The case against privatising power


PPP, PML-N both responsible for present power crisis

With 20 hours of outages in mid-summer and Rs500 billion circular debt balance to pay, there is no doubt that a serious crisis has beset the power sector in Pakistan. With all kinds of solutions to the power crisis being bandied about and the PML-N giving a strong indication that it will turn to the private sector as a solution, there is a need to ascertain what caused the power crisis in the first place.

The debate during the election was played out as a blame game between the PML-N and the PPP. The PML-N blamed the PPP for the rental power plants while its chief economic ideologue Sartaj Aziz blamed it for its 1994 power policy. The PPP’s rejoinder was that the PML-N had “cancelled the contracts of around 24,000MWs of Independent Power Plants (IPPs)” in their 1997-99 tenure, arguing that “had this additional power been available to the national grid today there would be no shortage.” But here lies the fundamental problem in the electricity debate: the crisis is not a crisis of capacity.

With over 20,000 MWs of generation capacity, Pakistan’s power sector far exceeds peak demand that hovers around 17,000 MWs. What both parties – and the PTI too – gloss over is that their energy policies during the 1990s were in fact identical. In 1992, at the insistence of the World Bank and IMF, the PML-N government’s Cabinet Committee on Privatisation approved a Strategic Plan for Restructuring WAPDA. The plan involved “unbundling” WAPDA’s Power Wing and shifting the burden of generation and distribution to the private sector. When the PPP was at the helm next, it approved the World Bank championed 1994 Power Policy which offered astonishing terms to private investors – including a 80:20 debt-to-equity ratio, minimal taxes, guaranteed capacity payments even if power plants were not producing.

The first major step in the direction was the announcement of the Hub Power Project, a 1,292 MW private sector project described as the “Deal of the Year” and later as the “Deal of the Decade.” The Hubco deal was followed by the signing of 16 IPP contracts to add 3,400MW of private thermal power to the grid, at a time when the future shortfall was assessed to be between 1000 and 1,500 MW. The PML-N, which now apparently questions the terms of the deal, only continued the process once it returned to power. In sanctioning the creation of NEPRA in 1997 and approving the unbundling of WAPDA into 13 units: eight distribution companies (DISCOS), three generation companies (GENCOS) and the National Transmission and Dispatch Company (NTDC), operating under the newly created Pakistan Electric Power Company (PEPCO). The unbundling of the WAPDA Power Wing was supposed to move the power sector “from an inefficient state-controlled monopoly to a competitive, market-driven system.” The actual plan, as the IMF describes it, was to “ready the power sector for a more attractive packaging to be sold to private investors.”

Smaller units of WAPDA could be privatised much more easily. That was the plan the PML-N had approved in 1992 and set up for packaging in 1998. Now that it has returned in 2013, the energy plan it has announced its intention to “finish their unfinished business.”

The PML-N envisages a three-step plan. Step one: merging the Ministry of Petroleum and the Ministry of Water and Power. Step two: raising Rs500 billion through treasury bills, bank loans and printing money and paying off the circular debt. Step three: selling government shares in public-owned power companies, reducing its share to 51 percent and handing over their management to private investors. The move is expected to raise another Rs500 billion.

But more importantly, it will leave the power sector one step behind the promise of the PML-N manifesto: complete privatisation. This is the reason why the shares of the Nishat Group, Engro Group and DESCO/Dawood Group have reached their peak. Each big business group in Pakistan is expecting a windfall from the government’s selling the self-created carcass of the public power sector. And like the KESC, they know that even if they are unable to make net profits, they will still be able to make good sums for themselves through the various gimmicks that each privatisation experience in Pakistan has coughed up.

The torrid experience of privatising the KESC should have set the alarm bells ringing that something is amiss in the policy. What began as a 25 percent share offering was upped to 51 percent and then 73 percent without undergoing due process. When in February 2005, KESC was finally privatized, the winning bidder withdrew four months later. From being handed over to the Saudi Al-Jomiah Group of Companies, it was switched to the Abraaj Group in 2008. Despite the privatisation, the government has continued to subsidise the KESC by around Rs30 billion a year since 2005.

With LESCO, FESCO and the rest of the distributing companies now set to be shifted under private control, the tussle between NEPRA and privately-managed distribution companies over increasing both tariffs and subsidies is likely to intensify. Already, the privately-run KESC continues to employ increased outages as a blackmailing tool with NEPRA when it refuses requests to increase the tariffs. Can the public, a decade down the line, afford around 20 separate privately-run power distribution and generation companies tussling with a central regulator because revenue is not as much as they expected? Surely not. But this is the direction the PML-N’s plan to sell a stake in government-owned power companies shall lead to.

In simpler terms, it means that the power crisis, if one considers only the small variable of availability of power, is likely to be severer under the private sector than the public sector. But there is another variable that is not being spoken about: the cost of consuming electricity. Consuming electricity at the current tariff rates has already become unmanageable for all sets of consumers: domestic, commercial, industrial and agricultural. Those who have forgotten must be reminded that the All-Pakistan Textile Mills Association (APTMA) and the Kissan Ittehad have both been organising protests and filing cases against both outages and the spiking of tariffs. Domestic and commercial consumer protests have turned cities into war-zones, as would be remembered in the summer of 2012.

The greatest irony of course is that the ideologues of the PML-N also point to the 1994 energy policy by the PPP as the point where things went awry. Finance minister in waiting Sartaj Aziz wrote an article in these very pages criticizing the same policy and defending the PML-N’s decision to cancel the relevant tenders. The power crisis blame game was played between the PML-N and the PPP during the election campaigning, without letting the people know that both were part and parcel of the same regime.

Cambridge economist Kamal Munir and Salman Khalid, affiliated with private sector power investments, state, “It took a few years for the true extent of this policy’s fallout to become apparent. When lights came back on, the power sector and everything else that depended on it lay in ruins. All the promises of great service vanished. Since 1990, tariffs in rupee terms have climbed up approximately 530 per cent for the median domestic consumer as the energy mix of the country shifted away from much cheaper hydro to thermal based power, exposing the average consumer to the vagaries of the international oil price fluctuations. As a result, the government and the consumers found it increasingly difficult, almost impossible, to pay for this electricity. By 2011, it became usual for large parts of the country to plunge into darkness on a daily basis – all this in the presence of substantial excess, unused capacity!”

The debate that is not being had is whether the solution to power crisis lies in promoting public sector investment or inviting the private sector to take over the public sector? Why was public money not pumped into the public power sector in the 1990s? Why was the same money used to “incentivize” private investors? And of course why is an “inefficient public sector” being blamed, when the bulk of the “inefficiency” in the system is the excess and expensive capacity added by the private sector?

With the PML-N government promising the end of consumer subsidies (except for domestic consumers), this is not to say that corporate subsidies shall end. In fact, in the next round of pushing the public power sector towards complete privatisation, expect the government to spend more than the Rs500 billion it expects to receive from selling shares, expect more controversial deals collapsing – and expect a starker power crisis a decade down the line with no path of return available. Munir and Khalid conclude their article by stating, “The blackout in Pakistan is a policy failure, a result of the disastrous privatization undertaken by the government at the behest of the World Bank.” More privatisation is likely to completely cripple the system.

The running joke these days with the spike in tariffs is, “Thank God for the load-shedding. If there were electricity 24 hours round, who would afford to pay the bill?” If the next round of PML-N led privatisation succeeds, we may not be able to afford the little electricity we consume at this moment. Be warned.

The writer is the general secretary (Lahore) of the Awami Workers Party. He is a journalist and a researcher. Contact: [email protected]