Competitive landscape remains missing!

May 17, 2020 By 0 Comments

If the bottled water you buy turns out to be adulterated, you can claim compensation. Can you do the same for electricity supply in Pakistan?

Several pieces we have written before highlighted the importance of introducing competition, especially in the electricity and infrastructure sector in Pakistan. Why then after continuous reforms agenda in the power sector, very little has been achieved? Why after so much of efforts, tariffs have only gone up, performance standards have remained deficient and tiers of debt have only piled up.

We have long argued a simple idea; our sector remains deficient of adequate competition.

Let’s analyze the competitive landscape for a moment. The NEPRA Act amendment 2018 has in principle opened up the market for multiple buyer and multiple seller scenario. However, on the ground, no concrete progress has been achieved with exclusive territory operations being continued by all DISCOs and K-Electric. The current structure implies that no other player can threaten the existence of incumbents. No innovation and no challenge can be meted out by new players. As long as the existing entities adhere to minimum prescribed performance standards, the players can continue to enjoy and maintain the status quo.

This monopoly of state utilities has, in fact, been the most significant reason that has constrained the growth of power sector in Pakistan. The incumbents have prevented any meaningful reforms and efforts to attract private sector investments have yielded little results. Of the total power produced, around 20 percent continues to vanish in transmission and distribution losses with some DISCOs such as SEPCO, PESCO and HESCO recording up to 40% T&D losses annually. Much of this is plain theft. When debt piles up and payables become due, the only result is the raising of consumer end tariffs. In the previous decade only, consumer tariffs have, on average, gone up by 300%, with levying of multiple surcharges. The result is not enhanced customer service, higher efficiencies or improved financial position of DISCOs but instead marginal improvements in T&D losses, meagre service efficiencies, and a large circular debt.

With higher consumer end tariffs, presence of ubiquitous subsidy regime, and little competition from outside, this also means a strong vested interest that oppose competitive reforms. This along with uneconomic tariffs given to residential and agriculture sector compounds the problems of increasing the debt pile up. In the absence of a credible market, the power utilities only represent a ‘single-buyer model’, which means that producers of power can only sell to these state utilities. Since most of the utilities / DISCOs are virtually bankrupt, private sector investments have stayed away. Even when they have come, they have been mobilized on the back of large sovereign guarantees with high repercussions on fiscal deficit and ballooning capacity payments. As a result, much of the capacity addition has taken place with bankrupt utilities as the only off-taker. Be it public or private sector investment in generation, higher inefficiencies and inability to make timely payments have only implied a large loss levels to the tune of Rs. 120-150 billion per annum for DISCOs.

What about the unbundling of DISCOs that promised improved efficiencies? Well, the sector comprises of ten unbundled DISCOs along with GENCOs and TRANSCO. However, with a single buyer model, they have perpetuated an industry structure that is based on interconnecting chain of monopolies that nullifies the basic purpose of unbundling, which is to introduce competition. As a result, unbundling has failed to produce the expected outcomes. Instead of managing one natural monopoly, we now have ten natural monopolies at hand, all inefficient and causing perpetual drain on public resources. The alternate answer is privatization. But privatization may just translate public monopolies into private monopolies. Granted, the capital structure will become efficient with the desire to improve performance by the private sector. But will that translate into lower consumer end tariffs and improved service delivery is anybody’s guess. There have also been instances globally where private monopolies in power and water have not proportionately resulted in efficiencies that consumers have been looking for – in fact just the opposite had happened.

It is time that any meaningful reform agenda talks about competition. The old, arcane and outdated reform agenda has given little to the sector and arguably nothing to the end consumer. The gimmicks of making ‘plans’ and ‘reports’ should end. The sector needs competitive structure, and without it, nothing significant will happen.