Liberal Solutions to End the Power Crisis

Policy has focussed on investment, it needs to focus on the consumer.

The prime minister has recently appointed a new adviser to address the energy crisis affecting Pakistan’s economy on urgent basis. This also echoes recent high level demands made by the business community leaders, such as Pakistan Business Council and Chambers of Commerce. The purpose of this article is to argue how a free market approach can help address what has become the single most important constraint in our economic progress.

According to the National Power Regulatory Authority (Nepra), the opportunity cost of every rupee not invested in building energy infrastructure of our country ranges between Rs5 and Rs10 of economic losses due to lost productivity, higher cost of doing businesses and transmission and distribution losses. Since the mid-nineties, the government has been trying to minimise these economic losses by various policy reforms, administrative restructuring and tariff adjustments, with limited success if any so far.

The focus of all reforms by the present and previous regimes in the case of power sector has been on attracting foreign investment in generation at all costs and on cosmetic restructuring of the power sector. That the peak time utilisation of capacity has not exceeded 75 per cent aptly demonstrates that there is enough power, but not enough capacity in the system of distribution. It is also supported by the unusually high level of transmission and distribution losses which go beyond 30 per cent. Thus the rationale of attracting investments in power generation is turned on its head. The power supply should be made user friendly, instead of only investor-friendly, by adopting basic tenets of free market principles: fair competition, level playing field and rule of law.

Power supply consists of broadly three phases: generation, transmission and distribution. In Pakistan, Wapda and KESC are the two major power generating companies which dominate the generation market with 67 per cent share with 17 foreign and domestic independent power producers making up the rest. The transmission is mandated to a newly-created state-run enterprise, called National Dispatch and Transmission Company (NTDC). Then comes the role of distribution companies, also known as DISCOS, which have been basically a result of unbundling of Wapda in the late nineties. There are eight DISCOS in the country, which are responsible for distribution of electricity to end consumers and collection of charges. Thus truly speaking, DISCOS become the point of interaction between power generation and end consumers. Any consumer-friendly reform must therefore give a due emphasis on this end.

The entry of independent power producers should have resulted into enhanced level of competition but it did not happen as the state continued to offer constitutional sovereignty and guaranteed rates of returns to foreign investors. Thus while at one hand the inefficiencies in Wapda were allowed, the foreign companies were guaranteed above normal market returns. This effectively meant that no level playing field developed simply as a result of foreign investment.

Take Away Subsidies?

In Pakistan, as elsewhere in the world, reforms in the energy sector have been equated with incentives for the IPPs on the one hand and removal of all subsidies for all income segments and for all types of users on the other hand. Because of negative political implications, these factors have also created wrong perceptions about the market friendly reforms.

In the next part of this article we will talk about how a true liberal framework can help reverse this perception.

The writer is an Economics consultant and Director Programmes and Development at the Alternate Solutions Institute, Lahore. He can be contacted at [e-mail]

Published in The Express Tribune, May 9^th, 2011.