Power reforms: The needle moves

The IMF’s Article IV Consultation report on Pakistan highlights positive developments, particularly from the energy sector’s perspective. The focus has shifted from tariff adjustment-only reforms to a more holistic set of reforms aimed at enhancing distribution and transmission efficiencies and stressing the need to privatize state-owned generation and distribution companies. The document offers solutions to many of the challenges facing Pakistan’s electricity sector.

Historically, the IMF has been criticized for emphasizing tariff adjustments in its programs with Pakistan, with other structural issues relegated to footnotes. The 2024 EFF marks a welcome shift, as the focus now moves to “resolving the energy sector’s problems and restoring its viability, which urgently requires reforms to improve distribution and transmission efficiencies and lower generation costs, ultimately allowing for tariffs to fall.”

That said, near-term quantitative benchmarks and performance criteria are still primarily focused on price-setting and stemming circular debt buildup through timely tariff adjustments and cost pass-through. Both the IMF and Pakistani authorities have laid out a reform agenda that, if implemented, could go a long way in ensuring the electricity sector’s sustainability and affordability.

After years of inaction where the singular focus on pricing was disguised as reform, it is safe to say the needle has moved beyond lip service on several fronts. However, timelines for key agendas, such as the privatization of distribution and generation companies, conversion of imported coal-based power plants to local coal, transmission overhaul, and the development of a bilateral energy market, do not convey a sense of urgency.

For instance, the privatization of two-generation companies, Nandipur and Guddu 747, is still 12 months away from even starting the bidding process. Regarding the conversion of imported coal-based plants, the commitment is limited to conducting an in-depth study for this purpose. It is safe to assume that any material impact on this front is not expected in the near to medium term.

The privatization of at least two distribution companies has been in discussion for some time, and current timelines indicate that the request for proposals (RFP) for the first distribution company will not be issued before the end of the first quarter of FY26. The only structural benchmark for privatization in FY25 is hiring a technical advisor to prepare distribution companies for privatization by updating tariff guidelines and other related matters.

The transmission sector is finally receiving the attention it should have years ago when capacity was added under CPEC Phase-1. According to the authorities' plans, the National Transmission and Dispatch Company (NTDC) will be restructured into three entities: the Independent System Operator and Market Operator (ISMO), which will assume the NTDC’s system operator function; the Power Transmission Infrastructure Development Company (PTIDC); and the National Transmission Maintenance Company (NTMC), which will be operational by the end of December 2024. Transmission sector reforms are crucial for ensuring reliability and optimizing fuel sources for power generation.

In the short term, the sector’s overall health will benefit significantly if ways are found to incentivize greater consumption on the grid. It is clear that there is no intention to reduce taxation on electricity consumption. The benefits of recently terminated contracts with the IPPs must be fully realized, necessitating a reset and reevaluation of the current net metering policy for solar rooftops. Without this, grid consumption will remain suboptimal, keeping consumer-end tariffs high and hindering efforts to reduce losses or increase recovery.