Electric shocks

LAHORE: The power sector is becoming increasingly unsustainable and the state is compounding the conundrum by covering up its failure to rapidly industrialise, while it blames higher capacity charges for ever-increasing circular debt.

Electricity supply goes hand-in-hand with industrial and economic growth. The government has been working with to establish Special Economic Zones across the country under China-Pakistan Economic Corridor (CPEC).

The Rashakai SEZ in Nowshera was inaugurated recently by the prime minister. SNGPL has committed the provision of 30 mmcfd to the zone by the end of 2021. PESCO (Peshawar Electric Supply Company) and NTDC (National Transmission & Despatch Company) are working to ensure the supply of 170 MW power by November 2021.

Further addition is expected by 2022. PESCO’s cumulative losses for four fiscal years have been Rs143.5 billion.

Will the boost in economic growth be enough to yield a return on investment? Gas is a limited resource and both SNGPL (Sui Northern Gas Pipelines Limited) and SSGC (Sui Southern Gas Company) have repeatedly informed that reservoirs are depleting. How long will SNGPL be able to sustain its supply to Rashakai?

Rashakai was originally conceived as one of 27 SEZs across the country. The number has been revised down to only nine. One could speculate that this reflects a lack of confidence in the potential of reviving the economy by the government. Thanks to CPEC, generation projects have mushroomed across the country. But there is no equivalent momentum in bolstering the transmission and distribution infrastructure. This is the main source of recovery.

The scope of the problem is huge and in a precarious balance. The government seems to have found itself between rock and hard place, as it struggles to stem the rise of circular debt that is plaguing the country’s economy.

The state-owned DISCOs (distribution companies) are known to be poor performers, raking in subsidies to the tune of billions, while also racking up equally high losses. In the period between FY2016 and FY2020 alone, FESCO’s (Faisalabad Electric Supply Company) annual reports show that the company has received over Rs140 billion in subsidies. During the same period, the company has generated a cumulative loss of Rd67.5 billion. Faisalabad is a major industrial cluster in Pakistan after Karachi and requires uninterrupted power all year round. It is no surprise that industries shifted to captive power and are reluctant to come back to the grid even though there is a surplus of power in the country.

FESCO is only one example. At least the company consistently declared its financial results for the public. Other DISCOs have poorer track records. LESCO (Lahore Electric Supply Company), which serves the second highest tax-paying city in the country, has only shown its financial results for two years since FY2016. During this period, the company received Rs50.3 billion in subsidies and generated Rs48 billion in losses.

Only two distribution utilities have posted profit during the last five years. K-Electric, which supplies electricity to Karachi, the highest tax-paying city, also stands to receive subsidies of around Rs260 billion. But it earned a cumulative profit of Rs68 billion. GEPCO (Gujranwala Electric Power Company) made Rs20 billion in profit.

The performance of KE (K-Electric) has prompted NEPRA (National Electric Power Regulatory Authority), the power sector regulator, to say privatisation is the way forward for the remaining DISCOs. But how will investors conduct due diligence if the financial data is not available?

The Circular Debt Management Plan developed by the Special Assistant to Prime Minister on Power Tabish Gauher is expected to be a panacea to the problem. But was this plan conceived with complete visibility over the financial landscape?

At this critical juncture, there is little room for error. Without intervention, the circular debt is expected to balloon to Rs4.5 trillion by 2025 or more than the tax revenues the FBR (Federal Board of Revenue) hopes to collect this fiscal. This is an appalling state of affairs.

Raising the cost of electricity is not sustainable for the common man and industries alike. As per the Uniform Tariff Policy of NEPRA, cost of electricity for industries is capped between 12.28 c/kWh and 16.14 c/kWh depending on tariff category (B1, B2, and B4).

Across the border, India enjoys much better rates of 5.46 c/kWh to 12.82 c/kWh. Even in the export-oriented sectors, Pakistan’s rate (9 cent/kWh) is lagging behind India (approximately 7.5 c/kWh) and Vietnam (7.3 c/kWh). These discounted rates were offered by the government to make industries competitive. This policy only privileged a certain demographic of Pakistan’s consumers.

Lowering the cost is also not sustainable. It increases the burden on the government in the form of subsidies, stretching the budget thinner than necessary.

In the interim, capacity payments for existing and upcoming power projects are creating a vicious cycle that is hindering the nation’s growth. The NEPRA and the government have chalked out a model for privatisation. Private sector involvement in the power sector is expected to change things. On February 18, 2021, DISCOs filed a stay order against NEPRA’s decision to allow wheeling via distribution networks. It seems that implementing the plan is going to take stronger political will and support from all stakeholders, especially the industries.

The NEPRA, ministries of energy, finance, and other associated government bodies must work in cohesion if a comprehensive solution is to be developed. The problem is as much infrastructural as it is fiscal.