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The power privatisation dilemma

January 09, 2017


PRIVATISATION of power generation and distribution companies was part of the PML-N’s manifesto for the last elections and to quote the chairman of the Privatisation Commission, “the only solution to the energy crisis”.

A road show in the US was arranged in collaboration with the World Bank in October 2015 to invite foreign investment. Due to the persistently poor financial health of these state enterprises, the privatisation list included public sector power utilities as part of the IMF’s $6.7bn package.

However, Pakistan conveyed to the IMF its inability to proceed with privatising these power companies in February 2016. In its parting note, the IMF underscored the need for reforms in the power sector, including privatisation, as an essential requirement for the country to stabilise its economy and achieve sustained economic growth.

The focus should shift from the single question of ownership of the service-provider to a broader question of how to improve institutions, whether in the public or private sectors

What led to this about-turn? The threat of political fallout and confrontation with labour unions apparently gave the government cold feet. With elections due in 2018, the chances of privatisation seem improbable.

But is it in the best interest of the country? While the government’s volte-face may have been triggered by political expediency — rather than any sound economic reason — we need to examine if global experience makes out an incontrovertible case for the privatisation of power companies so that they may improve their efficiency and financial position while ensuring better service quality for consumers.

In the power supply chain, most of the losses and revenue leakages are suffered by the distribution segment, something which affects the overall performance and economics of the sector.

So far, in Pakistan, while the private sector has been contributing robustly in power generation, the experience of private sector participation in the distribution sector has only been limited to the Karachi Electric supply company (KESC), now renamed Karachi Electric.

Reforms have largely been a success in Chile and Brazil resulting in a healthy competitive market with low overall tariffs and improved operational and technical performance compared to pre-reform days.

In Pakistan, a recent study has concluded that the privatised Karachi Electric Company ‘is performing exceptionally well in comparison to the two state-owned companies Pesco and IESCO due to decline in transmission and distribution losses, profitability and leaner organisation with adoption of newer technology.’

Notwithstanding a few success stories cited above, international financial institutions have been facing stiff resistance from most of the developing countries against their proposals to unbundle and liberalise electricity systems.

In fact, the last decade has seen a higher trend towards nationalisation rather than privatisation. It has been observed that private companies increase electricity prices for consumers but do not make the investments required for improving the sector’s infrastructure and efficiency.

Over the last ten years, privatised distribution and generation companies have been wholly or partly re-nationalised in Argentina, Bolivia, Brazil, the Dominican Republic and Venezuela, and there have been no new privatisations. In Africa and Asia, there are very few examples of the private sector managing and operating the distribution of electricity.

The common global experience of the privatisation of the power sector has indicated a consistent pattern of problems including consumers’ opposition, lack of competition, higher prices, oligopoly and lack of investments or innovations, according to a study conducted in 2013.

About half the developing countries in the world have tried some form of unbundling but most developing economies have rejected, frozen or reversed liberalisation.

A review of various studies reveals that the privatisation of electricity in developing countries, without the right institutional infrastructure and political will, is a dangerous policy.

The question, whether to privatise or not, does not necessarily have to be viewed in black and white. There are a number of ways in which we could opt for pragmatic privatisation.

In fact the focus should shift from the single question of ownership of the service-provider to a broader question of how to improve the institutions that produce or supply the services, whether in the public or private sectors.

Accountability before the shareholders, as well as fulfilment of the stated goals of public welfare, should be the guiding principles for the governance of these entities.

The writer is former chairman, Nepra, and is currently head of Energy Research Centre, Comsats.

Published in Dawn, Business & Finance weekly, January 9th, 2017