Federalism and electricity

Electricity is largely a federal subject in our constitution with some role for the provinces in small-scale power generation and the sector being under the oversight of the Council of Common Interest (CCI), although some confusion persists as evidenced by the formal and informal role of provinces in policymaking and investments. Sindh Chief Minister, Syed Murad Ali Shah has warned Hesco, Sepco and Wapda to pack up or stop the disconnection operations in Sindh or something to that effect. He said the Sindh government could handle its electricity sector itself. It is not the first time that a chief minister of a province has expressed a desire for autonomy in the electricity and energy sector as a whole. Earlier, similar statements have also been issued by the KPK on the issues related to tariff, hydro royalty and autonomy. Although self-control and management is a longer-term issue, more practical issues are at stake momentarily. Small provinces are a beneficiary of pooled pricing, but the provincial governments are behaving as free riders by not supporting the elimination and control of electricity theft drives launched by Discos.
Pakistan is a federation like the US, Canada, Australia and Germany with a difference that the US has a presidential system, while all others including India and Pakistan are parliamentary systems. Our erstwhile colonial master, the UK, has a unitary system, something that we tend to forget while trying to ape our masters. In the developed countries, the confusion and controversy of federalism and self-control are much less limited due to the role of the market. In federations, electricity generation, for example, is not in the government domain, federal or provincial (it is market-based, prices being determined by specialized commodity exchanges). Transmission and inter-state trade is normally under federal control. The provinces have provincial transmission under their control as well. Distribution is almost everywhere under the provincial or in some cases in the local government control. However, federal or provincial control in market economies does not mean the ownership or management. Companies normally own and operate the facilities under the regulatory framework of the government.
The problem becomes much more complicated in countries like ours, including India, where most of the electricity sector is owned and operated by governments. And when it is the government, there arises the controversy of federal or provincial. In Pakistan, there exists a co-operative federalism. We do not leave the provinces on their own but share the burden of each other. For example, there is same price of petrol or of electricity from Karachi to Chitral. In other commodities such as Fertilizer and wheat, perhaps, there is somewhat similar system. In electricity, prices are pooled and averaged which come from varied cost of generation in provinces. This has a lot of merit and has served us well, although WTO types might disagree.
Pooling has its problems as well, as we are seeing in the case of electricity sector, which is beset with the problems of losses such as theft and receivables. In Punjab (except Mepco whose losses are 20%), the losses are generally around 10%, while in all other provinces, the losses are in the bracket of 25-35%. However, things are more complicated than this. The cost of hydro electricity of KPK is very low and likewise the cost of gas-based electricity of Sindh and Balochistan is also low. KPK people are of the view that hydro electricity of Rs 3.00 (earlier of Re 1) is taken from them (although not exactly, as Tarbela and others are all federal investments) and resold at Rs 10. When you ask them as to what would they do in winters when there is no hydropower, they have no answer. Now, the KPK's royalty has been doubled and it gets around Re 1.00 per unit. They are flush with royalty income, so much so that they are investing the royalty income in arguably inefficient projects. The era of cheap hydropower is almost over. New hydro projects' cost of generation (Rs 8.00) is now almost the same or even more than other sources such as gas (Rs 6.00 per unit) due to ever-rising CAPEX of around 3.5 million USD per MW.
It is shifting sands. Commodity-based nationalism or sub-nationalism has short life or rationale. Bangladesh was made in large measure, based on jute. In 1971, jute earned a lot of foreign exchange. Today, jute has been superseded by plastic. Earlier, Balochistan used to be a major producer of gas but now Sindh is the largest producer of gas at present, which may again be superseded by RLNG and fast upcoming of KPK gas fields. Ultimately, renewable energy such as solar may be replacing oil, gas and coal. Solar is everywhere. Minerals used to be a major concern of political economy and raw material for conspiracy theorists. Recycling and synthetics have diluted the role of minerals and will continue to do so.
Power is a capital-intensive sector. Lot of external political issues influence this sector. It is highly unlikely that provinces alone would have the wherewithal, including finance, management and other resources to go alone in this sector. Look at Thar, despite Sindh government's successful struggle of gaining full control (which wasted a lot of time by the way), Thar coal and power project took so much time. Federal guarantees had to be given despite a 49% private equity and a higher tariff. And all other Thar projects would come under the China Pakistan Economic Corridor (CPEC), otherwise there would be no other possibility. And also federal government would have to restrain Punjab government from installing imported coal power plants. If not, where would the Thar electricity go. Where is the market and who would invest in Thar. So there is a merit in co-operative federalism of sharing strengths and weaknesses and opportunities and threats. Specially, when all of us are weak and poor, we need more co-operation. I do hope that we grow so rich that one brother may not need the other, as is the case usually.
