UNDOING OF HIGH ELECTRICITY COST
Syed Ali Kashif, MBA Class of 1996, after graduating from IBA joined banking sector, where he worked his way up from management trainee officer, to the position of Head of Export Refinance at one of the top-of-the-line Bank. His areas of interest in Banking are Treasury & Funds Management, Investment Banking, Corporate Banking, SME Banking, Project Financing, SBP Export Refinance and Islamic Banking.
The undoing of high electricity cost is imperative if Imran Khan's government, backed by Armed forces of Pakistan, has to vindicate the trust of its voters in its politically elected setup. Previously, the elected governments have been made to incur exorbitant electricity costs which ultimately had to be borne by the consumers. They orchestrated and went for contracting with IPP's, with high cost structure, leaving the consumers in tatters. The present PTI government is making efforts to revisit the high electricity cost contracts with the IPP's. The outcome of these efforts will be known within the three months to come.
In China, during the 1990s, there were 80,000 industries ranging from small- to large-scale, which were incurring heavy losses; the key drivers of this downturn being rampant and voracious corruption in the governance of these entities. This situation has evolved into incurring riches to the owners and impoverishment to the work-force and consumers. This has also undermined the whole cost of living in Chinese societies which has ultimately spurred inefficiencies in their economy.
As of now, there is a resemblance of the above mentioned Chinese scenario with the state of affairs of Pakistani electricity cost structure. Amid the IPP's there are senseless and pervasive pursuits of profiteering at the expense of the 220 millions of consumers. It's painful to see this stance being vindicated by them. We will investigate as to what this all about the exorbitant cost structure of electricity in Pakistan setting adds up to?
Let us now have a look at how this situation was caused. In our part of the world, the successive government did not do a better job in informing the populace of its plans and policies, which it keeps on framing to secure the interests of its citizens. This culminates into misinformation and speculations, ultimately rendering the populace to exist at the apex of a dilemma. In the wake of this scenario, the state supporting analysts could cherry-pick the numbers from the wide virtual databases which would serve their specific stories. These state supporting analysts, without being aware of the power sector's subtle intricacies, think of their analysis as definitive, leaving no room for public debate and ultimately leading to distort the dynamics of the sector. It was therefore imperative that these cost structures regarding electricity should have been debated earlier, at the time of making agreements and contracting with the IPP's, since it plays a pivotal role in the lives of the citizens of Pakistan.
The Electricity Supply Chain (ESC) has to be bifurcated into three distinct functions: Generation, Transmission and Distribution. The inefficiency in one vertical flows across the value-chain. IPP's, in our part of world, are not the single cost drivers of electricity. So it is highly imperative to take a holistic view of the issues of the power sector of Pakistan. What is more intriguing is that it is not the IPP's that are playing their role to distort the dynamics of this sector. To analyze the performance of 78 IPP's, the analysts employed different accounting techniques details of which are as below:
a) Returns allowed through successive national policies and regulations
b) Irregularities in various day to day operations
c) Misreporting of cost during project construction
The debate over the "profitability" of IPP's project, completed in 1994, could not be discussed since the data for this period is not available. However, the data for 2007 "profitability" of IPP's suggested that the government of the time doled-out USD-indexed returns which evolved into high IPP's profits and drove up the cost of electricity for the consumers with making them worse off, in case of excess payments made due to devaluation of rupee against dollars. The present Imran Khan government is striving to delink the returns from USD-Indexation to avoid the malpractices done by previous corrupt governments.
In terms of irregularities in routine operations, the misrepresentations of fuel costs and shortfall of inventories have already cost PKR 34.2 billion to the consumers. IPP's spend less on maintenance cost during the earlier years of its operations which levels out when plant starts ageing and needs more frequent repairs. The present Imran Khan government is striving to reduce the irregularities in routine operations by reducing the late payment surcharge to be paid by the government to the IPP's that was earlier KIBOR+4.5%.The same is now proposed to be reduced to the KIBOR+2.0% only. This will translate into reduction of financial cost to the government on one hand, and will enhance the government credit standing as borrower in the credit markets on the other. The other irregularity was that the payments to IPP's were being made on the basis of 100 % plant installed capacity. As against this, the new regime which is proposed to be adopted is based on actually acquired and consumed electricity which is in the range of 70% to 80%, in general, in most of the cases of electricity plants.
The next question is of cost overrun of Chinese-funded coal projects at Sahiwal and Port Qasim. Is it the IPP's that is bearing the business and financial risk of the project and is subject to losses, in case of cost overrun, to bear its overrun cost or will the consumers compensate for its cost overrun for 30 years?
The regulator NEPRA, allowed a dollar-indexed returns on equity (ROE) of 27.2 percent which is unnecessarily high. Another analysis revealed, by invoking another measure of profitability that is IRR (Internal Rate of Return), that for the Sahiwal plant, the ROE should be 20.8 percent. This foregoing analysis is not definitive but can serve as a starting point to analyze the previous governments power cost structure policies based on voracious and corruption-led designs vis-à-vis the IPP's and their non-popular governmental sponsors.
The state-owned utilities are the most notable players of Electricity Supply Chain (ESC). They manage nearly half of the country's power generation capacity and enjoy monopolistic power in transmission and distribution sectors. Of the 100 units supplied to the national grid, public utilities recover the cost for only two-thirds. Resultantly, the aggregate transmission and commercial losses (AT&C) are the highest among South Asian countries. The aggregate transmission and commercial losses (AT&C) amounted to a high cost of Rupees 788 billion from FY2014 to FY2019 bringing the tally to Rupees 1,131 billion as of Dec 2019.
These arguments favoring the rationalization of power cost structure in Pakistan are debatable as they impact the Pakistan's 220 million citizens' interest in general and has been stunting the economic growth of our country. As this debate has been avoided in order to enrich the IPP's and impoverish the consumers, the consumers should not be willing to let the status-quo stand anymore and should orchestrate their positive, peaceful, decisive and sincere efforts across the country to undo this present state of affairs and demand an equitable cost structure of electricity from IPP's and respective government quarters.