Power sector reforms: can we overcome the crisis?

By Usama Siddiqui

Pakistan has faced perennial load-shedding and frequent power outages over the past three decades, a problem which has most recently caused serious civil unrest and disturbances. A high demand growth rate has seen supply lag far behind. The state utilities suffer immensely from non-payment of dues, transmission losses, underinvestment, circular debt crisis, and general inefficiencies of manpower and plants.

Since independence in 1947, Pakistan had been primarily dependent for its electricity needs on the two state-owned vertically integrated power monopolies, Water and Power Development Authority (Wapda) and Karachi Electric Supply Company (KESC). While KESC covered the large demand centre of the business city of Karachi, Wapda covered the rest of the country. Both were fully-integrated generation, transmission and distribution companies and controlled by the government through the ministry of water and power.

Out of Pakistan’s net effective generation capacity of 19,000MW, as of end ’10, Wapda and KESC contributed 61 per cent. Independent Power Plants (IPPs) and nuclear make up the rest (see figure 1). However, Wapda’s hydel plants lose almost 3,000MW in the winters when the water reservoir levels drop dramatically due to lesser rainfall.

Evolution of power demand and supply

In the late 80s and early 90s, Pakistan’s total installed capacity hovered around 10,800MW. A burgeoning population coupled with robust economic growth reflected by an average GDP annual growth rate of 7 per cent in the 80s (see Figure 2) brought about a sharp increase in overall electricity demand.

It proved to be a severe strain on the existing power capacity with an estimated 2,000MW peak load shortfall. Electricity was effectively available to only 40 per cent of the population.

To tackle the chronic power shortages, the PPP government attracted several IPPs under its friendly 1994 Power Policy. While the manner of some contract awards and the costly tariff regime were much criticised, the 1994 policy did manage to add a total installed capacity of 6,000MW to the grid through 16 new IPPs from ’97 to ’01.

Unfortunately, the Asian financial crisis of the late 90s and the ’98 nuclear tests had a detrimental effect on Pakistan’s economy. As a result, demand for electricity slumped and Pakistan was faced with expensive IPP electricity, that were guaranteed capacity payments despite their under utilisation.

Post the 9/11 New York attacks, Pakistan benefited from the increased remittances (averaging $4 billion p.a.) sent back by expatriates as well as the inflows from western allies in the war on terror. This coupled with the military-led governments steady economic reforms resulted in Pakistan’s real GDP growing at a robust 7 per cent p.a. from ’04-’07. This had a direct bearing on the country’s electricity consumption which registered a phenomenal average annual growth rate of over 10 per cent during the same period.

The surplus capacity generated by the IPPs’ in the late 90s had however made the military government complacent and it only woke up to upcoming demand-supply gap in ’07. A new wave of IPP projects was signed that will add 2,632MW from ’09 to ’11. The controversial Rental Power Plants (RPPs) would also add to capacity. The recent and forecast demand-supply trend of Pakistan is highlighted in figure 2.

Sectoral reforms and liberalisation

Since their inception, both Wapda and KESC had been plagued with inefficiencies, poor governance, red-tape, and political interferences. Transmission & Distribution (T&D) losses amounted to 30-40 per cent.

This was as much a result of a lack of adequate investment in the strained transmission network as of the power thefts by various groups and individuals. On average, about 20 per cent of dues were not recovered, most of them owed by other public sector entities.

As a result of these inefficiencies, successive governments injected significant subsidies into them to keep the end consumer tariff manageable so as to minimise political damage. To counter these chronic problems and encouraged by the donor agencies like World Bank and Asian Development Bank, the government embarked on an ambitious power-sector restructuring and liberalisation programme in the 90s, with an eventual aim of privatising the loss-making entities and moving towards a market-driven electricity sector.

In 1997, the National Electric Power Regulatory Authority (NEPRA) was established to grant licenses, monitor standards and practices, enforce competition, and safeguard the interest of the consumer by determining tariffs.

