerbate the circular debt year on year, K-Electric has zero contribution to circular debt and as per its last reported financial statement has a net receivable of over PKR 80 billion from government entities on a principal basis.

The NEPRA State of Industry Report attests that while T&D loss improvements of government entities have deteriorated or stagnated, KE’s have improved significantly, and while network enhancement of other DISCOs suffer from financial constraints, since privatization, as per KE’s audited Financial Statements, KE has invested over PKR 190 billion in extending Karachi’s T&D network and adoption of new technologies including Aerial Bundled Cables, GIS Mapping and Automated Meter Reading. Thus, there is a compelling case for private sector inclusion with sustained investment to address the energy sector bottlenecks, keep ahead of electricity demand growth and adopt necessary technological advancement to address losses and power theft especially as Pakistan aspires to achieve universal electricity access by 2030 and grid expansion requires financial outlay.
Since attracting domestic and international investment is a strategic imperative, then improved governance, consistent legal, regulatory frameworks and clear investment roadmaps must be prioritised.

The shift from reactive regulation which unfairly penalizes private investors towards proactive measures which protect investor interests is critical to create cost efficiencies, enhance revenue collection, attract investment, strengthen indigenous energy security and drive economic growth. Delayed and excessive regulation of the power sector will damage competitiveness whilst inconsistent regulatory frameworks and absence of long-term market roadmaps leave investors vulnerable to regime changes and kill investment appetite.

Tariff adjustment delays are one symptom of regulatory inefficiency resulting in addition of at least PKR 120 billion to the circular debt annually according to IMF estimates, while lack of cost reflective tariff for T&D segment also remains a critical challenge, warranting immediate and due consideration from the regulator and policy makers. A worrying indicator is also the discriminatory treatment of private investors compared to state-owned entities. IPPs that invested in generation are being asked to renegotiate contracts and are facing severe cash-flow drain; and as per KE’s recent financial statements, KE’s government receivables continue to balloon and tariff adjustments stand undetermined for over a year – deterring needed private investment in the T&D segment.

Long-term and sustainable tariffs, consistent policies for the power distribution segment and timely payment of dues from government entities must be immediately addressed for power sector viability. Pakistan’s FDI as a percentage of GDP has continued to decrease since 2007 from 3.67% to a meagre 0.8% in 2019. Global investors do not suffer from a shortage of attractive investment destinations – with big opportunities in neighbouring India which ranks higher on all Ease of Doing Business indices. The ball is in the government’s court to take necessary steps to address inconsistent policy frameworks, institutional weaknesses and weak governance to improve Pakistan’s ranking in a substantive and enduring way.
—The writer has worked at leading Pakistani banks in a variety of cross-functional roles.