ajpirzada
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Shahid Kardar
Published a day ago
The writer is a former governor of the State Bank of Pakistan.
A COMMON refrain in Pakistan today is that the role of the middle class and industry has been reduced to earning enough to pay their monthly electricity bills so that entities in the power sector can stay afloat. Pakistani industry is under severe stress because of the high administered prices of energy and fuel controlled by inefficient and corruption-ridden government-managed corporations.
While acknowledging that the major reasons for the high cost of electricity are delayed investments and the fuel mix with its heavy dependence on oil, the primary factors that have brought things to such a pass are policy, management and governance failures.
Other countries undertook electricity and power reforms essentially to reorient the sector in keeping with contemporary trends in technology and innovations (to improve efficiencies, especially of industry). In our case, power reforms are being led by the need to ease the burden of the weak financial condition of distribution companies, the goals being confined to narrow requirements of financial health.
Resultantly, our priorities are also skewed in terms of who is to be supplied electricity and at what price; this runs contrary to the economy’s needs to expand productive capacity and competitiveness, to create jobs for a rapidly growing labour force.
For example, close to 47pc of consumers in our case are domestic and barely 29pc are running industry compared to even India (by no means an example to follow) where the ratios are 25pc and 37pc respectively. Moreover, the rates in both India and Pakistan are much higher for industry than domestic consumers, in sharp contrast to policies in other countries and the interests of our domestic economies.
We have not even begun to tackle the problems in our defective power sector.
The financial losses of the sector were originally the result of low tariffs and high levels of subsidies, but now are largely the outcome of political interference. The latter has contributed to weak governance, poor maintenance of technologically backward equipment, rickety distribution systems, inadequate metering, non-merit appointments and overstaffing, larceny on a grand scale, poor collection of bills and literally no accountability. To top it all is an archaic financial structure characterised by no equity base and very high levels of debt requiring large interest payments.
Not only are the systems inefficient, theft — owing to collaborative/abetted corruption between customers and distribution company (DISCO) employees, and euphemistically classified as ‘technical losses’ at more than 24pc ( among the highest in the world) — is a bane. We have not even begun to tackle it. No country can afford robbery with such aplomb. It is also ridiculous to expect DISCOs to operate as commercial enterprises without any equity capital. Instead of equity, they only get loans from government/banks at high interest rates.
Moreover, it is also absurd to continue to subsidise an economic sector through the tariff structure instead of through the federal or provincial budgets. The latter approach will not only make the system transparent but also make the service providers more accountable.
All these issues are well known. But no one has the courage to tackle them, except by looking to the honest consumers to pay higher tariffs and on time to enable these utilities to cross-subsidise inefficiencies, pilferage and populist tariffs charged to farmers and low-consumption households.
Moreover, while capital follows the course of least resistance we are paying a heavy price for attracting investment on almost any terms, which is keeping electricity tariffs high. The guaranteed returns on equity are truly excessive, with resulting incomes also exempt from tax (except the withholding tax of 10pc on dividend payments from these earnings).
This guaranteed return is a lender and investor requirement because there is no market and trading for power. It was an error to invite private producers without allowing a market for trading and open access to transmission. Trading would have enabled the producer to charge what the market was able to pay/bear. This policy has repercussions for the overall price structure, industrial competitiveness, the demands on the country’s scarce foreign exchange resources and inflows and the future development of the sector.
In this context, it is particularly disturbing that agreements with the Chinese on power/coal-fired power projects are shrouded in secrecy. Nepra, the power regulator, has determined a rate of return of up to 27pc in dollar terms on such projects that would supposedly also apply to the Chinese investors. This rate is much higher than what is on offer anywhere in the world — the country’s poor image is a significant factor contributing to the lack of investors offering competitive tariffs.
Existing IPPs that were promised a rate of return of roughly 17.5pc actually earn more than double this amount (based on an examination of their financial statements). The resulting outflows of foreign exchange to those investing in power systems will become an unsustainable burden. For a product or service to be sold in local currency, it is a mistake to provide a guarantee against exchange rate fluctuations. The heavy outflows in foreign exchange to ‘service’ these investments/loans will encumber our external account, pressurising a renegotiation of these agreements.
It is the distribution end of the electricity supply chain where management and governance is at its worst. However, privatising these monopolies (DISCOs) would be a complex task without a highly competent regulator in the form of Nepra. Instead of promoting competition, the inadequately equipped Nepra merely functions as a calculator of tariffs. In the UK, there was incentive regulation in place to reduce costs and improve efficiency of operations. Nepra has adopted cost plus guaranteed return-based pricing, an approach discarded by the rest of the world ages ago. Part of the problem is that Nepra was set up with distribution of power as the sole responsibility of the public sector.
The managements of these agencies prefer a cosy relationship with the government so that the independent regulator does not demand improved performance. Even donors and the IMF, on whose insistence Nepra was established in the first place, do not themselves believe in the need for, and efficacy of, such institutions, since the conditonalities attached to their loans have built-in clauses for tariff revision that require Nepra to merely serve as a rubber-stamping authority.
The writer is a former governor of the State Bank of Pakistan.
