Power sector: reforms and way forward
Allegations without backing them with robust data can have serious repercussions
PHOTO: REUTERS
ISLAMABAD:
If one looks at the recent inquiry committee report on independent power producers (IPPs) through a financial lens, it seems to be far more explosive than the hot sugar and wheat inquiry reports.
The alleged losses of over Rs4 trillion are many times more than any financial scam inquiry report in Pakistan’s history. While the alleged losses made headlines, a vital part of the committee’s report, which relates to the way forward and reforms, has mostly been ignored by the press.
The key reforms suggested include the future role of the government in the power sector, restructuring of the power ministry to make it more expertise-driven and putting greater emphasis on transmission rather than generation.
Other important points discussed relate to finding solutions to hydel power profit-sharing, averaging the price of local and imported gas and finding a long-term solution to the problem of circular debt.
Overall, the report is quite comprehensive even though there was no budgetary support. Had the committee been provided with the modest sum of Rs22 million that it had sought, it would have been able to get services of international experts and would have had the necessary data to compare costs with other countries.
Notwithstanding this impediment, the committee was able to critically review all the six power policies and balance sheets of most of the IPPs.
Although all the power policies have been mired in controversies since their announcements, particularly the earliest one of 1994, these policies did make considerable progress in alleviating the energy crisis. The installed capacity, which was 11,000 megawatts in 1994, has now tripled to 33,836MW.
It is also important to note that most of these policies were implemented when the country was going through acute electricity shortages, and the government had limited room to manoeuvre and not much scope of negotiating better terms.
The committee has given categorical findings as to how a majority of the IPPs manipulated various rules and falsified data in their favour. If the allegations are correct, then the regulator Nepra also shares the responsibility for letting the IPPs rig the system for so long and make such huge profits.
Similarly, some of the previous governments also share blame for their unwillingness to reduce the government’s footprint in the sector and for having resisted various reforms, mainly for petty reasons.
To deal with recommendations of the committee, it will be advisable if the government works on two independent tracks. One would be to do forensic inquiries and take follow-up action, while the second should be to review the suggested reforms and, where feasible, implement them.
The Pakistan Tehreek-e-Insaf (PTI) government should make every effort to complete the reforms before its term ends in 2023. It would also be the time when several new power plants will become operational, and market-driven tariffs will replace generation tariffs set by Nepra.
It seems very unlikely that the committee’s recommendation for shifting from US dollar-based tariff and take-or-pay contract provisions can be implemented for the contracts already in operation because of the past commitments.
The government will have to have solid proof of any fraudulent practices. Otherwise, it is well aware that any unilateral actions may result in local as well as international litigation, as has happened in several similar cases in the past.
LNG contract
It should also weigh all the pros and cons before embarking on a specific course of action. For example, the committee’s recommendation to renegotiate the liquefied natural gas (LNG) contract with Qatar may not give any positive result.
India has tried its utmost to renegotiate similar agreements for a much larger quantity but has not been able to do so.
Furthermore, there is a misperception that the country is paying more than twice the market rate. The prices negotiated with Qatar are not static but linked with the cost of Brent crude.
With the fall in crude oil prices, the contracted LNG prices also come down, with a slight lag in time as the rates are calculated on the basis of previous three-month average.
Since the inquiry committee is recommending a more detailed forensic study, it would be better if professionals, who have legal and technical knowledge, are associated with the details. Also, considering the importance of this inquiry for Pakistan’s economy, a proper budgetary allocation should be made.
Making speculative allegations without backing them with robust data can have serious repercussions.
It will also send a negative signal to any potential investors, whose support we need for upgrading the transmission lines and making a greater use of local resources to increase the share of hydel and renewable power in the energy mix.
The writer is a senior fellow with the Pakistan Institute of Development Economics and has served as Pakistan’s ambassador to WTO
Published in The Express Tribune, May 4th, 2020.
If one looks at the recent inquiry committee report on independent power producers (IPPs) through a financial lens, it seems to be far more explosive than the hot sugar and wheat inquiry reports.
The alleged losses of over Rs4 trillion are many times more than any financial scam inquiry report in Pakistan’s history. While the alleged losses made headlines, a vital part of the committee’s report, which relates to the way forward and reforms, has mostly been ignored by the press.
The key reforms suggested include the future role of the government in the power sector, restructuring of the power ministry to make it more expertise-driven and putting greater emphasis on transmission rather than generation.
Other important points discussed relate to finding solutions to hydel power profit-sharing, averaging the price of local and imported gas and finding a long-term solution to the problem of circular debt.
Overall, the report is quite comprehensive even though there was no budgetary support. Had the committee been provided with the modest sum of Rs22 million that it had sought, it would have been able to get services of international experts and would have had the necessary data to compare costs with other countries.
Notwithstanding this impediment, the committee was able to critically review all the six power policies and balance sheets of most of the IPPs.
Although all the power policies have been mired in controversies since their announcements, particularly the earliest one of 1994, these policies did make considerable progress in alleviating the energy crisis. The installed capacity, which was 11,000 megawatts in 1994, has now tripled to 33,836MW.
It is also important to note that most of these policies were implemented when the country was going through acute electricity shortages, and the government had limited room to manoeuvre and not much scope of negotiating better terms.
The committee has given categorical findings as to how a majority of the IPPs manipulated various rules and falsified data in their favour. If the allegations are correct, then the regulator Nepra also shares the responsibility for letting the IPPs rig the system for so long and make such huge profits.
Similarly, some of the previous governments also share blame for their unwillingness to reduce the government’s footprint in the sector and for having resisted various reforms, mainly for petty reasons.
To deal with recommendations of the committee, it will be advisable if the government works on two independent tracks. One would be to do forensic inquiries and take follow-up action, while the second should be to review the suggested reforms and, where feasible, implement them.
The Pakistan Tehreek-e-Insaf (PTI) government should make every effort to complete the reforms before its term ends in 2023. It would also be the time when several new power plants will become operational, and market-driven tariffs will replace generation tariffs set by Nepra.
It seems very unlikely that the committee’s recommendation for shifting from US dollar-based tariff and take-or-pay contract provisions can be implemented for the contracts already in operation because of the past commitments.
The government will have to have solid proof of any fraudulent practices. Otherwise, it is well aware that any unilateral actions may result in local as well as international litigation, as has happened in several similar cases in the past.
LNG contract
It should also weigh all the pros and cons before embarking on a specific course of action. For example, the committee’s recommendation to renegotiate the liquefied natural gas (LNG) contract with Qatar may not give any positive result.
India has tried its utmost to renegotiate similar agreements for a much larger quantity but has not been able to do so.
Furthermore, there is a misperception that the country is paying more than twice the market rate. The prices negotiated with Qatar are not static but linked with the cost of Brent crude.
With the fall in crude oil prices, the contracted LNG prices also come down, with a slight lag in time as the rates are calculated on the basis of previous three-month average.
Since the inquiry committee is recommending a more detailed forensic study, it would be better if professionals, who have legal and technical knowledge, are associated with the details. Also, considering the importance of this inquiry for Pakistan’s economy, a proper budgetary allocation should be made.
Making speculative allegations without backing them with robust data can have serious repercussions.
It will also send a negative signal to any potential investors, whose support we need for upgrading the transmission lines and making a greater use of local resources to increase the share of hydel and renewable power in the energy mix.
The writer is a senior fellow with the Pakistan Institute of Development Economics and has served as Pakistan’s ambassador to WTO
Published in The Express Tribune, May 4th, 2020.