Pakistan Restructures

Pakistan Restructures

August 01, 2002
The Pakistani regulatory authority allowed an unprecedented increase in electricity prices on average from 9% to 21% per kilowatt hour affecting some 10 million consumers across the country, excluding Karachi, on July 18.

However, President Pervez Musharraf asked that implementation of the tariff be put on hold in late July as the NewsWire was going to press. He directed the National Electric Power Regulatory Authority, or “NEPRA,” to review its decision.

The increase would have varied for different consumers and for different consumption slabs for each consumer group. It was expected to yield more than $3 billion to 12 corporate subsidiaries of the Water and Power Development Authority, or “WAPDA.”

The regulatory authority had viewed the increase as a fair reflection of WAPDA’s financial needs to facilitate its rehabilitation for providing reliable service to consumers. The increase was less than WAPDA requested. President Musharraf asked WAPDA to put the increase on hold because of the burden it would have imposed on the common man.

WAPDA asked for the increase because it has been losing money due to higher fuel prices and has had to rely on massive budgetary support from the government. However, that support has now been disallowed under government arrangements with the international financiers. WAPDA’s petition was opposed by the Planning Commission, all four provincial governments and a large number of other intervenors and experts.

While the tariff request was pending, the Ministry of Finance weighed in with news of its commitment to the international lending agencies to take certain administrative measures, including a structural tariff increase. NEPRA had little choice under the circumstances; it approved the increase, though at a much lower level than WAPDA had requested. WAPDA had hoped to cover a shortfall of nearly $9 billion over 15 months.

The Karachi Electric Supply Corporation, or “KESC,” has also asked for a similar tariff increase. A decision on the request is expected in August. Public hearings on the request were completed on July 17.

Major Reforms Underway

The challenge the government faces is to improve the finances of WAPDA and KESC while keeping the economy running in good health. The utilities must reduce line losses by revamping the distribution system and controlling pilferage, by converting some power plants from furnace oil to gas, and by improving the quality of service. WAPDA and KESC not only generate electricity but also transmit and distribute it. The Pakistan Atomic Energy Commission and private power plants also generate power and sell it in bulk to WAPDA and KESC. Total nominal generating capacity in Pakistan is 18,062 megawatts, of which two thirds is in the public sector. Hydroelectric power accounts for 28% of the total while the rest of the capacity is thermal. Most capacity additions in recent years were thermal, and the share of hydroelectric power was reduced from 70% to the present level. The government is now taking steps to promote more hydroelectric power, as it is a cheaper source of supply.

The number of electricity consumers in Pakistan is 12.5 million: households 46%, industry 28%, agriculture 12%, bulk supply 9%, and the remaining 5% are commercial establishments. For faster economic growth, Pakistan must have more reliable power at competitive prices.

The power wing of WAPDA has been restructured into 12 independent companies: eight distribution companies, three generating companies and a transmission company called the National Transmission and Dispatch Company, or “NTDC.” The Pakistan Electric Power Company, or “PEPCO,” oversees all these corporatized entities. Ultimately, the eight distribution companies and three generating companies will be privatized.

NTDC is expected in due course to replace WAPDA as the buyer of wholesale power, including substituting for it under existing agreements. Contractual arrangements among different stakeholders will not be simple. When all the arrangements are finally in place , NTDC will sell power in bulk to the eight distribution companies and KESC. The distribution companies will supply power to consumers in their geographic regions.

The assets that were earlier under the administration of the power wing of WAPDA are in the process of being transferred to PEPCO, NTDC, and the new distribution and generating companies. Valuation of assets being transferred to each new company is critical. Matching liabilities are also to be transferred. The government has already converted its substantial loans to WAPDA into equity.

The privatization of KESC is already underway. The KESC balance sheet is being cleaned up with a view to making it more attractive to prospective private bidders. The government has already picked up KESC’s accumulated losses and injected a large amount of cash to keep it going. KESC is expected to retain all its existing generation, transmission and distribution assets after privatization.

