Privatisation of power distribution companies-I

Not many investors have financial, organisational capacity to buy and run DISCOs

ISLAMABAD:

DISCOs (distribution companies) in the power sector have been a constant source of worries for successive governments in Pakistan. Losses, leakages, receivables, supply quality and discontinuities, and now the rising circular debt for which DISCOs are only partly responsible.

Many options have been examined and pursued, of which two are the most common and widely debated; privatisation and provincialisation. Provincialisation and privatisation need not be mutually exclusive as we will discuss later. And there is electricity market (CTBCM), which may result in partial privatisation by way of taking away electricity marketing and selling. We will examine the issues and prospects involved in each option.

In the electricity sector, power DISCOs are the remaining entities, which are the subject of policy discussion for some kind of offloading from the federal government. There is a circular debt of around Rs3 trillion, which belongs to the power sector and mostly lodged in the accounts of DISCOs.

High generation cost and unpaid subsidies may not be exactly ascribed to DISCOs. High fuel cost has been a recent phenomenon wherein gas and coal prices tripled, causing uncollected receivables, close-outs and increased theft; and then macroeconomic problems like current account deficit (CAD), currency depreciation and general inflation. Finally, Covid followed by floods. This is coupled with IMF and other IFIs dementia, which fail to recognise these issues and insist on increase in tariff, a subject that merits discussion some time later.

Privatisation background

There has been a long experience of privatisation. Public sector industries have been mostly privatised; some are running successfully and some have closed down for a variety of reasons.

Financing the annual losses and deficits has been a major issue of the SOE, which was largely reduced. Some still remain like PIA and Pakistan Steel, which have to be financed from government kitty almost yearly with no end in sight. In energy sector, privatisation has not happened, although government shares have been reduced in some companies. The problem with energy sector is that these are mostly monopolies or near-monopolies and are typically large companies.

Some companies have been and continue to be profitable and have been financing energy sector deficit like circular debt. OGDCL, PPL and PSO are successful examples. Although OGDCL and PPL are profitable, there are performance issues and their falling oil and gas resources have made their prospects of survival questionable. Gas DISCOs have almost the same problems as power DISCOs have.

Component of private sector has become significant due to the introduction of IPPs. Hydro and nuclear remain in public sector, while most of the other power generation is under private sector IPPs. There are some power generation companies in public sector (GENCOs), which are slated to close down eventually, one after the other. Private sector (IPPs) has an installed base of 18,750MW.

Privatisation issues

Why hasn’t privatisation succeeded or even implemented in the power sector? There are many possible reasons for it.

Firstly, DISCOs are a monopoly involving complex financial transactions. Electricity prices are not determined by the market. Prices have to be subsidised for the low-income group and even for export subsidies.

Accounting for these subsidies and losses in transferring and continuing with these is indeed complicated and makes both government (the seller) and private sector (the buyer) unsure of the viability and the risks involved.

KE was privatised in a highly fluid framework, when almost nobody was prepared to take it over. IFIs pushed the privatisation process. Secondly, DISCOs are large companies, financially and geographically. There aren’t many parties in Pakistan which have the financial and organisational capacity and capability to buy and run these organisations.

If there are a few, one would be diverting them from doing much useful work in other sectors. Look at PTCL. It was taken over by UAE government-owned Etisalat. Some of the large banks have been taken over by NGOs or foundations. Thirdly, there are risks in selling DISCOs to foreign enterprises due to special problems involved in DISCO business. There is widespread theft in which rich and powerful are involved.

A foreign company in loss may resort to international courts due to these issues. What has happened in the case of Karkey and Reko Diq.

Local partners may also indulge in some questionable and unacceptable practices, which are not unthinkable for the private sector in this country. Money laundering and double book-keeping is rampant, which can create complications of international dimensions. Many internationally reputed companies are not interested to come to Pakistan. Thus, there are risks on both sides.

Fourthly, stability and sustainability of government policy is yet another risk and unknown. Pakistan is a poor and developing country where political and ideological issues haven’t yet been sorted out with a broad consensus. This creates differences and disagreement in business transactions. Chinese have recently demanded withdrawal of Mohammad Ali Report; the latter report pointed out some accounting inadequacies in CPEC power projects.

Power generation is much simpler business than DISCOs. The opportunities of contract disputes are many as indicated earlier. This may cause cracks with major international friends.

Fifthly, a new policy issue and complication has emerged, that is of CTBCM. DISCOs are to be reduced to wire-only business. Under CTBCM, there is an open access wheeling policy under which the current DISCO management argues cost allocation has not been done properly. They have gone to court.

CTBCM is in limbo but has to be implemented under Nepra law.

Sixthly, public is not satisfied with the privatisation of KE, which is the only example of DISCO privatisation. This is not the place here to go into the controversial issue of KE performance.

Excessive load-shedding in Karachi has annoyed both residential and industrial customers. Would new parties into the DISCO privatisation process be any different? They may have the same or even more management, capital and ownership issues. This makes provincial governments rather unsure of supporting DISCO privatisation.

Seventhly, there are financial issues of payables and receivables and accumulated losses. Valuation issues are not simple; there are risks and uncertainties of all kind. Some propose selling DISCOs in one rupee.

Eighthly, there is a labour union issue. Pakistan’s private sector employers do not have very good standing with labour and employees. Their scepticism is not misplaced either.

Unions oppose privatisation. No practical formula has yet been available to deal with the labour union’s opposition.

The writer is former member energy of the Planning Commission and author of several publications on the energy sector

 

Published in The Express Tribune, December 26^th, 2022.

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