Privatize DISCOs – but carefully

Recent statements coming out of the federal government on its stated intention to shift the federally owned electricity distribution companies (DISCOs) to the provinces have generated a lot of interest in the media. This article will attempt to touch upon certain issues that have not been mentioned in most of the articles; these issues will impact any successful attempt to change the ownership structure of these companies as well as development of the power sector itself.

Shifting the DISCOs from the federal government would not be an advisable policy decision. It would just mean shifting a critical problem from one level of the government to another – albeit one with lesser institutional and financial resources to handle the issues involved. If anything, it is feared that it may further aggravate the problems facing these companies as well as the power sector. This is why the CCI had already rejected this idea earlier.

Converting public monopolies into private monopolies is not always desirable. If it has to be done, it has to be done very carefully in terms of the prerequisites and subsequent implementation scenarios. It is proposed to consider the following steps before finally privatizing them.

To begin with, as regulator Nepra needs to play its role better. While tariff setting remains its primary role, the equally important role of setting KPIs and monitoring and implementing DISCOs’ investment and development plans often gets neglected. As DISCOs are government entities, the regulator is usually shy of disciplining them through punitive actions. The result is that consumers pay the cost of these inefficiencies. The job of the regulator is to ensure sectoral development by balancing the interests of the government, the investors, and the consumers. When the government is the policymaker as well as the investor, as in this case, the regulator finds it hard to always protect the consumer’s interest. This needs to change.

The following two aspects pertaining to Nepra are worth a brief discussion. First, the chairman is a power sector expert hired through a competitive process, at a salary prescribed by the MP (market pay)-1 scale, which is about Rs700,000. It’s anyone’s guess whether a top industry leader of a multi-billion dollar sector would be attracted by this salary structure. The result is that the best are not interested in the job.

Second, the provinces nominate the four members of Nepra, who also head the various important wings of the authority. More often than not, they are neither power sector experts nor have any requisite experience of the sector or of regulatory work. One can recall a particular example of a civil engineer working as a member even though the Nepra Act clearly stipulates that only an electrical engineer can be placed at this position. This leaves the Nepra chairman often at odds with those primarily doing provincial bidding, rather than all of them performing the mandated regulatory roles. The OGRA Act certainly has a much better provision for hiring specific sector experts in the fields of oil and gas; perhaps, Nepra would also be better off if it has members who are specialists in the different fields of electricity generation, transmission, distribution, etc.

There is a major energy crisis in the country every few years. One of the reasons for it is the unsynchronized working of the two energy sector regulators – Nepra and Ogra. Although the energy ministry has two independent divisions – power and petroleum – each with its own regulator, the functions of both are intertwined. It is opined that there should be one regulator for the energy sector: oil and gas as well as electricity. This would be helpful in achieving energy security for the country and development of a robust energy sector.

In a previous article, I had written that the government has no business to do business in any sector for which a competitive market exists. The power sector in Pakistan does not have a competitive market; therefore, it is important to create it before the DISCOs are privatized. Three steps are suggested in this regard.

First, even if the DISCOs are not broken into smaller, more manageable sized companies, privatizing them in their present form must begin by segregating their functions – distribution business and supply business – and then privatizing the distribution business, through one or more private companies. This is where competition will help improve bill recovery, reduction in cost as well as improvement in the quality of service, and improved customer service.

Second, a uniform power tariff policy across the country is untenable. Why should consumers of a more efficient DISCO cross-subsidize those of an inefficient one? If for socio-economic reasons, or even for the sake of political expediency, the government wants to shelter consumers where the cost of electricity provision is higher or the bill recovery is low, the government should pick up the tab, rather than penalizing those who pay their bills.

Third, it is imperative to develop a truly competitive energy market. The present policy allows bulk consumers to buy electricity from any power company, through wheeling, or to make it themselves. In a competitive market, all bulk consumers in any DISCO’s territorial jurisdiction should be allowed to procure electricity from any other DISCO offering it cheaper and with better service. For example, if a consumer within the jurisdiction of LESCO can get cheaper power from MEPCO, it should be allowed. This incentivizes competition between DISCOs, with the consumer and the economy served better. This arrangement would lead towards development of a competitive power market and this needs to be promoted.

A very important factor to be decided before privatization is to determine the extent of market share that a company is to be allowed to own. In order to avoid the complications that monopolies create, it would also be advisable to set this limit not above 20 per cent of the market in terms of consumers. One can imagine the political power a private company can wield by checking how many National Assembly constituencies fall within the territorial jurisdiction of any DISCO. Since electricity is the most basic of required services, any power company can influence the political outcomes by supporting or opposing political players within its territorial jurisdiction through their service delivery to their constituents. Hence, no single business house or holding company should be allowed to have more market share than what is technically required.

For a successful privatization of DISCOs, it is imperative that the future investment and development plans are prepared meticulously for each DISCO, as the one size fits all approach will not succeed here. These KPIs and the yearly monitoring and evaluation system, along with a strong but transparent punitive system need to be determined, and put into the tender documents before bidding. Lessons must be learnt from the privatization of KESC, where a high level Implementation Committee was formed to check implementation of the agreed investment and development plans, but, unfortunately, it never even met once to keep a check on what was subsequently happening. This has to be done by creating a strong institutional arrangement for the purpose.

Finally, a myth needs to be broken that only one country is interested in partnering with us. During my time at the Privatisation Division (2014-17), all DISCOs were put up for privatization. Road shows were held for marketing the privatization of FESCO in China, Middle East, and Turkey. A power sector investors’ conference was also held in Washington, DC, which was attended by all the major US companies. There was serious interest from all over the world. Unfortunately, despite completion of the due diligence exercise by financial advisors as well as successful roadshows, the entire process was brought to a halt due to national political compulsions.

One final word. The financial advisers, who structure these transactions, as well as the potential investors, are serious entities. It is difficult to attract the best of them if they don’t view your intent as serious. DISCOs have been on the privatization programme since 1992, and we have been going on in circles. The cost of this lack of political will to go through with it for 30 years is now visible in the shape of the power sector circular debt and its threat to take down the economy. How long can this indecisiveness be allowed to continue?

The writer is a former civil servant. He tweets @ansukhera and can be reached at: ansukhera23@gmail.com