THE integrated power system in the country (excluding Karachi) is losing over Rs320bn annually from officially recognised system losses arising from governance challenges.

These are owing to inefficiencies and tariff policies that are affecting the generation, transmission and distribution systems.

The quantum of the loss is almost half of the federal government’s development budget and close to the subsidy it injects every year out of the budget to keep the power companies running. And despite an over 250pc increase in electricity tariffs in around four years, the menace of circular debt continues to build on.

Amid an aggressive media campaign at the public’s expense, the power sector’s bureaucracy has been building an image of its ‘successes’ around some controversial projects like Nandipur and the proposed LNG-based public power projects in Punjab. This is being done to counter the damage caused by recent criticism from political parties and Nepra’s annual report.

In targeted leaks, Nepra was accused of being incompetent and problematic.

Interestingly, the senior-most man at the power ministry is a grade 21 officer, while three out of four members of Nepra are retired federal secretaries. Its chief had led two major distribution companies before he was chosen by the incumbent government as the regulator’s chairman through a competitive selection process.

The shortfall in recoveries of electricity bills amounted to Rs32bn in Punjab, Rs67bn in Sindh, Rs36bn in KP and Rs25bn in Balochistan

All of these officials are backed by professional experts from relevant fields, unlike the general cadre officers in the power ministry.

The power ministry has gone to the extent of taking credit for tariff reductions based on automatic fuel price adjustments because of decade-low international oil prices. This is despite the fact that it has introduced a series of tariff surcharges to earn a windfall, dramatically lessening the pass-through benefit to consumers.

In the meantime, an IMF staff mission disclosed that even though the build up in the circular debt in the first quarter of this fiscal was within limits, the overall stocks nevertheless maintained their rising trend. Numbers officially reported to the IMF put the circular debt at Rs661bn, including Rs326bn in payable stocks and Rs335bn parked with the power holding company.

The IMF, however, said the authorities had met the quarterly target on recoveries from the power sector. In background discussions, a senior Nepra official revealed that this achievement was simply on account of the regulator’s willingness to change its goal post with the induction of a new chairman who had come directly after serving two distribution companies — K-Electric and Pesco.

The official explained that 1pc system losses worked out at Rs13bn. By gradually bringing down inefficiencies, the regulator has allowed the recovery of 13.1pc losses through tariffs, against officially reported losses of 18.6pc. This means that the power companies took a hit of around Rs71bn, according to Nepra’s data.

In 2014-15, technical and distribution losses increased from 18.6pc to 18.7pc instead of coming down even though the government machinery remained verbally focused on going after power thieves and dismantling the kunda system.

The new Nepra chief persuaded four provincial members to allow system losses of 15.2pc instead of the previous 13.1pc. This means that the power companies’ loss of 2.1pc or Rs27.3bn was transferred to the consumers through the tariff, thus reducing the discos’ take to around Rs44bn. Finance Minister Ishaq Dar’s commitment with the IMF was therefore met through tariff engineering.

And the power companies have not been able to ensure full recoveries. The recovery ratio remained at 88.9pc of the billed amount at the end of FY14.

These are not hypothetical but officially documented numbers based on 13pc of the electricity going to KP, 6pc to Balochistan, 11.5pc to Sindh (excluding Karachi) and around 68pc to Punjab.

Around Rs160bn is lost because recoveries fall short of their assigned targets. The shortfall in recoveries amounted to Rs32bn in Punjab, Rs67bn in Sindh, Rs36bn in KP and Rs25bn in Balochistan.

This is mainly because of an ad-hoc culture that runs through the entire power sector. For the long-term reform process to succeed, a person with strong political will is needed who will be ready to take the brunt of the criticism on behalf of a political government and also forcefully steer the sector.

That is not the case at present. Soon after the PML-N came to power, it replaced a full-time federal secretary and has since then been running the power ministry with grade-21 officers who remain vulnerable to political influence.

This temporary thread runs down the chain. At present, all 10 public distribution companies (excluding K-Electric) are being run on a ‘look after charge’ basis by junior officers, according to a report submitted to the parliament a few days ago.

These ‘look after officers’ have limited scope and incentive to deliver, with their loyalties divided between their respective boards of directors and the power ministry. When an executive engineer is appointed or transferred on the instructions of the power ministry, why would he feel answerable to the board, or vice versa?

Timely privatisation of these discos might have taken care of such shortcomings, but that too has been delayed for at least six to nine months.

Published in Dawn, Business & Finance weekly, November 30th, 2015