Getting rid of stale power sector reforms

August 10, 2020 By 0 Comments

Enough has been written about Pakistan’s power sector reforms that it hardly keeps anyone on the debate sidelines now. Nearly everyone produces a detailed power sector reform road map. On their part, the Government has been ‘reforming’ the sector for the past two decades. Development organisations have been suggesting their own reforms road map with circular debt topping their reform agenda. Consultants, members of civil society, regulator all have contributed extensively to the debate. The result so far: circular debt has continued to rise with impunity – with a stock of over Rs. 2 trillion and sector inefficiencies (recoveries and losses) almost the same as they were a decade ago. Even a child would point out that none of the suggested reforms have worked.

Let’s call this set of reforms as stale reforms. The stale reforms put circular debt as the biggest nut to crack. Solve circular debt and everything falls in line. As a start, make an elaborated circular debt plan, have all the reasons outlined as what causes circular debt and benchmark future targets against the current ones. Till the time anything materializes under such targets, emphasize on cost recovery tariffs, even when there is not enough room to accommodate more inefficiencies. When there is little room to increase tariffs, revert to surcharges as add-ons to consumer bills. Essentially, impose surcharges on paying consumers for inefficiencies caused by non-paying consumers. But as long as surcharges minimize gaps in the circular debt hole, make them a fine addition. Put here and there reforms to improve regulatory underpinnings and sectoral policy outlook and you have produced an ideal reform road map.

This set of reforms have unfortunately been repeated time and again with little or no avail. The stale reforms, no matter how many times have been repeated, have always produced a higher circular debt than before, more reliance on surcharges than before and lesser consumer welfare than before. Surely, something is not right with stale reforms. And here is why? The stale reforms have never challenged the status quo i.e. the Government’s own monopolistic role in the market, its inability to give up its own vested interest, its own bureaucracy’s role to not cede command and control behavior and private sector’s lack of incentive to invest, innovate and compete to create competitive tension. Consider this simple scenario. Today, all power producers in the country sell power to a monopolistic Government buyer (CPPA-G), which is nothing but a bankrupt institution. No lender gives them a dime without sovereign guarantees because they know their projects would go bust. The result is a perpetual cash flow crunch which the Government manages through more expensive debt, donor money and development aid. The cycle repeats with consumers as the only victims.

Let’s focus on an alternate, real-reform road map that has actually worked around the world – one that hinges on market economy and competition. Under real reforms, prices are determined by market with buyers and sellers free to transact voluntarily. No party remains hostage to another as both the buyers and sellers act on their own self-interest. In the words of Adam Smith who in the Wealth of Nations remarked, “it is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest. We address ourselves not to their humanity but to their self-love, and never talk to them of our own necessities, but of their advantages”. Unfortunately, this very simple idea remains missing from the entire reform road map. Today, if you are a buyer in the electricity market, all you have is the Government grid, which howsoever wretched and pitiful does not give buyers any leverage to transact from an alternate, more competing supplier. The result is a monopoly without any incentive to improve or make supplies available at lower costs. The consumer welfare in such a model is always at a loss without any regard to service, quality or the price.

The command and control mode of Pakistan’s power sector also negate concepts of private ownership in a free-flowing market economy. Whether they are cups, mobile phones or coffee, the state does not enter into production and distribution of all the commodities. The Government of Pakistan does not decide how many smart phones residents of Islamabad should purchase in a given year and neither it decides how many cups of coffee residents of Lahore should consume, but it surely does decide how many megawatts of electricity should be provided to the residents of Quetta and to the residents of Peshawar and so on for the rest of the country. Why operate in this command and control fashion is beyond anyone’s comprehension? Further, the rules of tariffs and subsidies are also pre-determined. For consumers, it’s a take it or leave it contract. The Government, being the monopoly, decides how much to subsidize every household, how much to charge at each exact slab and what rates to levy at what times. Disagree with it, but there is little you can do anything about it.

To show the Government’s true intent on reforms, when any material reforms, has in fact, taken place, they have been swiftly sabotaged. One example is the wheeling arrangement, introduced by NEPRA in 2016. Wheeling allowed generators to sell directly to bulk power consumers through a bi-lateral contract that was supposed to be governed by NEPRA. What should have become the basis for a competitive road map, was soon strangled by the Government. Obviously, DISCOs feared that any introduction of alternate suppliers would make them redundant as they will provide better service, reliability and price to what is currently being provided by them. The end result was a blockage of wheeling transactions throughout the country. If the Government had allowed the wheeling arrangements to flourish, we would have seen suppliers and consumers transacting amongst themselves and coming up with perfectly legal ways to improve service delivery, thus giving the Government a run for their money. In economist-speak, this would have made the markets contested, resulting in consumer welfare.

Sadly, competition is not anywhere in the reform roadmap as there are entrenched vested interests. Knowing full well that any competition would challenge policy makers fiefdom and would ultimately result in door closing of several billions of rupees of corruption and mala-fide exploitation. In short, why corporatize? why introduce best practices? why improve service delivery and why compete when the Government can operate under the garb of a close sector; un-challenged, un-hindered and un-contested. If there is a real reform, it would only come when the Government ends the cost-plus tariff regime for generation contracts, end exclusivity to distribution license monopoly, let wheeling flourish, adapt competitive bidding practices, introduce private sector transmission investments and gradually introduce competitive tension in the sector.

We all remember the old PTCL days when consumers would end up in the que to ask for a telephone connection. It does not happen anymore. Today, there is no circular debt in the telecom sector. Consumers can procure connection, anytime, at any place. Tele-density is touching an all-time high and broadband connection seems to penetrate even in rural areas in wide numbers. In a quite contrast to circular debt, telecom sector earns the Government license fees every year and is one of the highest contributors to national exchequer. Could all this have been achieved with an old, monopolistic style government Telco. Surely not. The Government needs to wind up its role in the power sector, introduce competition and stay on the sidelines. That is the only way to introduce real reforms and exempt us all from the routine, stale-reforms.