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Rationale for power sector reforms

The Ministry of Finance informed a parliamentary body that the previous PML-N government had borrowed Rs. 180 billion to reduce circular debt, but the burden was shifted to consumers in the form of debt surcharge who honestly and regularly pay their electricity bills. The government has miserably failed to recover Rs. 850 billion from defaulter federal and provincial government departments, politicians, influential businessmen and industrialists. Officials of the Finance Ministry made the disclosure in a meeting of Senate Special Committee on power sector circular debt.

A lopsided power generation policy was implemented by the elected governments of PPP and PML-N. The clauses about the tariff and capacity charges and mark up payment in the agreements with power producing companies both foreign and local are loaded against the national interest. The circular debt accumulated over the last five years is Rs. 900 billion plus. The amounts include 40 percent debt liability on account of idle capacity charges and mark-up on loans that private power producers had obtained. This amount is regularly paid by consumers for the electricity which is not produced and consumed.

The PML-N government made shady deals with Chinese companies for coal based thermal hydro-power generation at the expense of the country and its people. Capital expenditure ( Capex) for the coal projects was about 40 percent higher than the international cost and coal power tariff was 8.4 cents per unit as compared to a tariff in many jurisdictions of five cents and below. In the meantime more evidence has emerged against irrational coal tariff that Chinese power producing companies will charge and for the payment of which the previous government agreed to create a revolving fund in the banking system. Recently there were bids for Jamshoro Coal Power Plant, wherein bids for Engineering, Procurement and Construction (EPC) contracts were one half than the contracts made under the CPEC framework.

Bidding got underway for 2160 megawatt (MW) first stage of Dasu hydro-electric power project, which is being constructed in the Kohistan district of Khyber Pukhtunkhwa under World Bank financing with reasonably low capital expenditure. The project has two stages with cumulative power generation capacity of 4260 MW. A recent bid was for electro-mechanical works including turbines, pressure shafts etc. In this case too there was a similar trend of rational capital expenditure. Bids were lower by 50 percent or even more to the similar projects that are executed under CPEC umbrella.

The hydropower projects which are being completed by Chinese under CPEC will alarmingly raise the power tariff in future. A comparative data of different projects shows that per unit cost vary widely. Karot has 2.03 times more the reference cost for Dasu, Kohala 3.31 times, Azad Pattan 3.97 times, Suki Kinari 2.38 times and Mahal 2.50 times. It shows how merciless the Chinese and self serving Pakistani political elite are. The power generation and distribution system equipment of China are much inferior in quality and reliability as compared with ones supplied by the companies of Germany, France and Italy.

There are two institutions that are responsible for such egregious cost variations—Private Power and Infrastructure Board (PPIB) and National Electric Power Regulatory Authority (NEPRA). The country needs energy but at competitive cost that can be afforded and make country’s export competitive in overseas markets. In this case none of the two are happening. Production of exportable goods went down because of lack of energy and its high tariff. If the trend set by the governments of two mainstream parties of awarding contracts at high capital cost continues in the next elected government exports will suffer more due expensive energy inputs. Due to sagging exports and rising imports, particularly petroleum products, the current account deficit is widening, adding to Pakistan’s external financing risks, according to report released by Fitch credit rating agency on Tuesday.

Power sector urgently needs drastic reforms aimed at lowering electricity tariff. A more vigilant oversight EPC bidding process has to be introduced. It cannot be left to the discretion of sponsors because the cost and penalty is passed on to the consumers under cost plus tariff As a result phony contractors are invented by sponsors with resultant impact on cost. Breaking the EPC into a number of components and inviting separate bids for them in hydroelectric projects will be in order. It is time to revise list of CPEC projects along with some meaningful negotiations with the Chinese government. The focus should shift on more competitive projects like, solar, wind and hybrid of solar and wind. There is dire need of 10000 MW low cost electricity, bringing the average tariff down and reduce fuel imports.

 

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