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Power Failure-Fueling Further Failure

The heart-breaking tale of how Pakistan’s power sector became a millstone around the national economy’s neck instead of fueling growth.

The story of Pakistan’s power sector is one of collective failure of the policy makers, civil and military governments, operational managers, and international lenders.  It would perhaps be no exaggeration to say power sector is an unmitigated disaster that has been a major drag on the country’s economic growth.

The national power grid is as large as the country itself. While in the care of the erstwhile Water and Power Development Authority (WAPDA), the sector suffered from unsustainable line losses, rampant mismanagement, and insufficient investment in system improvement.

During this period, when executives of lending agencies led by IMF, World Bank, and ADB pitched their loans along with policy prescriptions that bureaucrats and the governments found irresistible, the operational managers and engineers found their formulations incomprehensible.

Between 1985 and 1988, the energy sector emerged as one of the top priorities for the then governments and lending institutions as electricity tariffs started to increase through political decision making. By 1990, it was clear that the Wapda in its then shape had become unmanageable. Thus came the decision to separate the power sector from the Wapda’s water sector responsibilities as the share of imported fossil fuels in our energy mix began to rise.

But then the power sector has become more unmanageable 30 years later as reform initiatives were undertaken by successive civil and military governments. But the funding from lenders was used for budgetary support instead of going into system improvement and fostering performance and inculcating corporate good governance.

Many things changed over the decades but the one thing that remained constant was the missing good governance and professionalism. The situation would slightly improve when the Wapda was lucky enough to get a good administrator as its head, but slide back again after he was replaced. Also, even the good heads were administrators only – lacking the professional and technical chops required to lead a mammoth engineering establishment that needed to be profitable.

In 1991-92, a decision was finally made to unbundle the colossus called Wapda. Its power wing operations were further compartmentalised into thirteen corporate entities and put under the administration of the umbrella Pakistan Electric Power Company (PEPCO).

The Pepco was required to transform area electricity boards of the erstwhile Wapda into nine distribution companies, three generation companies (Gencos) running thermal power plants, and a transmission and dispatch company (NTDC) to procure power from Gencos and sell to Discos along commercial lines. A sunset clause required the Pepco to dissolve itself in two years’ time after completing the process and establishing thirteen corporate entities able to stand on their own feet.

The bifurcation of staff between Wapda and Pepco and the corporate entities took time. Simultaneously, the privatization of portions of generation companies was started by the government culminating in sale of up to 36 percent stake of Kot AdduThermal in the first stage (1995-96) followed by majority shares of a separate entity Karachi Electric Power Corporation in 2005.

Alongside, the regulator NEPRA was created to balance commercial interests among the private investors, the government and the consumers to minimize bureaucratic interference in commercial and business issues. The unbundling and corporatization process was completed within a few years but power division continues to control about 20 corporate entities through a dysfunctional Pepco that should have died about 25 years ago.

About this time, private sector investments were sought for power generation as public finances faced shortages and load shedding started to hit the consumers. Independent power producers were allowed in to the generation sector but their counterpart Discos were kept operating in their old cultures.

This was in spite of a variety of experiments. More than 40,000 army personnel led by a lieutenant general and assisted by a major general in uniform controlled the Wapda, Pepco, and Power companies for five years, before control was transferred to a private sector business leader and all-weather bureaucrats.

Notwithstanding all these measures, no meaningful improvement was seen and technical and distribution losses fluctuated in a close band of 1-2 percent. Finance results also moved up and down and poor recoveries and high losses remained persistent, leaving large gaps becoming part of the circular debt. Even the foreign funds were either misused or left unutilised in the absence of counterpart funds for investment in technology and projects of transmission and distribution at the level they deserved.

The upshot was that projects faced delays and investments remained limited mostly to the generation sector. The failure to match the expensive private sector energy production with an efficient transmission and distribution system continued to takea heavy toll on public finances and consumers.

Political instability leading to also played a key role in shaping this failure of epic proportions. It would, however, be unfair not to forget the ramifications of the nuclear tests and events like 9/11 terror attacks and war in Afghanistan that affected Pakistan’s internal and external priorities besides the fluctuating power demand in the country.

The witch hunt against local and foreign investors following surplus capacity contracts and resultant capacity payments without consumption increase commensurate with availability resulted in higher costs of investment, leading to more expensive contracts in the coming shortage cycle. The attempts to finance circular debts through privatization also faced political and regime change setbacks and no major entity could be handed over to the private sector.

As one of the lenders itself conceded later, it was clear that the commitment to reform and performance improvement of those working in the power sector had been neither complete nor consistent. Creating Pepco as a subsidiary of Wapda was bound to cause delays because some senior Wapda staff had a personal career interest in delaying restructuring.

Transferring responsibilities out of government and to the power regulator meant ministers and civil servants giving up powers they had exercised for many years, and this was also an inevitable source of delay. Having multiple agencies involved in the sector was also a certain recipe for delays as it became necessary to secure overall commitment to required changes, the ADB conceded years later.

The companies were registered as independent commercial companies with the Securities and Exchange Commission of Pakistan to ensure their financial and administrative independence through independent boards of directors. In practice, however, the companies are directly controlled from the power division and the prime minister office even today.

The Discos created in 1998 are still financially integrated and have uniform tariffs irrespective of the performance, inefficiencies, and technical losses (that vary between 40 percent and 10 percent) of individual companies. Their managers have no incentive to be efficient and no disincentive to poor performance. Small wonder the Discos continue to post losses.

On top of everything, the burden on honest consumers continues to grow as thieves pilfer power and others continue to refuse to pay their bills. Even after thirty-odd years, there are no key performance indicators for staff and managers of power companies against which to judge their performance, nor is there any proper mechanism for reward and punishment.

The power sector reform programme initiated more than three decades ago is a story of broken promises, unfinished plans, and half-cocked strategies. Unless the work culture is changed, governance structures are strengthened, and reward and punishment systems are put in place across the chain of stakeholders, managers, workers, consumers, policymakers and regulators, it would remain impossible to run the sector on sound footing.

That, however, needs political will and unwavering commitment from all stakeholders – tough asks both for our circumstances.

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