Privatising power distribution

Published June 13, 2024
The writer is a former governor of the State Bank of Pakistan. This article has benefited from research by the Pakistan Institute of Development Economics.
The writer is a former governor of the State Bank of Pakistan. This article has benefited from research by the Pakistan Institute of Development Economics.

A WIDELY held perception, if not an unshakeable belief, is that the energy sector presents an existential threat to Pakistan’s economy, with no likely respite if it remains fixated on its poor policies and a mode of governance managed by over 20 organisations.

A key area of concern is the high 17 per cent transmission and distribution losses of the system — with a 50pc share of the latter — compared to 3.6pc of South Korea, 5pc of the US and 8pc of China.

The key issue afflicting the distribution sector is governance in the form of collusion between Discos personnel and consumers through theft of electricity — via illegal connections, underreporting of consumption or its parking under some other head — followed by a high level of technical losses, owing to inadequate investment in the transmission and distribution networks and grid infrastructure.

Resultantly, the majority of Discos, established with literally no equity base, are not financially solvent and are unable to upgrade their infrastructure, expand capacity and manage the distribution systems to ensure reliable electricity supply. The extent of their insolvency has been adding to the debt profile of the government, which is reflected as ‘circular debt’.

To address the issues of the Discos, the news making the rounds is that the government is considering, yet again, privatising them as a way of improving service delivery and operational efficiencies and checking their financial haemorrhaging. This article argues that there are enough reasons to be less sanguine about the ability of the private sector and competition to provide affordable electricity to all.

To begin with, clarity is required on what is being privatised. For instance, will the wire and pole infrastructure, a monopoly, be transferred? If not, then how is competition to be induced? Only increased competition can have a beneficial impact through better customer services and lower prices, say, by commissioning a system of several small entities operating in the same area sharing this network of infrastructure.

Clarity is required on what is being privatised.

Furthermore, will we continue to maintain a policy of uniform tariffs for all areas of the country? How will the element of cross-subsidies to some categories of consumers be handled, because the private operator is more than likely to target profitable, higher-paying consumers? Will tariff revisions be allowed in a timely manner — a politically sensitive issue? Will the private operator be empowered to a) decide who to retain on the payroll; and b) penalise or eventually disconnect government agencies for not paying their bills by the due date? Will continued active support be available from law-enforcement agencies to prevent illegal connections, ie, the use of kundas?

More importantly, how can competition be introduced at the retail end with performance base contracts without competition anywhere in the rest of the supply chain, if only government agencies run primary fuel markets and publicly owned transmission and distribution companies are free to determine wheeling charges as carriage for the wire and pole infrastructure that they’ll be mandated to manage?

Absolute freedom to the latter to fix prices to fully cover all inefficiencies of the public sector will end up making the privatisation of services, metering (say, through pre-paid smart meters) and billing a non-starter. And with more than 70pc of the electricity paid by consumers at the stage of generation, this governance structure is more likely to result in sub-optimal outcomes in technical and economic efficiencies. It may even render the operations of private distribution financially unviable.

Global experience suggests that the most successful privatisation of distribution in developing countries was in middle-income countries with stable governments, policy predictability, skilled personnel managing the system independently and political commitment to tackle the complications posed by the regime of subsidised tariffs. The latter is important because the global experience of inducing competition at the retail level is that it results in greater convergence in the cost of supply and tariffs of different consumer categories, which in turn implies an increase in tariffs of domestic and agricultural consumers and reduction in the element of cross-subsidies, with political implications. Moreover, privatisation was successful only in selected areas and not the entire distribution network.

For us, a major challenge will be the quality of regulatory oversight and inter-agency coordination — because of multiple agencies operating in the sector and the arbitrary division of powers — for safeguarding public interest and smooth service delivery and economic and social regulation.

Our regulatory regime is highly politicised. There are governmental interventions, with opportunities for employment provided to retiring well-connected/ ‘loyal’ bureaucrats — most of whom have limited technical and market expertise — playing to the gallery. It is not managed by proficient professionals focusing on service standards, efficiency and economic considerations. And when even an agency like Nepra has supposedly been made autonomous, the powers granted to it by legislation have been taken away by the executive, making it ineffectual and functioning purely as a subordinate agency, if not a rubber-stamping entity, to the Ministry of Water and Power. This shows the distaste of our political leadership for any kind of institutional autonomy.

Finally, since electricity is a concurrent subject under the Constitution, we need to ensure that there is a consensus over the institutional arrangements, especially to avoid regulatory overlapping, confusion and a conflict-ridden environment for settling disputes.

To conclude, one is left wondering if these aspects are getting adequate attention in the plans to privatise Discos. It will be a massive challenge to achieve the lofty objectives being associated with privatisation without clarity on how these critical issues will be attended to.

The writer is a former governor of the State Bank of Pakistan. This article has benefited from research by the Pakistan Institute of Development Economics.

Published in Dawn, June 13th, 2024

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