SBP calls for power sector overhaul

The special section in the SBP’s latest State of Pakistan’s Economy report on the fiscal burden of State-Owned Enterprises (SOEs) in the power sector is all what you need to know what is wrong with the system, its extent and the possible solutions to the mess that it is. The SBP rightly points out that efforts such as issuing Sukuks worth Rs200 billion would only work in the short-term, recommending a massive overhaul of the system (also read: Sukuks to the rescue, published Mar 7, 2019). And nothing short of a massive overhaul is what is needed, in all fairness, and soon too.

The special section details how the inefficacies have been allowed to nurture in the overall power generation and distribution chain. And how the inability to target the subsidies, and price the power in relation to costs, have led to such a massive circular debt stock, which to some estimates had crossed Rs800 billion by December 2018.

When it comes to energy sector losses, it is only the power distribution chain that is solely responsible for the grim reading. The practice of incentivizing inefficient discos under the subsidy blanket at the cost of better performing ones also caught the SBP’s notice. This space has repeatedly maintained that performance parameters and yardsticks for good and bad performing discos should be separate, in order to create a more efficient chain.

But the need of having a unified tariff across the country, would not let that happen, and not only the discos have been consistently allowed higher T&D losses, there is hardly any penalty on missing them. There has been zero improvement in terms of T&D losses over the years. In fact, in most cases, discos are now being told to be more inefficient, having been allowed higher T&D losses in the final tariffs than earlier.

It is hardly surprising that even the best performing discos in terms of recovery and T&D losses, such as Fesco, Gepco and Lesco, have turned into loss marking entities. The T&D and recovery rates of these discos are at par with those in the developed countries, but have turned into loss making units after FY16. Here comes the governance, policy, and regulatory aspect of the equation. The procedural delays in tariff announcement and implementation in some cases have resulted in the best performing discos making net losses.

Then there is the inefficiency on part of the government, which delays paying the subsidy amount. The case of Qesco is a prime example, where the recovery ratio has worsened from 80 percent in 2010 to 44 percent today. Consumers stopped paying beyond a certain limit for over two years, and the backlog continues till date. Even the government owns no less than Rs45 billion to Qesco.

Since privatization does not appear on the menu, the distribution system needs massive up gradation. The need is to rationalize the subsidy and invest in the system. Discos cannot be expected to finance the process, given the cash flow constraints. The structural and regulatory issues need to be sorted out as well.

The system must run on commercial basis. Price distortions must end. The blueprint prescribed by SBP is not anything new. It has been known to those who matter. It will all boil down to the willingness, ability and capacity of the concerned authorities to do the needful.