Pakistan’s Power Sector — the cost of prescribed reforms
We need to learn from the international experience and customise them to our conditions
The writer is Secretary Ministry of Water and Power
“To reform means to shatter one form and to create another; but the two sides of this act are not always equally intended nor equally successful”
George Santayana
When our Power Sector started facing shortages in 1980s and we failed to address the problem, it paved the way for donor-prescribed reforms of 1990s. Championed by a group of donor-trained economists who told us to religiously follow these reforms without asking any questions, as the only way out of our myriad problems; these reforms became dogma for the power sector. The outcome was an unmitigated disaster.
The main reason for their failure has been that the reforms prescribers failed to do the hard work of getting into the nuts and bolts of the system and get practical home-grown solutions. They collected a bunch of international practices and prepared a potion which they thought would instantly heal the wounds. It didn’t; rather aggravated those.
The Power Sector reforms had these main components:
All high-sounding objectives but then, let’s see the results.
Wapda used to be a major institution of national development which gave us several mega projects still serving as lifeline for the economy, such as Tarbela and Mangla Dams and several barrages and waterways, apart from the major sources of power. Reducing Wapda into a miniature deprived the economy of major initiatives in water reservoirs and hydropower. Result: No big dam or mega hydel project since the reforms; and resurgence of power crisis within a decade of reforms.
Bringing private sector investment was also conceived in a way that led us into making policy blunders which distorted the power sector fundamentals for a long time to come.
We booked a large capacity on the costly generation (at an upfront tariff of US cents 6.5/unit in 1994) based on imported furnace oil, abandoned by the rest of the world after the oil embargo of 1973. In 2007/08, their generation costs reached as high as Rs18/unit eating away our foreign exchange reserves. With 40% of our generation on imported oil, there was no easy way out. This policy also seriously compromised our energy security.
The current policy of diversifying the generation on Coal (especially Thar Coal) and Gas coupled with investment on mega hydel projects will help reverse the trend.
The prescribed reforms never aimed at achieving self-sufficiency by exploring our indigenous resources such as Thar Coal or in construction of Diamer-Bhasha Dam. We were told about the effects of coal on climate, although clean coal technologies were available and Coal Power projects had recently been provided finances by the World Bank in Botswana and Kosovo, but that policy was not extended to Pakistan.
Now these strategic energy projects are becoming a reality through CPEC financing in Thar Coalfield and with the decision to fund the Dam through our own resources.
A bold deviation from the prescribed-reforms agenda: the decision in 2015 to fund three mega projects of 1,200MWs each on gas turbines, in the public sector. Result: transparent procurement saving around Rs100 billion in costs and reducing the Nepra upfront tariff for LNG power from Rs9.78 to Rs6.42 a unit. Without this public sector initiative, the power consumers would have never got this massive benefit of Rs20.6bn per annum (Rs618 bn over the life of these three plants) and would have to pay the higher bills, had these been awarded on high upfront tariff to the IPPs.
The unbundling and creation of 10 Distribution, 5 Generation and 1 Transmission Companies were supposed to provide benefits of corporate governance. Result: multiplied overheads, with no improvement in efficiency or governance. The reform-prescribers kept on saying: leave them alone, they will improve in due course. Successive governments kept on paying heavy costs to sustain these experiments.
In 2014, the power ministry took a conscious decision to start close monitoring of the affairs of these companies. In the past two years the annual loss of around Rs200bn was brought down to only Rs8bn, saving almost Rs400bn in two years (2014-15 and 2015-16). Had the reforms-prescription of non-interference been blindly followed, another Rs400bn of national wealth would have been lost.
The creation of a power sector regulator, Nepra, was again a step in the right direction but without customisation to local realities. The world was moving away to a modern regulatory regime encouraging market competition, ensuring best prices and services for the consumers, but we were given a regulatory framework focused on unrealistic tariff setting and excessive controls.
Result: The tariff setting on unrealistic target of 100% recovery in a country with law-enforcement challenges and unverified line losses in the DISCOs since 2007 have by themselves resulted in a Circular Debt of Rs1073bn (almost $10bn on current rates and much more if taken on past dollar rates) which had to be paid off from time to time by taxpayers or power consumers.
More importantly, since the 1990s these reforms could not achieve improvement in DISCOs and GENCOs performance, and only brought circular debt into the system. On the other hand, for the past two years the home-grown initiatives by the Ministry (mobile meter reading, online financial and operational monitoring, etc) brought the desired results of improving recoveries from 88% to 93% (the best-ever performance) and visibly reduced loadshedding. The financial crisis in the power sector all those past years, and the resultant power loadshedding, could have been avoided had the reforms been home grown based on the ground realities and appropriate use of technology rather than regulations. The Council of Common Interests is now considering bringing futuristic amendments to the law.
We need to learn from the international experience, customise them to our conditions and make use of technological advancement to improve efficiency of our power sector. Let the competition in the market be the driving force to achieve better terms of price and service for the power consumers rather than the old-fashioned high-regulation model that has largely been discarded the world over. Meanwhile, we need to avoid the heavy cost of prescribed reforms that we have been paying since the 1990s. It is time to take inventory of our past failures and take a better course for the future.
Published in The Express Tribune, January 5th, 2017.
