Distribution companies (DISCOs) are the face of the electric utility industry and its cash cows. Any lapse in their performance has a ripple effect, not just within this industry but in the whole economy. A glaring example of this fact is the “circular debt” that has reached alarming levels already and is defying every effort to control it.
The National Electric Power Authority (NEPRA) estimates that poor performance of the power sector is causing the nation's financial losses which exceeded Rs 690 billion last year. Roughly 60 percent of this came from DISCOs mostly due to energy losses and lack of full revenue recovery. No business or industry can survive with such colossal losses.
This demanded that the government move swiftly to save the power sector from financial disaster. Instead, it seems content with rhetoric like shifting DISCOs to provinces or privatising them. Both seem non-starters. Moving their control to provinces will be merely shifting the monkey from federal shoulders to those of the provinces. Privatising them and hoping that it will rid DISCOs of their problems is also hoping against hope.
The term “privatisation” generally means purposely shifting the ownership, operation, and control of a business or industry to private hands. In practice, it covers a broad set of options that fall on a broad spectrum between pure government control and minimal control by it.
As a business concept, “privatisation” has its roots in two schools of thought. One believes that public sector is inherently inefficient, lethargic, and wasteful therefore business and commercial activities should avoid any state role and allow markets to regulate them. The other school believes that private sector by its nature is greedy, rent-seeking, and exploitative and must not be given a freehand.
The first school received a major boost when the Berlin Wall fell and the Soviet Union collapsed. A change took place in the economic development philosophy that emphasised that trade, financing, and other prominent markets should be liberalised, deregulated, and privatised. International financing institutions (IFIs) and multilateral development banks (MDBs) championed the new cause and further promoted it by embedding it in their aid, financial support, and bailout packages.
The power sector’s problems shouldn’t be attributed to the state’s ownership or control alone. We must get to the root of the issues to resolve them instead of shifting DISCOs to provinces or throwing them to the private hands.
A new paradigm for reforms was introduced in the late 1980s. It aimed at reforming the electric utilities in developing countries through functional unbundling, private participation, competition in contestable parts of the industry, and establishing regulators to oversee and regulate the restructured entities.
A World Bank study, conducted to review the outcome of its efforts in the past 25 years to reform the power sectors of developing countries concludes that even though regulation was widely adopted in most countries, practices fell short of theory, and cost recovery goals remained elusive. The private sector did finance a large portion of new generation capacity, but its contribution to network parts of the industry remained insignificant. Restructuring and liberalising, though beneficial in a few larger and better-off developing countries have proved too complex for most of them.
Pakistan also boarded the bandwagon around 1989-90 and set on a journey that had as its milestones reductions in public expenditure, open trade, liberalisation of the economy, and privatisation of its components. Anything that had even a trace of link with the government was to be abhorred and avoided. Development programs, as much as possible, were to be entrusted to the private sector.
Pakistan’s governments have been quite docile in following the dictates of the international donors and lenders. They followed the above philosophy blindly which often came piggybacked on the financial support and bailouts packages from them for which our governments are in perennial pursuit, regardless of their economic and political costs to the nation.
NEPRA correctly observes that “the primary driver of the power sector’s stress is poor governance, spanning from planning to execution and subsequent operation, coupled with lack of accountability.”
Our policy and decision makers must do some introspection to pinpoint the real causes behind the dismal performance. There are examples of good utility companies in public control as there are bad ones under private hands. South Korea, Taiwan, and Singapore are living examples of how state institutions, if managed properly, can successfully develop infrastructures and industries also. In our own country, we have well-performing distribution companies like IESCO, LESCO, and GEPCO.
The power sector’s problems shouldn’t be attributed to the state’s ownership or control alone. We must get to the root of the issues to resolve them instead of shifting DISCOs to provinces or throwing them to the private hands.
In its report, NEPRA correctly observes that “the primary driver of the power sector’s stress is poor governance, spanning from planning to execution and subsequent operation, coupled with lack of accountability.” This should be the starting point for a diagnostic study in the power sector. But it must not be restricted to the power sector only and must look beyond to pinpoint the real drivers of misgovernance.
Privatisation of DISCOs can benefit provided it’s planned and executed properly. It can improve the allocative and productive efficiency of resources, add more value to investment, promote new technologies, and enable economic and reliable service. If not done properly, it can lead to staff layoffs, avoidance of grid access to new consumers, and exploitation of existing consumers.
We are not sure what specific mode of privatisation the government has in mind for DISCOs. Will it be phased in via managerial or service contracts, leases, or concessions or does it plan a direct leap to divestiture? Each will have its own dynamics which must be understood using a careful diagnostic effort for each DISCO.
The objectives of reform should be compared with the results of the diagnostics and scope of each mode of private participation, its pros and cons, likely outcomes, and prerequisites identified. From this evaluation, it will be possible to determine which option will likely succeed at meeting the objectives.
The data required to perform such diagnostics may not be available. What we normally see is aggregate statistics showing company-wise performance whose accuracy NEPRA itsef has suspected frequently. Even if correct, they mask the causal variation that may exist due to differences in their systems and operating practices.
These parameters will need contextualising also. Multiple factors influence a DISCO’s performance. Losses for a densely populated company like LESCO or GEPCO may not be the same as for a spread-out company like QUESCO or MEPCO. Such influencers will need to be removed from the statistics by normalising them as technical losses per circuit-km, O&M expenses per employee, or per GWh delivered.
Pakistan is already reeling from the results of its experiment with IPPs. It must tread carefully with DISCOs’ privatisation as it will be much more complex, risky, and politically sensitive
The evaluation must be comprehensive also. It should consider not only the potential benefits, but also the pitfalls and limitations as well. Here the experience from other countries that have undertaken privatising of distribution systems would be helpful. Lessons of experience from them would identify what has worked and what has not and why?
Before dashing into uncharted waters, it’s important to ensure that we have the right environment and enabling conditions requisite for success. Initial conditions, enabling policy and regulatory frameworks, and financial and business environments are crucial for any reform to succeed.
Unlike that generation, privatising DISCOs will focus mostly on existing systems to improve their performance. DISCOs are infected with high technical losses and pilferage, low productivity, inadequate maintenance, poor reliability, and low revenue recovery. This will be a daunting challenge. Almost 25 percent of Pakistan’s population lacks access to electricity at present. Finding adequate private finances to manage these issues and extending the distribution grid to new consumers will be another.
Pakistan is already reeling from the results of its experiment with IPPs. It must tread carefully with DISCOs’ privatisation as it will be much more complex, risky, and politically sensitive. Curiously, while the governments in Pakistan and elsewhere also have tried to renegotiate contracts with IPPs, in contrast, many of the private incumbents taking over the control of distribution function were compelled to approach their government to renegotiate their contracts; some even seeking exit.
There are many other ways our government can resolve the performance issues of DISCOs provided it’s willing to take some bold decisions. Even if it’s determined to privatise them, it would be wise to follow an evolutionary approach and avoid a direct dive into uncharted waters. On a lighter note from an unknown author, “We must learn from the mistakes of others as we may not live long to make all by ourselves.”