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ISLAMABAD: The privatisation of distribution companies (Discos) may lead to private-sector monopolies in the absence of a competitive electricity market in Pakistan, an effective regulatory regime and contract enforcement, the World Bank has warned.

The Bank in its report “Public Expenditure Review 2023” stated that state-owned enterprises (SOEs) in the power sector presently are state monopolies. Based on the K-Electric (KE) experience of higher tariffs and little improvement in service, the privatisation of these SOEs is perceived as the emergence of private sector monopolies and regulatory capture by the deep pockets.

There is also organisational resistance to privatisation because of the potential loss of rent-seeking opportunities. Non-resolution of circular debt, gap between cash inflows from Discos and outflows to power suppliers on a sustainable basis has also undermined the privatisation process.

Power sector woes: ‘Privatisation’ of Discos emerges as long-term solution

The reasons are weak governance, political appointees in the boards and the regulator, government directives, technical, operational, and commercial inefficiencies and leakages, a tariff-determination framework and tariff-differential subsidy regime, and lack of sufficient incentives for the Discos to improve their financial and operating performance, as they are regularly bailed out by the government. Participating in privatisation also hurts the confidence of the private sector.

The Bank stated that privatisation in Pakistan can be divided into three distinct phases: 1989–1999 (political governments), 2000–2008 (military and quasi-military governments), and 2009–to-date (political government). In the first phase, 104 units were sold for Rs 59.3 billion, 54 SOEs were privatised for Rs 416.8 billion during the second, while 14 entities have been sold/ privatised for Rs 173 billion since 2009.

Energy sector SOEs have the largest asset base, with 51 percent of total SOE assets. However, they also have the largest liabilities (47 percent of the total), followed by the infrastructure and transport sector, with 33.5 percent of total assets and 20 percent of the liabilities. They are followed by the financial SOEs, with 28.6 percent of total assets and 26 percent of the liabilities.

Commercial SOEs have a combined asset base of Rs 22,944 billion (48 percent of GDP) in fiscal year 2020, and they account for over 99 percent of the total SOE assets.

The commercial SOE assets have grown by an average of 10 percent in the past 5 years, with the power sector seeing the highest growth. However, the growth in power sector assets is partly attributable to the accumulation of receivables, that is, the non payment of electricity bills, rather than capital infrastructure.

The report further noted that net inflows from federal commercial SOEs to the federal government budget were negative, averaging 0.9 percent of GDP over fiscal year 2016–21. Revenues remitted by the SOEs in the form of taxes and dividends, which averaged 0.4 percent of GDP over the period, was significantly lower than government direct transfers to the SOEs, which averaged 1.3 percent.

The Bank has recommended to divest loss-making SOEs, especially those in sectors where there is no clear rationale for government involvement, further strengthening SOE governance through the implementation of the new SOE law, strengthening the capacity of the SOE Central Monitoring Unit for improved financial management and performance, and by institutionalizing performance monitoring.

Copyright Business Recorder, 2023

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Tulukan Mairandi Oct 10, 2023 09:46am
Yup. Thats the plan. To milk the masses
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Mahboob elahi Oct 10, 2023 01:56pm
How many times the World Bank guys would change their views...
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