Politics of energy

The newly-elected PML (N) government released its energy policy amidst much fanfare. Ignored by the media was the last sentence of the second paragraph, “this document does not elaborate on issues surrounding operational strategy, nor does it lay out detailed implementation plans.” In other words, it is a strategy, a vision that leaves ample room for the government to change the time of implementation of specific actions as well as its operational strategy no doubt premised on the extent of opposition from the public or the private sector.

The policy’s objectives are varied but a start has been made in terms of attaining financial efficiency through implementation of three policy decisions: (i) elimination of inter-circular debt; (ii) a raise in tariffs; and (iii) a proactive approach to cut connections of bill defaulters as well as those with illegal connections.

The PPP-led coalition government, it may be recalled, implemented two policies with respect to achieving financial efficiency in the power sector: (i) elimination of inter-circular debt, around 300 billion rupees, through parking it in the Holding Company established as per the International Monetary Fund condition contained in the 2008 Stand-By Arrangement (SBA); Term Finance Certificates were issued for the purpose which increased the interest payment component of the budget and led to eventual escalation by banks to further increase their exposure to the power sector; and (ii) raising the power tariff across-the-board to reduce subsidies. However, tariffs were not raised by as much as required to achieve full cost recovery and in the absence of other reforms not only did the inter-circular debt resurface but also accounted for almost doubling of the budgeted power sector subsidies leading to a rising budget deficit.

The newly-elected government cleared the inter-circular debt in fiscal year 2012-13 at one go. Dar’s claim that it was from savings is simply too ridiculous to merit a comment. His insistence that the bulk of the debt be cleared by 30th June 2013 (and he had to compel the banks to stay open on Saturday to meet the deadline) was without doubt the reason why the 7.7 percent budget deficit he announced a day before the budget speech escalated to 8.8 percent on budget day. No economic analyst missed the significance of the timing of clearing the debt which has in effect enabled generating companies to begin operating at capacity accounting for approximately an addition of 1700 MW to the national grid.

The question is would the inter-circular debt reemerge like it did during the PPP rule? Musaddaq Malik, the Advisor to the Prime Minister on Water and Power, recently revealed that the debt is expected to rise to 400 to 500 billion rupees by the end of the current year if no other corrective policies are implemented. One such policy that has been implemented is the average rise of 35 percent in electricity tariffs on commercial and industrial consumers with domestic consumers expected to be slapped with a rate rise in the last quarter of the current calendar year. The returns on such a policy are immediate and needless to add a rise in tariffs is the easiest to collect – considerations that seem to guide our entire tax system which has rendered it extremely unfair, inequitable and anomalous.

The PML (N) government has begun implementation of a policy that the PPP-led government was unable to: going after those who steal electricity or fail to clear their bills. The policy envisages a three-pronged approach. First reports from around the country reveal that the newly-elected government is proactively going after energy thieves and non-payers with connections to entire areas cut off due to the high rate of a particular feeder’s customers’ not clearing their bills. Second the Ministry of Water and Power is targeted to sign performance contracts with generation and distribution companies and fuel transporters to hold them accountable for the quality and theft of oil; fuel procurement contracts would be open sourced to eliminate a single supplier and the policy states that “in the event that fuel is found to be missing or adulterated the full economic value of the fuel will be appropriated to the end receiver.”

The implementation of this has not yet been reported and one may assume that it is yet to be implemented. And thirdly while the policy envisages a federal adjuster with the capacity to cut the bill amount due of the government ministry/department at source yet there has no agreement with the provinces on this score in the Council of Common Interest. Thus public sector arrears estimated at over 100 billion rupees would not be cleared till such an agreement is made effective with several provinces arguing that the distribution companies routinely overstate their arrears – a credible charge.

The newly-elected government, however, has challenged and at the same time given a vote of confidence to the Independent Power Producers (IPPs) established during the premiership of Benazir Bhutto which the party had vigorously attacked at the time claiming corruption and nepotism in their award.

The PPP-led coalition government, including President Zardari, had periodically patted themselves on the back by maintaining that it was the IPPs that were by far the most efficient in generating electricity relative to state-run Gencos and hence the decision by the Bhutto led PPP government was fully vindicated. The energy policy 2013 acknowledges that the IPPs are indeed more efficiently run than the other Gencos but at the same time argues that heavier reliance on IPPs that use the more expensive imported furnace oil relative to hydel dams has led to rising tariffs.

The policy envisages: “allowing the fuel mix towards less expensive fuels will lead to low cost energy. Investments required for low cost fuel mix will necessitate rationalisation of the electricity tariff.” In other words, electricity tariffs would come down after the fuel mix is changed which would require massive medium and long-term investments. Given Pakistan’s current state of the economy, the government would be compelled to rely on foreign investment, from multilateral and bilateral sources, to fund this change. However attractive the energy policy it is unlikely that the foreign private sector would be interested in investing given the law and order situation in the country.

The energy policy also seeks to manage demand through raising rates at peak times, a tried and tested demand management policy, and improving efficiency of existing infrastructure, which would require massive investment. Finally the policy envisages the passage of legislation aimed at technology/product labelling standards which would ban the import of inefficient electronics in the country. One can just about imagine more than a mile long queue of aspirants for a job in determining product labelling standards and/or the rise in smuggling that would effortlessly compromise the implementability of such a condition. But one dud policy clause out of many good ones is perhaps easily forgiven. Not forgiven would be an inability to reduce load shedding.

A tailpiece: KESC has announced thirteen to fourteen hour loadshedding due to the refusal of the federal government to either retire its circular debt or release the tariff differential subsidy. The Water and Power Ministry claims that (i) KESC is different from other Gencos reliant on expensive furnace oil as the PPP-led coalition government had compelled NTDC to supply 650 MW cheap electricity to KESC for five years, and (ii) KESC’s proposal to the federal government to deduct the amount due from Karachi Water and Sewerage Board (KWSB) and release the 7 billion rupee subsidy is not possible as KWSB is a provincial department and not a federal one. There is a need to resolve the stalemate however that would not be possible till KESC is allowed to run its affairs as a private sector entity rather than be compelled to take decisions for political reasons.