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Energy: tough decisions

May 28, 2013

THE public narrative oversimplifies ways of eradicating load-shedding. Just settle the ‘circular debt’ and improve governance — prevent electricity theft, collect bills on time and install prepaid meters — and we’ll reach the promised land.

To begin with let’s examine what constitutes ‘circular debt’. The numbers reported in the press are the sum of the amounts of each organisation’s receivables from others. This results in double counting. After all, one party’s payables are the other’s receivables, which should cancel out on subtraction. In our case, they don’t. There is an unadjusted amount, which the government picks up through the budget. This amount is growing by Rs1 million a minute.

Three-fourths of this build-up represents the inadequacy of consumer tariffs set by the National Electric Power Regulatory Authority to cover generation, transmission and distribution costs. When tariffs are not revised for any increase in prices of inputs (like oil), the government bears the subsidy. Presently, the tariff charged to consumers is Rs3 per unit less than the cost of generation.

The cost of producing an additional unit of electricity from imported oil is Rs18, while the existing tariff is around Rs9.50. Increasing load-shedding then makes sense because generation using this resource raises the government’s subsidy bill by almost Rs9 per unit. By failing to foot this subsidy bill the government builds up the circular debt.

Three components which partially raise power rates for consumers and partially require budgetary allocations are the following:

— The technical and managerial inefficiencies of government and generation and distribution companies (Gencos and DISCOS), cosy deals with rental power plants, overstaffing, free provision of electricity to employees of the Water and Power Development Authority, poor equipment maintenance, obsolete technologies, mismanagement, corruption, etc all adding to the cost of electricity provision.

— The mega issue of electricity theft, especially in DISCOs in Hyderabad, Peshawar, Quetta and Fata, with no one paying in the latter.

— Poor bill collection; more than Rs200 billion due from federal and provincial agencies; well-connected individuals and companies not paying bills and not being disconnected (Rs150bn) — although close to Rs120bn of this are ‘dues’ from fictitious consumers. This is simply theft in collusion with Genco staff.

So, what is the way forward? This writer has argued in these columns that the short-term solutions are fairly obvious: ‘print’ money for a one-time settlement of the circular debt, divert generation to independent power producers which produce power more efficiently that Gencos, etc. But, these efforts will only buy us four to five months. There are no quick and easy sustainable solutions to end load-shedding and provide energy at affordable prices. They require fundamental policy adjustments beyond the power sector, political determination to take on powerful interest groups, give and take between the provinces, the merger of almost two dozen agencies under one ministry, etc. Some of these are being repeated below.

For a variety of reasons it will be difficult to get meaningful private participation in the sector. Therefore, massive government investments in hydel power and coal development (plus upgrading of Genco equipment and infrastructure for importing liquefied natural gas and coal) will be required to produce electricity at affordable rates.

Each project will take more than seven years to complete — a period beyond the tenure of any government — during which there will be load-shedding, and employment of scarce funds on schemes with limited visibility and no immediate political returns. Such levels of funding will need a combination of enormous tax effort and a major restructuring of the Public Sector Development Programme (with Rs1.6 trillion still to be spent on on-going schemes — almost five years of annual development expenditure). It will require some projects to be abandoned, which could involve penalties for rescinding contracts, and deferment of others cutting subsidies on fertiliser, wheat, etc. (with their political costs). Regrettably, there are serious doubts about the present capability of government institutions to implement this formidable agenda.

A decision will also be required on the allocation of gas, a scarce resource, along with its price rationalisation, since it is presently one-fourth its international equivalent. Should this heavily ‘subsidised’ gas be used for power generation, as fuel for CNG and industry or for fertiliser production? If fertiliser units are denied gas, fertiliser will have to be imported, requiring a decision on the level of subsidy and the courage to face up to the ‘cost’ of diverting gas from fertiliser companies where huge investments have been made. But after the Eighteenth Amendment the first right over gas use is of the province of source.

Consumers in Punjab pay a higher tariff for greater theft in Sindh, Balochistan and KP. To address this issue should DISCOs be privatised or transferred to the provinces — with electricity being provided at a uniform price at the provincial boundaries for them to determine tariffs? If they are privatised, a first-rate regulator will be needed, a role which Nepra is incapable of performing.

All this will require legislation covering Nepra’s future responsibility, empowering provinces to set tariffs, etc. Will this have to be routed through the Council of Common Interests, requiring Sindh, KP and Balochistan to raise tariffs sharply for the higher rate of leakages?

A decision will also be required on maintaining supply of 650MWs from Wapda to the KESC (despite greater load-shedding in other parts of the country) and on whether other consumers should continue to bear the cost of oil provision at subsidised rates to richer Karachiites while they themselves pay for it as ‘fuel adjustment’ charge. All in all, this is a politically daunting undertaking.

The writer is a former governor of the State Bank of Pakistan.