Plan to decentralise power sector

Updated 19 Oct 2020

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Special Assistant to Prime Minister (SAPM) on Power Tabish Gauhar has revealed that Prime Minister Imran Khan will personally promise the International Monetary Fund (IMF) a time-bound road map for power sector reforms in return for a freeze on the tariff increase — in fact, lower flat rates for the industrial and SME sectors to spur economic activity and absorb surplus capacity.

The prime minister has had a series of meetings on this issue over the last couple of weeks. Mr Gauhar has recently replaced Shahzad Qasim, his former senior colleague at AES Corporation. The SAPM said the prime minister was convinced that breaking the status quo was the key to execute a holistic three-year plan to sustainably “move the needle”.

The plan to be made public soon seeks the decentralisation of power from the centre to the provinces and the boards of directors and managements of individual companies under an incentive- and performance-based public-private partnership (PPP) model, including “provincialising” the distribution companies (Discos).

The Ministry of Energy will only be responsible for “planning and policy” encompassing both power and petroleum sectors and regulating them through the National Electric Power Regulatory Authority (Nepra) and Oil and Gas Regulatory Authority (Ogra). Within three years, the delivery and pricing of power and petroleum products will be deregulated under a multi-seller/multi-buyer plus wheeling arrangement to ensure “consumer choice” in retail distribution by abolishing all existing “natural-monopoly exclusivities”.

The provinces will receive assets and equity of all nine Discos for Re1 each. But all external liabilities on the books of Discos will remain sovereign debt

Perhaps the most daring move under the plan is to do away with the countrywide uniform pricing formula, meaning more efficient Discos and lower end-consumer tariff and vice versa. This will be done through the removal of all “cross subsidies” i.e. from industrial to residential customers. The centre and the provinces will for the time being provide targeted cash transfers to the most deserving population through the Ehsaas programme.

The government will shift its focus from investment in distribution and largely restrict its financing and ownership role to augmenting and removing the existing bottlenecks in the power, oil and gas transmission infrastructure for a more faithful merit order despatch regime to lower the incremental cost of power generation for consumers.

With the formal actualisation of memorandums of understanding with Independent Power Producers (IPPs) within six months, the backdoor discussions with China will continue on the China-Pakistan Economic Corridor (CPEC)–based IPPs for extension in the debt tenor and reduction in the markup to address the chronic challenge of the circular debt.

The primary payment commitments will be transferred from Central Power Purchasing Agency-Guarantee (CPPA-G) to various other private-sector parties on a power commodity exchange within the next 18-24 months and the federal government will be responsible for only backstopping the “residual” capacity payment obligation subsequently. The reconciled net outstanding circular debt amount is planned to be settled through a 10-year government of Pakistan sukuk that the final intended recipients may choose to also monetise on the stock exchange. The key principle is not to recover the added cost of previous inefficiencies from paying customers in the tariff.

The plan argues that after the 18th Amendment and the 7th NFC Award, plugging the leakages in the “last mile” distribution network by reducing theft and improving collections has to be the primary responsibility of the local and provincial governments. The plan concedes that privatisation may not be the immediate practical solution as reforms may not materialise under the status quo scenario.

Therefore, a province-led PPP model envisaging the transfer of assets and 100 per cent equity ownership of all nine Discos to the respective provincial governments will start with Punjab for Re1 notional payment. All external debt and liabilities on the books of various Discos that are currently guaranteed by the Ministry of Finance will remain sovereign debt and the Discos will stand effectively transferred to the provincial governments on a “debt-free” basis.

Afterwards, all future operational losses, or bleeding, of the Discos owing to transmission and distribution (T&D) losses and lower recoveries will be back-stopped and funded by the relevant provincial governments. National Transmission and Despatch Company (NTDC)/CPPA-G will continue to sell bulk power to various Discos as per the agreed allocation or quota and the payment for such future supply under a power purchase agreement (PPA), including the settlement of fully reconciled arrears, will be deducted at source by the federal government under the forthcoming NFC Award.

Discos or their respective provincial governments will be free to set up their own power generation capacity or source surplus power from IPPs not already fully contracted to NTDC. More importantly, they will be fully responsible for controlling theft, improving supply and reducing loadshedding or supplying power as per commercial and non-political considerations.

The various provincial government–owned Discos will be encouraged to sign PPP deals with the private sector — in the manner of Sindh Engro Coal Mining Company (SECMC). Such deals will handover management, but not ownership, control to the private sector that will also agree to finance 100pc of an agreed business value creation capex plan for each Disco. An appropriate incentive-based profit-sharing formula can be agreed between the two parties on a case-by-case basis.

Nepra will continue to regulate the power sector, including tariff setting, by eliminating the inter-Disco cross-subsidies and doing away with the countrywide uniform power tariff policy that has become a major source of disincentive for improvement.

The plan also envisaged that the long-delayed transfer of K-Electric to Shanghai Power should finally be consummated under the CPEC umbrella on an unbundled basis with the government exercising its right to tag along half of its residual 25pc stake in KE, whilst offering the remaining half (along with its board seats) to the Sindh government. The responsibility to budget and pay for any tariff differential subsidy and strategic customer default claims will reside with the provincial government.

Published in Dawn, The Business and Finance Weekly, October 19th, 2020