George Santayana
When our Power Sector started facing shortages in 1980s and we failed to address the problem, it paved the way for donor-prescribed reforms of 1990s. Championed by a group of donor-trained economists who told us to religiously follow these reforms without asking any questions, as the only way out of our myriad problems; these reforms became dogma for the power sector. The outcome was an unmitigated disaster.
The main reason for their failure has been that the reforms prescribers failed to do the hard work of getting into the nuts and bolts of the system and get practical home-grown solutions. They collected a bunch of international practices and prepared a potion which they thought would instantly heal the wounds. It didn’t; rather aggravated those.
The Power Sector reforms had these main components:
- Unbundling of Wapda into several Distribution Companies (DISCOs), Generation Companies (GENCOs) and a Transmission Company
- Bringing Private Investment into the Power Sector
- Reducing Public Sector’s role in Power Generation
- Introduction of a Regulator to oversee the power sector entities in the interest of the consumer
All high-sounding objectives but then, let’s see the results.
Wapda used to be a major institution of national development which gave us several mega projects still serving as lifeline for the economy, such as Tarbela and Mangla Dams and several barrages and waterways, apart from the major sources of power. Reducing Wapda into a miniature deprived the economy of major initiatives in water reservoirs and hydropower. Result: No big dam or mega hydel project since the reforms; and resurgence of power crisis within a decade of reforms.
Bringing private sector investment was also conceived in a way that led us into making policy blunders which distorted the power sector fundamentals for a long time to come.
We booked a large capacity on the costly generation (at an upfront tariff of US cents 6.5/unit in 1994) based on imported furnace oil, abandoned by the rest of the world after the oil embargo of 1973. In 2007/08, their generation costs reached as high as Rs18/unit eating away our foreign exchange reserves. With 40% of our generation on imported oil, there was no easy way out. This policy also seriously compromised our energy security.
The current policy of diversifying the generation on Coal (especially Thar Coal) and Gas coupled with investment on mega hydel projects will help reverse the trend.
The prescribed reforms never aimed at achieving self-sufficiency by exploring our indigenous resources such as Thar Coal or in construction of Diamer-Bhasha Dam. We were told about the effects of coal on climate, although clean coal technologies were available and Coal Power projects had recently been provided finances by the World Bank in Botswana and Kosovo, but that policy was not extended to Pakistan.
Now these strategic energy projects are becoming a reality through CPEC financing in Thar Coalfield and with the decision to fund the Dam through our own resources.
A bold deviation from the prescribed-reforms agenda: the decision in 2015 to fund three mega projects of 1,200MWs each on gas turbines, in the public sector. Result: transparent procurement saving around Rs100 billion in costs and reducing the Nepra upfront tariff for LNG power from Rs9.78 to Rs6.42 a unit. Without this public sector initiative, the power consumers would have never got this massive benefit of Rs20.6bn per annum (Rs618 bn over the life of these three plants) and would have to pay the higher bills, had these been awarded on high upfront tariff to the IPPs.
The unbundling and creation of 10 Distribution, 5 Generation and 1 Transmission Companies were supposed to provide benefits of corporate governance. Result: multiplied overheads, with no improvement in efficiency or governance. The reform-prescribers kept on saying: leave them alone, they will improve in due course. Successive governments kept on paying heavy costs to sustain these experiments.
In 2014, the power ministry took a conscious decision to start close monitoring of the affairs of these companies. In the past two years the annual loss of around Rs200bn was brought down to only Rs8bn, saving almost Rs400bn in two years (2014-15 and 2015-16). Had the reforms-prescription of non-interference been blindly followed, another Rs400bn of national wealth would have been lost.
The creation of a power sector regulator, Nepra, was again a step in the right direction but without customisation to local realities. The world was moving away to a modern regulatory regime encouraging market competition, ensuring best prices and services for the consumers, but we were given a regulatory framework focused on unrealistic tariff setting and excessive controls.
Result: The tariff setting on unrealistic target of 100% recovery in a country with law-enforcement challenges and unverified line losses in the DISCOs since 2007 have by themselves resulted in a Circular Debt of Rs1073bn (almost $10bn on current rates and much more if taken on past dollar rates) which had to be paid off from time to time by taxpayers or power consumers.
More importantly, since the 1990s these reforms could not achieve improvement in DISCOs and GENCOs performance, and only brought circular debt into the system. On the other hand, for the past two years the home-grown initiatives by the Ministry (mobile meter reading, online financial and operational monitoring, etc) brought the desired results of improving recoveries from 88% to 93% (the best-ever performance) and visibly reduced loadshedding. The financial crisis in the power sector all those past years, and the resultant power loadshedding, could have been avoided had the reforms been home grown based on the ground realities and appropriate use of technology rather than regulations. The Council of Common Interests is now considering bringing futuristic amendments to the law.
We need to learn from the international experience, customise them to our conditions and make use of technological advancement to improve efficiency of our power sector. Let the competition in the market be the driving force to achieve better terms of price and service for the power consumers rather than the old-fashioned high-regulation model that has largely been discarded the world over. Meanwhile, we need to avoid the heavy cost of prescribed reforms that we have been paying since the 1990s. It is time to take inventory of our past failures and take a better course for the future.
Published in The Express Tribune, January 5th, 2017.