In the past, federal government has offered Sindh government to take control of electricity distribution and even Pakistan Steel Mills (PSM). Interestingly, the wise men of Sindh only want to have management control and not ready to bear the cost and want to continue to be a free rider. It would be childish to try to take over Discos and PSM and afford losses to the tune of billions.
Smaller provinces should stop acting as free riders and cooperate with the federal government in reducing losses and theft. All are involved, irrespective of poor or rich, private sector and government departments. These losses cannot be reduced without active co-operation of the provincial governments. In the smaller provinces and to some extent in large one as well, it is difficult for the provincial governments to take action against influential people. Thus, wiser approach would be to let the Discos continue with their campaigns and indulge only in lip service to support the locals.
We are passing through an energy crisis and hopefully by 2018, this should be over with the completion of new projects. After this period is over, some tinkering may be possible with the system. In the long run, all provincial and federal governments may consider and evaluate alternative models a la in India, where there is larger provincial role in the electricity sector and do a cost-benefit analysis. Electrical sector in India, under provincial domain partly, is not in ideal condition (In Indian model, generation, within province transmission and distribution are managed by provincial boards. There is provincial regulator and independent provincial tariff and thus no pooling with other provinces. There is, however, inter-provincial trade option. There is load-shedding all over, despite having coal and other advantages. We should try to improve the current system by enhancing the performance of Council of Common Interest (CCI), while the federal government should take steps to reduce the informal and de facto influence of the government of Punjab on its determinations. Just must be done and it should appear that justice is being done.
Ministry of Power and Natural Resources (MoP&NR) has commissioned a restructuring study of the petroleum sector. The ministry may consider commissioning a similar study, which may involve consultations with the provinces. Neither decentralization should mean anti-federation nor is the talk of centralization to be taken as patriotic. These are administrative issues of which cost-benefit analysis and consideration are to be more important in order to maintain a sector that is viable and is able to attract investments. The CPEC has temporarily solved the problem. This grapevine may not always be there with that kind of funds. Indeed, CPEC's energy sector investment has been possible, among other factors, due to the availability of a reasonable and well-structured power policy that has been developed and improved upon over the years. One has to remain open and eligible from all sources.
Excessive centralization and preponderant role of Punjab thereof led to the passage of 18th Amendment. There are people who are not satisfied with the implementation of the 18th Amendment and would like to expand its scope and there are others who have doubt whether the 18th Amendment has been successful in delivering the provinces what was expected under it. It is true that there are capacity issues in the provinces. A review appears to be in order with a view to improve upon it. As it is said that problems of democracy can be solved by more democracy. In the same way, the proponents of autonomy and decentralization argue that the failures cannot be made an alibi to wind up or dilute the process of decentralization. It is the competitive aspect of decentralization that is often forgotten and has to be stated here. Under a federal monopoly, there is no competition under decentralization, provinces compete with each other, not for federal funds, but for investors. The latter are often at the mercy of one federal entity, while in provincial systems they have more options and flexibility. Secondly, governance has a lot of bearing with decentralization. Bureaucratic structure has not been altered accordingly in the wake of 18th Amendment. Provincial bureaucracy is largely limited to Grade 20, while provinces are now required to handle the whole sectors of education, health and others independently. It cannot be done by the junior officials. There is a case for upgrading the provincial bureaucracy to the federal level of grade 22, at least in selected sectors. Planning Commission has recently prepared a report on governance reforms, which should be given due consideration to improve the governance. Forces of status quo appear to be prevailing these days for whom classical system is untouchable, if the recent decision on the appointment of DCs in Punjab is an indicator. General elections are around the corner and any major policy decision has to wait till then. Albert Einstein said: "Life is like riding a bicycle; in order to keep the balance, one must keep moving." So let us see how we can move in this issue without falling down on either side. Democracy is a very good bicycle that we may have to learn to drive.
(The writer has until recently been Member Energy Planning Commission)