Haste makes waste

Published September 30, 2019
The writer is an analyst.
The writer is an analyst.

LET’S put one thing on record first: There’s nothing inherently good or bad about privatisation. Its history is full of ‘successes’ and ‘failures’. And that, of course, depends on a host of factors along with your own definition of success or its lack thereof. But we won’t dig into that.

In the public policy world, civilian, quasi-civilian and military regimes romanticise maximum returns in the shortest span of time, which extends hardly beyond their administrative term or, even worse, a fiscal year. Pragmatism is the first casualty of this longing. Ironically, in the pursuit of maximum political gains what they appear to dislike the most is ‘cost’ — both monetary and non-monetary. If the reality were to satisfy that wishful thinking, we would’ve been living in a perfect world. That’s just not the case — yet.

Pakistan has been grappling with two major challenges for the last many years: terrorism and economic meltdown. While the scourge of militancy seems to be tamed to an extent, the latter remains unmitigated. The prevailing energy crisis, or more precisely the ailing power sector, and recurring financial losses of state-owned enterprises have shaken the country’s economic fundamentals. It’s a dangerously naïve premise that some window-dressing exercise in commercial and industrial SOEs and vending of sought-after public assets will prompt macroeconomic stability. But Prime Minister Imran Khan’s all-powerful economic manager, Dr Abdul Hafeez Shaikh, seems to prescribe that.

Alluding to the privatisation drive, Dr Shaikh stated that he has fast-tracked the programme and doubled the active list of SOEs selected for privatisation. The reason, he noted, is the public sector’s “inability to run [these] SOEs”. This narrative is in stark contrast to Pakistan’s commitment towards the IMF which states that the government will “select SOEs [for privatisation] with minimal operational, financial and human resource issues”. Simply put, the government will offload most valuable SOEs and retain loss-making entities, which will be restructured for efficiency and profitability and (possibly) privatised later. The contradiction points towards a bizarre practice in this country’s power corridors: don’t inform the public of your pledges to the outside world; but when unavoidable, don’t care about the accuracy of information.

The renewed effort to privatise power-generation plants indicates the growing despair of the PM’s economic managers.

Let’s now delve into the anatomy of power-sector woes. Major stakeholder groups, with some rare exceptions, have been working in regrettable harmony for the undoing of this crucial sector. The role of a well-functioning and competitive power sector in our economic growth and stability can’t be stressed enough. Nevertheless, as a mere reflection of its players’ deeds, the sector is plagued with voracious interests and rent-seeking ambitions.

Consumers, for example, had defaulted on Rs500 billion as of end-2018 to various distribution companies (DISCOs), which continues ballooning as you read these lines. A case in point is the Peshawar Electric Supply Company in KP. The company incurred transmission and distribution losses (T&D) of 32 per cent to 38pc annually between 2013 and 2018 and has very poor bills’ recovery ratio. Pesco’s books show financial losses of tens of billions of rupees every year.

Most power producers care chiefly about lucrative returns on their investment underwritten by sovereign guarantees and seldom pay heed to the social and macroeconomic implications of their projects. A recent rush to instal power plants that will trigger fuel imports and the establishment of oil-fired generation facilities in the past demonstrates corporate insensitivity.

However, the scale and intensity of the government’s missteps humble the role played by consumers and power producers. As a guardian of national interests, the government is entrusted with the creation of an ecosystem that spurs an efficient and effective electric power market. While the federal bureaucracy continues introducing ad-hoc, flawed policies, elected members of the provincial and national legislatures take pride in their undue interference in the decision-making processes of DISCOs serving their constituents. The state apparatus has failed the power sector at the policy, regulatory and operational levels.

In this backdrop, two broad conclusions can be drawn from the proposed privatisation of regasified liquefied natural gas plants together with the Guddu (747MW) and Nandipur (525MW) power projects. This is a classic example of brute-forced front-loading intended to plug the fiscal deficit of FY2020. Second, if anything, it’s not aimed at addressing the multipronged challenges faced by the power sector.

By recognising that the incumbent administration has to play a firefighting role, we can sympathise with its despair. But there’s a caveat: Dr Shaikh has little to his credit when it comes to the introduction of much-needed reforms in power-sector SOEs during his previous stints with Gen Musharraf’s dictatorial regime and with the PPP government. After all, Dr Shaikh’s performance will be judged based on (im)balanced public accounts, which is why he’d prefer front-loading over gradualism to get a satisfactory performance evaluation report from the IMF in the coming months.

On the other side of the isle is Omar Ayub Khan, minister of energy, the man with an onerous role requiring him to roll up his sleeves and look beyond the numbers. Notwithstanding his potent understating of sectoral fault lines, his role is limited to improving the operational efficiency of DISCOs. He resembles a junior partner in the administration tasked with maximising revenue. He ought to assume more responsibilities concerning the structural issues in the power sector and the privatisation of its entities since lower T&D losses alone aren’t sufficient, albeit necessary. Fortunately, he’s aware of that.

The hasty sale of valuable power generation assets would be counterproductive. For the privatisation of profitable electric power, SOEs generation and distribution to stimulate sector-wide improvements, divestment proceeds should be channelled towards fulfilling the financial needs of an overarching reform program. Such a programme must be nonpartisan and equipped with measures to cope with the multitude of policy, regulatory and operational issues in the power sector. Dr Shaikh would be better advised to play a more constructive role this time, which requires him to restrain the urge of cashing in on valuable SOEs for short-term fiscal gains.

The writer is an analyst.

Twitter: @sohaibrmalik

Published in Dawn, September 30th, 2019

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