Another strong indicator suggesting Discos need to turnaround is their contribution to the circular debt, which has been affecting Pakistan's power sector and its socioeconomic landscape for years now. Apart from poor performance of ex-Wapda Discos, the Ministry of Finance has also been accused of further aggravating circular debt by delaying subsidy payment to power producers. However, overall Nepra's unrealistic assumption with respect to 100 percent bill recovery by power distribution companies and average line losses in tariff determination, has been considered a major factor behind the surge in circular debt. Therefore, continuing the reforms is crucial to achieving power sector transformation in Pakistan.
This would also entail sustained efforts to achieve the unmet targets from the 12th Review Report of Pakistan's Extended Fund Facility programme released by the IMF last year. For instance, establishing a multi-year tariff framework for ex-Wapda Discos was outlined as a key factor to prepare for their privatisation and strengthen the regulatory framework. It was recommended to notify multi-year tariffs for three distribution companies (FESCO, LESCO and IESCO) by July 2016 but it could not be achieved, due to unrealistic benchmark setting for distribution losses and collection targets used in the determination of the FY 2015/16 tariff.
Notifying performance based multi-year tariffs for aforementioned ex-Wapda Discos was a necessary step to attract private sector participation, reduce uncertainty for investors and move forward with the gradual setting up of a multi-year framework for the remaining ex-Wapda Discos. Pakistani authorities in their letter sent to the IMF last year also agreed that starting with FESCO, followed by IESCO and LESCO, ex-Wapda Discos would be offered for sale in the stock market through IPOs and the proceeds from these IPOs would be utilised to reduce the stock of outstanding circular debt. However, given the high level of regulatory uncertainty around ex-Wapda Discos tariff and their poor financial performance these plans may never materialize.
Currently, the only performance-based multi-year tariff in local power utility sector is awarded to K-Electric, which became profitable for the first time in 2012 after decades of running in loss. Recently a Chinese company expressed its interest in acquiring majority stake in KE which would be the largest such transaction in Pakistan and can be considered as a prime example of the benefits of privatisation. However, the very recent tariff determination issued by the regulator seems to adversely affect the progress made by the company while discouraging investment in enhancing the power infrastructure of Karachi.
As the government is seeking private sector participation in the power distribution landscape, it should incentivize tariff instead of making distribution business highly unattractive through unrealistic benchmark setting, extending no business risk protection and offering lower returns. This scenario doesn't support the agenda for DISCOs of attracting private capital and in fact adversely affects the overall vision to create a more efficient and private competitive market.
A stable electric power sector is critical to spurring growth in various other economic sectors in Pakistan and one of the foremost steps to strengthen its soundness is to continue the power sector reforms. The framework should encourage private capital which will generate more employment opportunities, enhance industry competitiveness and cater to the expected increase in power consumption as Pakistan becomes more developed.
Copyright Business Recorder, 2017