Analysis: Is there light at the end of the tunnel?

The man on the street is least concerned with the technical reasons behind the recent back-breaking increases in electricity and petrol prices that have sharply eroded their monthly disposable income.

It is also Human Nature 101 that we instinctively seek simplistic answers and solutions that inadvertently create false narratives and allow actual factors off the hook without explanation. But to sustainably fix a structural problem, one must first diagnose its root causes before offering tailored remedies that may work within the peculiar ecosystem in which it exists.

On a purchasing power parity basis, it is perhaps safe to say that the current energy prices in Pakistan are unsustainable for its residential, commercial, and industrial customers. It is a standard economic textbook theory that the true cost of service should be recovered from ratepayers, other than the most vulnerable segments that may remain subsidized via targeted social security programs such as BISP/Ehsaas. There is no (or very little) money in our federal budget to provide across-the-board relief to average middle-class folks bearing the brunt of inflation, and the small and large industries that drive economic growth and create jobs.

By comparison, the much-richer Europeans were shielded from last year’s energy price shock (due to Russia’s invasion of Ukraine) with almost $650bn of subsidies, while much-poorer Pakistanis could not be because we had to restore the IMF bailout package and did not have the same financial wherewithal. In any case, subsidies are neither the right answer nor a sustainable structural solution to Pakistan’s energy problem.

Contrary to popular belief, electricity theft and bill defaults are not the primary causes of power tariff increase. In fact, the regulated tariff determinations now assume an almost barebone ‘line losses’ allowance and a 100 per cent bill recovery ratio. Of course, the actual aggregate technical & commercial losses are higher in at least half of our distribution companies, but those incremental losses are not necessarily or formulaically passed through to the end consumers.

Nonetheless, the last-mile distribution sector will continue to financially bleed and provide unsatisfactory service without a customer-centric mindset that is impossible for state-owned natural monopolies to evolve. Their managements and boards must be handed over to the private sector in an open and transparent process, alongside an equitable sharing of liability between the federation and provinces per the spirit of 18th Amendment and recent NFC Awards.

Privatization, in any shape or form, without competition, would however be a big policy mistake and a recipe for disaster. Since DISCOs have already lost exclusivity in their franchise zones, the wheeling (tolling) regime needs to be operationalized so that the bulk power customers can freely choose their electron supplier. In a controlled manner, the market should be further liberalized to allow all consumers (including residential) the option to also choose their service providers. To achieve this milestone, implementation of the wholesale commodity market (CTBCM) needs to progress at God’s speed.

In a deregulated, multi-seller and multi-buyer model, the biggest beneficiary will be the consumer who only cares about affordable tariff and uninterrupted supply of service that the prevailing system is unable to provide. The biggest losers will be those DISCOs whose prime customers will switch to cheaper and more reliable suppliers of electrons on the same wires. Unless they too are free to source their own supplies (that is: not forced to buy expensive power from the national pool) and set their own non-regulated tariffs to effectively compete on a level playing field.

It is, however, the state’s responsibility to provide energy, as an essential service, to all people regardless of their profile and creditworthiness. Therefore, a ‘social cost’ will necessarily be imposed on the DISCOs (even if they are privatized) that ultimately must be funded by the federal and/or provincial exchequer to provide societal justice without compromising the business case.

In an ideal scenario, the most efficiently run distribution companies should be allowed to charge a relatively low power tariff to their consumers without cross subsidizing their fellow countrymen in the loss-making DISCOs as is currently the case. This, of course, is easier said than done as it will open a can of worms in other spheres (such as gas, water, and agriculture) and require a lot of political will to do away with the ‘uniform’ nationwide electricity tariff policy in vogue. But a differentiated, performance-based tariff regime would incentivize healthy competition among various distribution franchises in the long run.

In any case, Islamabad needs to realize that it cannot and should not continue to run these last-mile operations and cede their management control to the private sector and local governments. The fear of letting go, equally pronounced among the politicians and bureaucracy, may be justified because it is venturing into unknown territory, but it is mostly parochial in nature. The ability to provide jobs to constituents, influence transfers and postings, and steer development funds for political purposes, is one of the main attractions of maintaining the status quo across the board.

The top leadership and decision-makers must realize that it is the common consumer that ultimately suffers in the do-nothing scenario, and that we can apply the lessons learnt from Pakistan’s relatively successful experience of liberalizing the telecommunication and banking industry.

To be continued...

The writer is a former SAPM on Power & Petroleum.