Special editorial feature

Ensuring a
sustainable future for
the Power Sector

By Farhat Ali | August 2020

The power sector in Pakistan continues to face turbulent times with no meaningful and sustainable relief in sight. While the government is still embroiled in figuring out how to manage the IPPs, the outcome of its recent enquiry report revealing mind-boggling profits of the IPPs and load-shedding in Karachi and other parts of the country, has once again surfaced as a heat wave sweeps across the country.

The public and private sector, since the 90s, is systematically investing in the power sector and has put in place a number of rather randomly and aimlessly chosen power plants based on fuel oil, HSD, wind and, lately, on LNG, coal and solar.

The end result of decades of investment is that the country is producing some of the most expensive electricity in the world and long hours of power black-outs still haunt the public. The tariffs are crippling the industry and the resulting circular debt is severely denting the country’s fragile economy.

All of this is not sustainable. The country has to ensure a sustainable future for the power sector. The areas which need to be addressed are the conduct of the IPPs, the crumbling power generation and distribution in the public sector and the incompetence of the country’s power regulators.

The current, behind-the-scenes negotiations between the government and IPPS, based simply on their profit margins, is not sustainable on legal grounds and the power purchase agreement signed between the two. The IPPs can be reprimanded if there are financial or operational irregularities in their conduct of business.

To judge that, a comprehensive, fair and transparent financial, technical and administrative audit, by independent and credible auditors, of the complete supply chain of the power sector, needs to be conducted. This should include the fuel supply chain, the conduct of IPPs, the conduct of regulators (NEPRA, OGRA, etc), the delivery of the power generation and distribution companies in the public sector and the consumers. They are all seamlessly linked to each other.

The public power sector is the weakest link in the power supply chain - riddled with incompetence, multiple losses and mis-governance - leading to a severe dent to the country’s economy. This is one sector which needs radical reforms.

The other weak link is the conduct of the regulators, namely, OGRA and NEPRA. The previous government placed them under the oil and power ministries, respectively, forfeiting whatever little independence was left with them. Competence needs to be built up in these entities and their independence restored.

The sustainable way forward is the privatization and deregulation of electricity generation and distribution. Now, nearly all over the world - Europe, USA and in the emerging markets in Asia - the power sector is privatized and deregulated. This has invariably resulted in the reduction of tariffs and improvement in service - both in the interest of the consumer.

Highlights of 1994 Power Policy

Pakistan was facing load shedding of 5 to 10 hours a day from 1986 to 1998.
• 1994 Power Policy was introduced by the Benazir Government in 1994 to attract investment in the Power Sector.
• Bulk tariff of 5.91 cents per kilowatt was provided to the investors. The response was unprecedented. PPIB received applications to the tune of 50,000 MW. Projects of 2,850 MW were agreed to by Government.
• The policy provided a US$ based IRR of 18%.
• There were a total of 14 projects in the 1994 Power Policy.
• From 1998 to 1999, the Government disowned the projects and coercive measures were adopted to renegotiate tariffs. Besides AES having American investors, all tariffs was renegotiated.
• Due to this exercise, two projects went bankrupt and investor confidence was lost.

Pakistan experienced fantastic results by deregulating its telecommunication sector - being at that time one of the first few countries in the world to do so. Once, the availability of telephones in Pakistan used to be the privilege of the elite. It came with expensive tariffs and poor service and the consumer was at the mercy of the lineman. Today a telephone is available in almost every home and is affordable by all.

In the power sector too, Pakistan was among the first few countries which inducted the private sector in power generation. Thereafter, we lost track. What should have followed was the induction of the private sector in power transmission and distribution and then the deregulation of the sector to provide quality and affordable power to consumers.

The way forward for ensuring a sustainable future for the power sector in the country is to catch up where we lost track and move on with the privatization and deregulation of the power sector to deliver reliable and affordable power to consumers.