Other Challenges Remain

The government has already extended significant financial support to WAPDA and KESC. The increase in the tariff will help. However, other challenges remain.

Both the WAPDA and KESC systems suffer frequent breakdowns and interruptions in service and have abnormally high line losses. Both utility operations are in the red. Complaints about delays in new connections, wrong or inflated billing, and breakdowns are common. The attitude of the employees is generally unfriendly and bureaucratic. WAPDA and KESC have initiated measures to improve operational and management efficiency to redress the situation, but it will take time.

The unbundling of WAPDA, as part of the reforms of the power sector, is a complicated process, particularly when it comes to the division of assets, allocation of liabilities, transfer of contractual arrangements pertaining to supply of fuel to generation companies, and the sale of bulk power to NTDC and distribution companies. The government probably needs to inject additional capital into the new companies so that they are in a position to sustain themselves. The position will become clear after assets and corresponding liabilities are finally transferred from WAPDA to the new companies.

The conversion of government loans to WAPDA into equity and the fresh injection of cash to cover operating losses will make the government the majority shareholder in the new companies. Therefore, the government will have a major say in the composition of the boards of directors of the companies. All boards should be given powers to run the companies on purely business considerations.

KESC is currently experiencing abnormally high line losses — even higher than those in the WAPDA system. The losses can be largely controlled quickly if the distribution function were to be privatized first. It would be best if KESC were broken into four or five private-sector distribution companies during the privatization of KESC. The company’s generating assets could be sold later and its transmission lines merged into the NTDC. However, it is not clear this is how the government plans to proceed.

The managing director of KESC said recently that the company had to import nearly one fourth of its power needs from WAPDA due to inadequate generating capacity of its own. The tariff increase approved for WAPDA in July would affect KESC as a purchaser of electricity from WAPDA. KESC has been enjoying a special tariff so far and, at times, it could defer payment to WAPDA. Sometimes, WAPDA supplied KESC even when it was itself experiencing shortages. WAPDA is not likely to continue with the existing arrangements after KESC is privatized. The issue needs an early resolution for a smooth privatization of KESC.

Existing power policies for thermal and hydroelectric generation have lost much of their relevance. The government needs to start work on a new policy and institutional framework. Matters requiring review include fiscal incentives for private power developers, risks assumed by the government, the roles of different institutions involved with the power sector, whether to have uniform or separate tariffs for the eight new distribution companies, the resolution of circular debts among different energy companies, and a mechanism for amicable resolution of disputes among different stakeholders. As there are now more distribution and generation companies, there is room for more circular debts and more friction as each entity will be protecting its own interests.

Available generating capacity is less than the nominal capacity of of 8,002 megawatts as some of the public sector thermal plants are old. Also, there has been less water in the rivers for the past few years. As a result, the country has experienced power outages. Additional generating capacity is needed on an urgent basis.

Pakistan, with the assistance and financial support of the World Bank and other donors, set up a “Private Sector Energy Development Fund” in 1988. Private developers can use subordinated loans from the fund for up to 30% of the capital cost. Both the grace periods and repayment periods of these loans are attractive with the result that a project’s debt service profile will typically be more commensurate with the long life of power projects than would be feasible given commercial finance alone. The fund was originally administered by the National Development Finance Corporation. It is now administered by the National Bank of Pakistan.

NEPRA is committed to providing a fair return to investors while ensuring safe and reliable service at competitive rates to consumers. These are always difficult objectives to balance. WAPDA and KESC have not been fully satisfied with NEPRA’s decisions. A special committee has been formed to look into the matter.

The World Bank and the Asian Development Bank are supporting the restructuring of WAPDA and the privatization of KESC. Pakistan needs additional generating plants. All new thermal capacity probably will end up in the private sector or perhaps be built by joint ventures between private developers and the three new generating companies created out of the restructuring of WAPDA.