Published in Dawn, November 25th , 2014
Power sector woes - Newspaper - DAWN.COM
Published a day ago
The writer is a former governor of the State Bank of Pakistan.
A COMMON refrain in Pakistan today is that the role of the middle class and industry has been reduced to earning enough to pay their monthly electricity bills so that entities in the power sector can stay afloat. Pakistani industry is under severe stress because of the high administered prices of energy and fuel controlled by inefficient and corruption-ridden government-managed corporations.
While acknowledging that the major reasons for the high cost of electricity are delayed investments and the fuel mix with its heavy dependence on oil, the primary factors that have brought things to such a pass are policy, management and governance failures.
Other countries undertook electricity and power reforms essentially to reorient the sector in keeping with contemporary trends in technology and innovations (to improve efficiencies, especially of industry). In our case, power reforms are being led by the need to ease the burden of the weak financial condition of distribution companies, the goals being confined to narrow requirements of financial health.
Resultantly, our priorities are also skewed in terms of who is to be supplied electricity and at what price; this runs contrary to the economy’s needs to expand productive capacity and competitiveness, to create jobs for a rapidly growing labour force.
For example, close to 47pc of consumers in our case are domestic and barely 29pc are running industry compared to even India (by no means an example to follow) where the ratios are 25pc and 37pc respectively. Moreover, the rates in both India and Pakistan are much higher for industry than domestic consumers, in sharp contrast to policies in other countries and the interests of our domestic economies.
We have not even begun to tackle the problems in our defective power sector.
The financial losses of the sector were originally the result of low tariffs and high levels of subsidies, but now are largely the outcome of political interference. The latter has contributed to weak governance, poor maintenance of technologically backward equipment, rickety distribution systems, inadequate metering, non-merit appointments and overstaffing, larceny on a grand scale, poor collection of bills and literally no accountability. To top it all is an archaic financial structure characterised by no equity base and very high levels of debt requiring large interest payments.
Not only are the systems inefficient, theft — owing to collaborative/abetted corruption between customers and distribution company (DISCO) employees, and euphemistically classified as ‘technical losses’ at more than 24pc ( among the highest in the world) — is a bane. We have not even begun to tackle it. No country can afford robbery with such aplomb. It is also ridiculous to expect DISCOs to operate as commercial enterprises without any equity capital. Instead of equity, they only get loans from government/banks at high interest rates.
Moreover, it is also absurd to continue to subsidise an economic sector through the tariff structure instead of through the federal or provincial budgets. The latter approach will not only make the system transparent but also make the service providers more accountable.
All these issues are well known. But no one has the courage to tackle them, except by looking to the honest consumers to pay higher tariffs and on time to enable these utilities to cross-subsidise inefficiencies, pilferage and populist tariffs charged to farmers and low-consumption households.
Moreover, while capital follows the course of least resistance we are paying a heavy price for attracting investment on almost any terms, which is keeping electricity tariffs high. The guaranteed returns on equity are truly excessive, with resulting incomes also exempt from tax (except the withholding tax of 10pc on dividend payments from these earnings).
This guaranteed return is a lender and investor requirement because there is no market and trading for power. It was an error to invite private producers without allowing a market for trading and open access to transmission. Trading would have enabled the producer to charge what the market was able to pay/bear. This policy has repercussions for the overall price structure, industrial competitiveness, the demands on the country’s scarce foreign exchange resources and inflows and the future development of the sector.
In this context, it is particularly disturbing that agreements with the Chinese on power/coal-fired power projects are shrouded in secrecy. Nepra, the power regulator, has determined a rate of return of up to 27pc in dollar terms on such projects that would supposedly also apply to the Chinese investors. This rate is much higher than what is on offer anywhere in the world — the country’s poor image is a significant factor contributing to the lack of investors offering competitive tariffs.
Existing IPPs that were promised a rate of return of roughly 17.5pc actually earn more than double this amount (based on an examination of their financial statements). The resulting outflows of foreign exchange to those investing in power systems will become an unsustainable burden. For a product or service to be sold in local currency, it is a mistake to provide a guarantee against exchange rate fluctuations. The heavy outflows in foreign exchange to ‘service’ these investments/loans will encumber our external account, pressurising a renegotiation of these agreements.
It is the distribution end of the electricity supply chain where management and governance is at its worst. However, privatising these monopolies (DISCOs) would be a complex task without a highly competent regulator in the form of Nepra. Instead of promoting competition, the inadequately equipped Nepra merely functions as a calculator of tariffs. In the UK, there was incentive regulation in place to reduce costs and improve efficiency of operations. Nepra has adopted cost plus guaranteed return-based pricing, an approach discarded by the rest of the world ages ago. Part of the problem is that Nepra was set up with distribution of power as the sole responsibility of the public sector.
The managements of these agencies prefer a cosy relationship with the government so that the independent regulator does not demand improved performance. Even donors and the IMF, on whose insistence Nepra was established in the first place, do not themselves believe in the need for, and efficacy of, such institutions, since the conditonalities attached to their loans have built-in clauses for tariff revision that require Nepra to merely serve as a rubber-stamping authority.
The writer is a former governor of the State Bank of Pakistan.
Published in Dawn, November 25th , 2014
Power sector woes - Newspaper - DAWN.COM
