In continuation of my article on "State-sponsored corruption' in fiscal policies," an attempt has been made through this article to provide an accountant's view of financial status of the overall power sector in Pakistan. This attempt is necessitated by the constant use of the term 'Circular Debt', which in my view is simply 'state subsidy' on supply of power to consumers (domestic, commercial or industrial) in the country. At the outset, I must emphasise that I am not against state subsidy on utilities if they are in line with economic realities of the country. In my view, such subsidy will continue to exist and there is no economic rationale to curtail it if it contributes towards achieving the goal of a welfare state. Under the present ground realities there will always be a subsidy in one form or another for at least a decade in certain sectors, including utilities. The issue is the identification of the sectors and the beneficiaries of subsidy to be provided. There should not be a political 'hand out'. Furthermore, transparency and identification are a must in relation to the sectors and targeted recipients. If domestic consumers are suffering due to Transmission & Distribution (T&D) losses in commercial sector then it should be known. If the rest of Pakistan is suffering due to non-payment by erstwhile FATA residents then that should be divulged and acknowledged. If tubewells in Baluchistan are not paying their bills then that should not be a burden on the residents of Lahore or Gujranwala. These are hard but real facts. The last and most important aspect is the need for a huge capital investment in this sector that in my view is not available with the domestic private sector as against the general prevalent perception in the country. There is a need for financial subsidy to the investors in the form of upfront guaranteed return of investment if substantial investment is desired. The State will be required to intervene. In short, the economics of power sector in Pakistan requires an out of the box practical nationalistic strategy. In the following paragraphs this has been described in layman's language:
When Benazir Bhutto's first government was dismissed under the then infamous Article 58(2)(b) of the constitution, one of the charges was the non-transparency in the contract with the foreign private sector company that was the first Independent Power Plant (IPP) in Pakistan. Now almost after 30 years people are confused whether the contract was fair or not. I will not enter into this debate. Then there were investments by the private sector in Karachi Electric Supply Corporation (KESC) now renamed as K-Electric (KE). KE is still struggling and NEPRA is not on board. What will happen to the consumers of Karachi in coming summer is still undecided. In this case whether the private investor's return has been ensured in the tariff is questionable. Then, there was investment in Nandipur power plant which is a sub judice matter in courts. Then there was investment in other IPPs. The recent report of the task force identified the need for a revision in their contracts. There was investment in a power plant in Sahiwal and others by Chinese investors. There is an allegation of non-transparent non-arm's length transactions in these entities. There is a contract for LNG. The matter of pricing is in courts. Even the matter relating to return to investor on LNG terminal is not yet fully decided. In addition, there are very relevant cases against oil marketing companies for some alleged mishandling in the supply of furnace oil to the power sector. Notwithstanding the merit of these cases, the fundamental question is whether or not this manner of handling the most important economic sector of the country will ever be conducive for economic survival of the country. Is it a matter of prime time discussion on televisions? There may be various reasons for the same and I am convinced in many cases there may be serious breaches of transparency, however, in my view all these questions arise on account of the primary fact that we are not able to present certain hard facts about the power sector to our people. We as a nation are acting like an ostrich with its head buried in the sand. This culture of non-transparency and non-disclosure provides space to decision-makers to make mistakes, errors and indulge in corrupt practices. Who will decide whether it is a mistake, error or corruption? The obvious answer is the courts. However, in many such instances the underlying economic factors change so rapidly that by the time the case arrives before the court there is a complete change in the political landscape and underlying economics. The beneficiary is the person who made non-transparent decisions and the investors if they were collaborators, the victims, however, are people, industry and the state of Pakistan. At times the victim is the genuine investor when the state's commitments are not fulfilled or delayed extraordinarily. The issue of KE's tariff is a glaring example of such muddle.
In a period of over 35 years, despite huge claims, there is no mentionable reduction in (T&D) losses. This indeed is main reason for the subsidy by the state. Are there correct data on T&D losses available? On government files there has been an 'Unbundling of WAPDA however when one examines the financial statements and operational systems of PPEPCO, CPPA and Discos then one is not convinced whether or not the financial statements of Discos provide substance over form information of the transactions between PPEPCO, CPPA and Discos. Accountants are nudged to reexamine their opinions after looking into the question of substance over form. Almost all the Discos are not 'going concerns' under the prescribed norms of accounting. The purpose of this article is not to provide the dark side of the picture but only to identify and emphasise that this is not a subject for point-scoring for political reasons and not a matter of prime time discussions. It is a fact that, like many other subjects, this has not been handled well by all the governments in power in the past. Unfortunately, however, there is insufficient correction that needs to be accelerated. State and the people have suffered due to incompetence and corruption of the people in power. Let us discuss some primary issues which have to be totally clear before people.
On the basis of my preliminary workings there is a perennial difference between the cost of production and sale price of electricity in the country on overall basis. Cost of production is unregulated in certain respects whereas sale price (tariff) is completely regulated. In my view, sale price will remain so for at least another five to ten years. No recognizable reduction is possible in T&D losses due to lack of enforcement. In this situation, the general mechanism of 'market based pricing' may be a desire but not a socio-political reality in Pakistan. In my view, there is no escape from this situation. The state has to play its part in this relevant sector of the economy. The question, however, is about the extent and the manner. In case if it is assumed that sale prices at present are not to be increased on account of socio-economic circumstances then there will be a negative difference between sale price and cost of production of electricity in the country of around Rs 1000 to 1250 billion. This we decipher as circular debt giving an impression as if it can be liquidated although in reality this is a subsidy which the state has to provide directly or indirectly in aggregate to the electricity sector of Pakistan. This is not a political issue. The performance of any government cannot be gauged on the basis of the amount of circular debt or subsidy. It is a reality that cannot be ignored. The amount of Rs 1000 billion will continue increasing in coming months and years. In my view, there is nothing wrong with this if it is studied in the light of 'development economics', not the investors' return under the standards and measures prescribed by the multilateral creditors.
The first decision, and its acceptance by public at large, is that there will be a subsidy on electricity of Rs 1000 billion every year for at least five years. In case if anyone has any other view then they should present it so that it can be debated. The primary condition for that debate will be the economic conditions of the people and need for rapid industrialization. In this situation the question to be decided is the distribution of that bounty of Rs 1000 billion that should not be decided in the corridors of Islamabad? It should be made public and be discussed in a session of parliament with direct viewership for the people. The general perception is that this amount is siphoned off by high tariffs of IPPs, corruption in procurement, T&D losses and input suppliers like LNG etc. All such allegations may be right however at least for future there has to be a simple principle that all transactions will be at arm's length basis and the amount of subsidy of Rs. 1000 will be distributed equitably and transparently.
(To be continued)
Copyright Business Recorder, 2020
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