THE recent decision by the Economic Coordination Committee to grant unusual advantages to RLNG power plants in their power purchase agreements reflects the costs of poor governance in the power sector.

Because the power sector is riddled with problems, such as the circular debt, poor recoveries (in spite of some improvement in the outgoing year) and frequent policy changes, future investors require high levels of protection before acquiring stakes.

This puts the government in a situation where investment in future capacity has to be mobilised with massive price inducements coupled with guarantees and protections that effectively transfer all risk to the government.

The net result is a rise in the price, nibbling away at whatever gains are made from switching to cheaper fuels.

Examples of this are numerous. The upfront coal tariff was revised upward precisely to accommodate the additional price of the country risk that the Chinese investor wanted. Likewise with the upfront solar tariff, where Pakistan offers one of the highest tariffs in the world.

The upfront LNG tariff also had to be revised shortly after being announced. In the latter case, reading between the lines it seems that it was uncertainty regarding LNG supply and future pricing that drove investor concern.

Now we hear that sweeping guarantees have been assured to RLNG power plants, which ironically are being set up in the public-sector domain with a view to being transferred to private investors eventually, in the matter of fuel supply and pricing.

There is little doubt that the ultimate cost of these assurances will eventually land up in the tariff. The government’s power policy in 2013 was to bring down the cost of power generation into single digits by 2017, and some headway has been made towards this goal.

But it has come at a grinding pace, primarily because market forces are playing a very limited role in arranging new capacity.

The state alone cannot carry the burden of reducing this price by its own powers of negotiation, especially when its negotiating position is hampered by a lack of investor interest and enduring weaknesses in the power-sector governance regime.

Rather than continuing to price in the risks and lure investors through guarantees and price inducements, the government ought to have advanced power-sector reforms with more conviction.

That is the surest route to bring down the price of power as well as to improve efficiencies.

Published in Dawn, July 2nd, 2016