Wapda’s corporatisation and unbundling

In 1998, Pakistan Electric Power Company (Pepco) was created to manage the unbundling of Wapda’s assets. Hydel power generation continue to be managed under the banner of Wapda, which retained ownership of the 14 hydel plants. The thermal plants were distributed into 3 Generation Companies (Gencos), according the geographic location of the plants. The Gencos and Wapda hydroelectric sell their electricity to the National Transmission and Dispatch Company (NTDC), which acts as a single buyer and is responsible for the entire transmission network. This electricity is transmitted downstream to 8 Distribution Companies (Discos), for onward distribution and billing of end consumers covering their respective geographic regions. The power produced by the IPPs under their PPAs also flows through this Pepco system.

The restructuring of Wapda led by Pepco has hardly been a success. While the individual entities were created, they have yet to become independent and fully autonomous. Pepco still exercises influence over the financial transactions and governance issues of the Discos and Gencos, and monitors the sale and purchase of power up and down the value chain.

From ’03 to ’07, despite NEPRA having notified significant increases in tariffs in view of the rising fuel costs, the government kept the consumer tariff frozen due to political reasons, choosing instead to give subsidies. However, the ballooning international fuel prices meant the government could not service its subsidies in time. The Discos incurred huge losses as they could not pass on the cost of electricity purchased to the end customer and defaulted on their payment obligations to the Gencos, Wapda and IPPs. The Gencos and IPPs then defaulted on their payments to the fuel suppliers (PSO, Shell, SSGC, SNGPL), who in turn have defaulted on their payment obligations to refineries, E&P companies, and international fuel suppliers. An alarming ‘circular debt crisis’ has emerged, that in May 2010 stood at Rs500 billion.

Other factors hampering the profitability of the Discos include their continued inability to recover dues especially from the public sector and provincial governmental departments, a legacy bureaucratic mindset in governance, and high losses in the distribution systems. Gencos are running on average at only 67-90 per cent of their net available capacities due to not having conducted maintenance and scheduled outages over the years as per standard industry practices. Finally, the required contracts between Gencos and NTDC, NTDC and Discos, and Gencos and Discos are still not in place.

The then government initiated efforts to privatise KESC in ’96. The management was brought under army control to recover the T&D losses. The government assisted financially in cleaning up its books and wiped out its accumulated losses. In ‘05, the fully integrated utility was finally sold to a Saudi group who later sold their stakes in ’08 to Middle East’s private equity giant, Abraaj Capital.

The privatisation has been a mixed story at best. T&D losses have averaged 35 per cent since privatisation, only marginally down from the 40 per cent prior to that. New generation capacity additions are not due before 2012. The streets of Karachi over the last two years have become a battleground against the frequent loadshedding that has continued unabated. The new management has had troubles with the powerful labour unions in attempting to initiate new human resource reforms and rationalisation of the workforce. KESC has at times not produced at peak capacity, to avoid purchasing expensive furnace oil, preferring instead to purchase cheaper electricity from the Pepco/NTDC system. This is clearly a downside of privatising monopolies as fully integrated entities and in an environment where the market is not competitively structured. Finally, KESC too is involved in the circular debt crisis owing large payments to Pepco and its fuel suppliers.

Despite still making losses, the new management should however be credited for lobbying hard to get tariffs reflective of market realities and for clamping down on the rampant culture of power theft in Karachi. Also, efforts to increase the older plants’ capacity are beginning to bear some fruit. Government planners and donor advisors should keep in mind that Pakistan is still far from being a fully liberalised and competitive market. A new experiment in liberalisation needs to be carefully managed and implemented, with the commercial capacity and regulatory framework well in place before embarking on it.

The deregulation, liberalisation, and unbundling of the sector should gather more momentum so that all players can compete on an equal footing. If all market players compete fairly, the end objective of the cheapest prices for the end customer should be achievable. The ongoing move towards a market-oriented system would encourage not just KESC/ex-Wapda entities but also private players like the IPPs to maximise efficiencies in order to retain their consumers.