Circular debt: PM reprimands PD for supporting Pepco's existence

The Power Division has reportedly been reprimanded by Prime Minister Shahid Khaqan Abbasi for seeking to support the existence of Pakistan Electric Power Company (Pepco) which is responsible for increase in circular debt, well-informed sources told Business Recorder. Giving the background, the sources said, Power Division submitted a summary to the Cabinet Committee on Energy (CCoE) for continued existence of Pepco, an organisation which controls Discos.
The Power Division stated that pursuant to the Executive Order of the Prime Minister on October 24, 1998, Pakistan Electric Power Company (Pepco) was set up in 1998 for implementation of the reforms programme for privatization of power wing of WAPDA, and was made responsible for operations & management, monitoring and oversight of the companies falling within the operational purview of the then Ministry of Water and Power, ie, Discos, NTDC and GENCOs through management control under a Memorandum of Agreement (MoA) between WAPDA and Pepco for a period of two years. Subsequently, in 2010 the Cabinet Committee on Restructuring of Public Sector Entities (CCoR) restructured the Boards of the Companies, giving a majority representation to independent directors and empowering the Boards to independently manage the affairs of these companies.
It was later decided by the Cabinet, in its meeting held on October 12, 2011 to dissolve Pepco and establish Central Purchasing Agency (CPPA) as its successor. The Ministry consequently directed Pepco to transfer all HR record to the respective entities. However, through a subsequent directive, the Ministry stopped transfer of HR record to the entities.
Since then the Ministry was granting yearly extensions for not transferring HR record to the entities and the Memorandum of Agreement was being unilaterally extended by the Board of Directors Pepco, with last extension made upto June 30, 2019. NTDC & few Discos staff have instituted writ petitions in Lahore High Court against transfer orders by Pepco wherein legal authority of Pepco has been challenged.
The Power Division further stated that the Federal Cabinet's decision of October 12, 2011 has neither been implemented nor revised or modified the authority of Pepco though the role of holding performance review meetings and monitoring of Discos, GENCOs and NTDC was assumed by the Ministry. Resultantly structural distortions relating to tariffs, subsidies etc have increased over time and financial discipline in Discos is not being maintained. Moreover, integrated development of power generation, transmission and distribution network could not take place. The deterioration of governance and HR development is as follows: (i) eight MDs were posted in Pepco since 2011, seven of them were appointed through additional charge among the officers of the Ministry;(ii) during last 5 years the turnover of officers in Discos alone at a single place of posting was either too short to perform or too long to maintain zeal; and (iii) in eight out of the ten Discos, the tenure of CEOs was either a year or less during the last five years.
Power Division apprised that CPPA-G was incorporated in 2015 with the core functions as power market operator excluding all other governance related functions that Pepco was performing. Ministry of Energy Power Division has intervened from time to time to rigorously monitor the performance of the companies, but despite best efforts, the performance of the companies especially that of the Discos has not improved.
Power Division said that reasons are two-fold viz: the Ministry by design does not and cannot have requisite technical expertise and secondly the size of companies is too large to have an effective control over their performance, the only solution of power sector mismanagement and reduction in losses was introduction of technology and privatization of the worst performing entities. In the interim period professional oversight and monitoring of performance of Discos was imperative. Besides that, Discos were wholly owned by the Government of Pakistan. According to Rule 8(1) of the Public Sector Companies (Corporate Governance) Rules, 2013 as amended up to April 21, 2017, the performance evaluation of members of the Board including the chairman and the chief executive must be undertaken annually by the Government for which the Government would enter into performance contract with each member of the Board at the time of his appointment.
It was stated that the Power Division, would require a robust technical arm for its assistance to address such issues. Therefore, in the transitory period till privatization of the Discos, Pepco with a restricted and focused role vis-à-vis governance of only Discos was inevitable to assist the Ministry to oversee and ensure best practices with regard to their corporate governance, commercial, financial and operational performance.
The Power Division requested the Cabinet Committee on Energy to recommend approval of following to the Federal Cabinet: (i) to review its previous decision of December 12, 2011 and approve continuation of role of Pepco for monitoring and supervision till Discos are privatized; current budget for Pepco for the year 2017-18 is Rs 745 million;(ii) Discos shall appoint Pepco as their managing agent for monitoring, co-ordination and supervision :(i) a full time MD is appointed for Pepco; (ii) performance contracts shall be signed between members of Discos ' Boards and Pepco on behalf of the Federal Government as per Rule 8(1) of the Public Sector Companies (Corporate Governance) Rules, 2013 as amended up to April 21, 2017 and ;(iii) NTDC and GENCOs Holding Company Limited shall report directly to the Ministry of Energy Power Division for the transmission and generation sectors instead of through Pepco.
During ensuing discussion, on a query of the Prime Minister, the MD Pepco revealed that Pepco under their mandate has been monitoring the performance of Discos, GENCOS and NTDC since its establishment. They collect data of demand and supply of power losses from all Discos on daily basis which is further transmitted to the Power Division in a consolidated form for evaluation. Pepco also facilitates Discos in calculation of their taxes. He further stated that currently, 211 employees are working in Pepco, out of which 50 are officers, whose services have been borrowed from Discos on deputation.
The Prime Minister observed that Pepco was not performing its role effectively. Consequently, losses [due to theft, less billing and less recovery] of majority of Discos have increased substantially, which was the main reason for piling of circular debt.
He observed that in the current scenario there is no justification for further existence of Pepco. The Secretary to the Prime Minister endorsed the remarks of the Prime Minister. He stated that the Board of Directors of Pepco has no authority to grant extension to Pepco.
However, the board unilaterally has granted extension to Pepco up to June 30, 2018. He further stated that Pepco has failed in performing its role as per given mandate. The Minister for Power agreed with the views of the Secretary to the Prime Minister. He suggested that Pepco may be allowed to continue to work up to their extended period ie June 30, 2018 and in the meantime an alternative to this entity may be explored.
Secretary to the Prime Minister also suggested that Establishment Division may be directed to lift the condition of seeking its prior permission by the Ministries/ Divisions for recruitment. After absorption of all surplus staff there is no need to seek NoC from Establishment Division for fresh recruitment. The Prime Minister desired that Power Division should analyze/ assess the existing role of Pepco keeping in view its given mandate and achievement and its continuity in future setup. The Power Division should also examine whether role of Pepco can be strengthened in the proposed restructuring plan of the Power Division for effective monitoring of Discos to ensure minimum losses.
After detailed discussion, the CCoE decided on a summary titled " effective management of Power Distribution Sector - Restructuring of Pakistan Electric Power Company (Pepco)" and decided as follows : (i) directed Power Division to analyze/ assess the existing role of Pepco keeping in view its given mandate and performance as well as its continuity in future setup. Power Division should also examine whether role of Pepco can be strengthened in the proposed restructuring plan of the Power Division for effective a monitoring of Discos to ensure minimum losses and;(ii) directed Establishment Division to lift the condition for seeking its prior permission by the Ministries/ Divisions for fresh recruitment, including placement of advertisements, which had been introduced under a specific set of circumstances following devolution to ensure that surplus staff of devolved Ministries was absorbed before fresh recruitment.