The energy sector has been hit by a number of snags in the past few years. WB and ADB, the two major donors for the sector, have emphasised the urgency to implement power sector reforms to generate sufficient funds for enhancing transmission and distribution capacity and to make functioning of the electricity regulatory authority transparent.

Addressing the prevalent energy crisis and implementing reforms in this sector forms a pivotal part of the government’s agenda. But according to a report by South Asia Regional Initiative (SARI) for Energy, “There seems to be a lack of political will to implement it aggressively.”

The government is giving serious consideration to power sector reforms in view of the decision of the IMF that it would withhold the tranche of $1.7 billion (due to be provided to the country a few months earlier) till the fifth review takes place in November/December, 10. The review is also to include implementation of power sector reforms.

Power sector reforms go back to mid-90s when the sector faced hitches on the back of poor operational and financial performance. It was then emphasised by donors that efficiency in power generation, transmission and distribution could only be achieved with active participation of the private sector. Consequently, a strategic plan of privatisation was prepared with prime focus on “decentralisation, establishing a competitive infrastructure that would make the sector efficient to spur economic growth and reduce fiscal deficits”. National Electric Power Regulatory Authority (Nepra), an autonomous regulatory agency was established in December, 1997 to “ensure transparent and judicious economic regulation in the power sector”. Private Power and Infrastructure Board (PPIB), was established in 1994, to facilitate private investors. Since then a number of public sector power units have been privatised with the financial and technical assistance of WB and ADB.

Water and Power Development Authority’s (Wapda) vertically integrated power wing was split into separate generation, transmission, and distribution companies according to Wapda Act 1998. Wapda was reorganised into four thermal generation companies (Gencos), nine distribution companies (Discos), and one National Transmission and Dispatch Company (NTDC). NTDC would remain under state control and be responsible for national dispatch, transmission and system planning as a ‘single buyer’. The hydroelectric power development and operation functions remain with Wapda. Despite these measures and pouring in of $2.0 billion by WB and ADB for enabling privatisation and introducing structural changes in the sector over past many years, the results have been contrary to expectations. The ADB is of the opinion that Wapda still exercises strong oversight and control over the unbundled corporate entities, heavy financial losses continue to plague Wapda and Karachi Electric Supply Company (KESC) and drain the government budget. Further, Wapda and KESC have also failed to generate sufficient funds for investment in urgently needed transmission and distribution capacity. Financial drain on the public exchequer adds to the soaring fiscal deficit. It is due to these reasons that international aid agencies ask for more reforms to make the sector competitive.

As the very first step, Pakistan Electric Power Company (Private) Limited (Pepco), a separate entity within Wapda responsible for restructuring and privatisation for generation and distribution companies is being abolished. This can take roughly nine months after the notification is issued on 31st October, 2010.

Privatisation of KESC did not result in anything fruitful and its affairs are no better than they were prior to privatisation. It is being contemplated that the privatisation model for generation and distribution companies of Wapda should be changed to management contracts, leasing and equity injection through initial public offerings to avoid private monopolies. Its success will depend upon multi-factors and is likely to take greater time than one can contemplate.

Another point of contention is the issue of power tariff hike and withdrawal of subsidies, which is being addressed since the past two years to make the sector financially self-sustaining. These two matters also form the major conditionalities of the current SBA programme.

Donors have repeatedly insisted that subsidies to the energy sector should be withdrawn because they create distortions in financial management. The government is going through the process and it has made electricity quite costly for commercial consumers, particularly those associated with export businesses. They condemn the measure on the basis that the rise in tariffs increases the overall cost of production and therefore, exporters’ products become less cost effective in comparison with products of regional competitors, who enjoy supply of electricity at cheaper rates.

Similarly, the dilemma of circular debt has reached its pinnacle. Circular debt has been accumulating due to non-payment of electricity bills. This is why the focus is on improving the functioning of distribution companies. Implementation of power sector reforms is imperative to rectify distortions faced by the sector and fiscal imbalances and power outages faced by the economy and people. The government should demonstrate strong political will to implement the reforms. Their implementation should not create unnecessary hardships for common consumers or cripple the country’s export potential due to high power tariffs. In order to reduce dependence on expensive fuels, furnace oil and natural gas, emphasis should be laid on generating comparatively cheaper hydroelectricity by expediting construction of Basha and Munda dams. Priority should also be given to curb line losses, theft and improve functions of the distribution companies. All deals in the sector should be made transparent to establish credibility of the political regime and its ability to deliver the results.