Let’s briefly reflect upon the circumstances in which we responded to the miseries in the power sector. These are rooted in the past, as were the remedies that we have not yet fully implemented decades later.
Let’s briefly reflect upon the circumstances in which we responded to the miseries in the power sector. These are rooted in the past, as were the remedies that we have not yet fully implemented decades later.
The 1970s were mostly chaotic: the fall of former East Pakistan was followed by political uncertainties, nationalization drives, oil crises, global recession, and floods. GDP growth was at 4.8 per cent per year, poverty levels rose to 55 per cent, fiscal deficit reached 8.1 per cent of GDP, and inflation touched 26.66 per cent.
The power sector’s status, alarmingly noted in the Fourth Five-Year Plan, raised serious doubts about Wapda’s ability to handle retail distribution alongside the construction of major power and irrigation facilities. It was suggested that the power wing be bifurcated from Wapda, and retail distribution handed over to an ‘autonomous’ power corporation.
The deliverability of the authority was questioned just twelve years into its existence. More surprising is that half a century later, the desired reforms have yet to be fully implemented. Just days ago, the government of Pakistan initiated the privatization of public-sector distribution companies (DISCOs), more than five decades later. What this exercise entails remains to be seen.
The 1980s, at last, marked the decade when power reforms emerged and were partly implemented. The economic outlook was good: GDP was 6.3 per cent, poverty levels declined to 29.1 per cent, fiscal deficit was 7.0 per cent of GDP, and inflation dropped to 5.31 per cent. However, the growth was riding on large domestic borrowing, which increased from Rs58 billion to Rs521 billion, while the trade deficit stood at $993 million in the mid-1980s. This upsurge in debt impeded the government’s ability to deal with the power shortfall of around 30 per cent, with loadshedding continuing for hours across the country, not a pretty picture.
Power sector reforms had been under consideration for some time, and in the end, they necessitated the government to seek outside assistance. The World Bank devised a Long-Term Energy Strategy in 1985. Besides reforms, they proposed an incentive package for private power projects supported by the $150 million Private Sector Energy Development Project (PSEDP-1) in June 1988. Additionally, the reforms resulted in the creation of three dedicated entities to handle energy project transactions: the Private Power Cell in the Ministry of Power and Water to conduct due diligence and contract awards, the Private Power Organization in Wapda to negotiate and administer power purchase agreements, and the Private Energy Cell in the National Development Finance Corporation to handle funding.
Consequently, Wapda’s business model was permanently altered, as it was now required to purchase power from the private sector. This necessitated cash management to pay the private sector in a timely manner, which the authority had never done in the past. Moreover, the financial health of the authority was weak, as noted by the Public Accounts Committee in 1987: “Rs2.8 billion were outstanding against various energy debtors and government agencies. Additional resources were sought to alleviate the crisis in the energy sector. Dues of Rs4 billion, if paid by public-sector entities, could have created a much healthier organization, less dependent on federal funds. Above all, the inability to recover dues adversely affected Wapda’s and KESC’s creditworthiness before international donor agencies”.
This sounds familiar today -- four decades later. A country under a huge debt burden, along with a structurally and financially weak institution, embarked on a mission to rescue the power sector from perpetual crisis. We do what we can with what we have.
Thus far, the government’s reform agenda and the World Bank’s funding, however, failed to attract private power projects. Earlier measures, such as setting up power projects on the build-own-operate-and-transfer model and the purchase of power plants by the private sector to revitalize them, did not work either. Fortunately, the only outcome in 1988 was a private sector power project, HUBCO, with an installed capacity of 1,292MW, largely due to the efforts and presence of the World Bank and the arrangement of its own lending and private capital.
“It was the first major private infrastructure project in a sub-investment grade developing country to be financed by international commercial banks on a limited recourse basis, the first international equity offering and underwriting for a developing country infrastructure project under construction, and the first stock market flotation of a single power station under construction” (World Bank 2005).
Those who have been involved in setting up such capital-intensive projects, with implementation periods not in months but spanning over years, know quite well that no matter how much they plan not to fail, failures will always emerge as events causing them could not be fully anticipated at the time of the award of the contract. The inescapable result is an increase in the project cost and the cost of the product. That is how the real world works.
It was not unusual for a project of this magnitude to face delays in concluding a very complex set of financial transactions among the stakeholders and aligning all the vendors and contractors required for the project. It was also not unusual for disputes to evolve between the parties and end up in court.
What was unusual in this case was that the disputes, worsened by all sorts of accusations from coercion to corruption spanned over a decade, and were compounded by politics. This was against the backdrop of an evolving public and political impression that private power projects being set up in the country were too expensive, a key factor in the settlement discussions between the parties. The matter between the parties ended up in court, and finally, as is often the case, the parties agreed to a settlement, and all criminal and civil cases were dismissed in December 2000.
At the time, the circumstances were extraordinary for the country; it was on the verge of losing its credibility as a reliable place for foreign lending and private investment due to disputes with IPPs, with the real possibility of bankruptcy against an external debt of $32.310 billion and foreign currency reserves dipping to $400 million. This was compounded by sanctions placed by the West due to nuclear tests conducted in May 1998.
Nonetheless, the disputes between the authority and the company left indelible fingerprints on the discourse that shaped the future of the power sector in the country, its costs, and its benefits. The project declared commercial production on March 31, 1997, two years after the financial close, and has been operating since.
Concluded
The writer is a chemical engineer with experience in various fields.
