ISLAMABAD: The Cabinet Committee on Privatisation (CCoP) has deferred approval of the Power Division’s proposal to give Discos management to private sector on long-term concession agreement basis, seeking more information and comprehensive replies to questions raised by other ministries, well-informed sources told Business Recorder.
The CCoP met on February 7, 2024 under the chairmanship of caretaker Minister for Privatisation, Fawad Hasan Fawad.
“The CCoP has deliberated on the summary of Power Division and deferred the decision with the direction to submit further information and para-wise answers of comments of other Ministries,” the sources said, adding that the issue will be sorted out in the next CCoP meeting.
The Power Division in its summary apprised the CCoP of summary’s background saying that power sector’s long-standing difficulties stem primarily from the operational performance of the 10 Distribution Companies (Discos) under Power Division.
The key challenges of these Discos are poor governance and inadequate investment. For these Discos: (i) technical losses have fallen marginally from 18.46% to 16.48% in the past ten years; and (ii) collections have risen marginally from 87% to 90.5% of billing in that decade.
Meanwhile, the value of electricity tripled, sending circular debt to Rs. 2,310 billion and Discos receivables to Rs. 1,786 billion in June, 2023. Discos losses in 2023-24 may reach Rs. 589 billion.
Power sector reforms launched in the late 1990s intended privatization of the Discos, but this step was never achieved and Discos have worked in traditional mode rather than as corporate entities.
The result is reflected in their dire financial health. Now, a paradigm shift is required to stop the sector’s financial haemorrhage and its threat to macro-fiscal balance.
In line with earlier decisions, Discos were placed on the active privatisation list but the process of privatisation could not move forward. During the tenure of previous government, a committee on transfer of Discos to provinces was constituted. The committee submitted its report to the then Prime Minister who directed that the summary may be placed before the new Cabinet.
During the meeting of Executive Committee of SIFC held on 26-27 September, 2023, Minister for Privatisation suggested adoption of an appropriate course for transferring management of Discos to private sector. Apex Committee of SIFC during its meeting held on October 4, 2023 considered and agreed with the proposal and noted that the “recommendation of Minister Privatisation regarding private sector participation in management of Discos , including management contracts/outsourcing, was approved.
Summary for Cabinet would be moved to reinstate the earlier decision of the Cabinet regarding private sector participation and annul the option of provincialisation. The concession mode outsourcing will be discussed and firmed up on the proposal to be presented by Minister for Energy and Minister for Privatisation in next EC meeting.“
To come up with a workable solution which brings a private sector-oriented culture governance and management, modern expertise, information and communication technologies, and adequate investments to the Discos, Ministry of Energy (Power Division) undertook extensive consultations during the last three months with the relevant entities and IFIs to: (i) develop model for private sector participation suited to Pakistan’s ground realities; and (ii) identify key policy decisions with a clear action plan.
The Power Division maintained that there is unanimity that transferring the Discos to the provincial governments is unlikely to lead to required strategic shift. Further, provincial authorities have also attached a number of conditions for taking over the ownership of the respective Discos which may not be conducive for improving operational performance and may delay the process further.
While there is consensus that privatization is the best solution, there are strong arguments such as legal and political pressure on account of the valuation of assets. The argument of sale at throwaway prices and why it should be pursued at a later stage persist. Foremost, sale of government assets has often come under legal and political pressure on account of the valuation of the assets. The argument of sale at throwaway prices has the potential to derail the whole process. Further legacy issues of the ownership of assets (Discos vs WAPDA) still exist and have been major hurdle in privatisation.
The long-term concession model has delivered the benefits of private participation in Turkey, Argentina, Brazil, Uganda, etc, without outright sale of government assets under which: (i) the rights to operate the DISCOs are offered to private party for a long-term duration (typically 20-25 years) with clear obligations for investment; (ii) the concessionaire’s financial incentives are tied to improvements in Discos operations; (iii) the concessionaire typically invests in the initial period and recoups investment over the entire concession period creating a strong stake of the concessionaire in the Discos success; and (iv) the regulator oversees the concessionaire’s performance while government conducts third party audits to ensure compliance and to impose penalties for failures.
Under such concessions, Turkey’s twenty Discos attracted much larger private investments than under public sector, much better service quality for consumers, losses cut by a third in a decade, job security for most DISCOs staff for first five years and only 3-5% long-term increase in tariffs. A similar experience is required in Pakistan whereby government agrees with concessionaires on a gradual reduction in government liabilities through loss reduction without a significant increase in tariffs. Discos will then secure much better value from privatisation.
The GoP has committed to the IMF that it will engage a Transaction Advisor for long-term concessions of Discos by end-April 2024. The World Bank has offered (i) grant-based technical assistance and (ii) its risk guarantee instruments which give greater confidence to prospective private concessionaires and their lenders. IFC has expressed interest to provide transaction advisory services using its global experience with concessions.
Based on the existing situation, Power Division argued that concession model will bring desired results for Pakistan. To start with, two smaller Discos, one from the better-performing (GEPCO) and one from the worse-performing (HESCO), may be earmarked. Sequencing of other Discos may be done on the advice of transaction advisor.
An Action Plan for the proposed scheme has also been given final shape . Other specific approvals include: (i) delisting of all Discos from Provincialisation and Privatisation lists; (ii) offer Discos through concession model; (iii) constitution of Ministerial Steering Committee under the chairmanship of Minister for Energy along with Minister for Privatisation, Minister for Law and Minister for Planning; (iv) constitution of Technical Working Group under Power Division to support the Ministerial Committee with composition to be determined by Minister for Energy as per requirement; (v) appoint IFC as Transaction Advisor; and (vi) Action Plan with responsibility matrix and time lines.
Copyright Business Recorder, 2024