POWER SECTOR PRIVATIZATION: AT WHAT COST?

Non-productive use of electricity is constantly on the increase

By Dr. MIRZA ARSHAD ALI BEG
Jul 06 - 12, 1996

The Water and Power Development Authority (WAPDA) was set up in 1958, charged with the responsibility of development of water and power resources of the country. What the WAPDA could have done was to achieve both objectives in one go by starting with the establishment of the hydel power projects at the most appropriate site, identified while developing the water resources. Its deviation from this mode of achieving the objective has been catastrophic and now the nation is paying heavily for this lack of foresight.

The WAPDA and the country planners are, however, only partly to be blamed since they were constrained by the availability of funds and were pre-occupied with the implementation of the Indus Basin Treaty. WAPDA had to attend to the development of the water resources in the light of the apportionments made to the two countries by the Indus Basin Treaty and hence could not undertake the development of hydel energy resources, other than those under the said treaty.

Both Mangla and Tarbela are, no doubt part and offshoots respectively of the Indus Basin Treaty, but they are the only ones which have been accomplished by WAPDA. It was unequivocal that Pakistan had great potential for the establishment of hydel power stations. WAPDA could, if it had been planning and executing its own plan, have done much better by pursuing further on projects for which studies were already available. After successful completion of the Mangla Dam project, word on a dam identified by these studies, besides Tarbela, should have been launched. This might have brought the Basha, Ghazi Brotha and Kalabagh Dam into reality long time before the onset of the political mudslinging. By not prioritizing these dams, the planners missed the best opportunity. The hydel power projects have hereafter been so heavily politicized that the WAPDA had to withdraw its tentacles and just did not establish any major hydel unit. The power development programme received a severe setback as a result of the Kalabagh Dam controversy. The power sector lost all its time over this issue, which was denied the place the nation deserved, if it had developed the larger power generation capacity at the most appropriate time.

WAPDA could have gone in for small-scale hydel power generators to reduce the cost of power production, as has been done by Pakistan Council of Appropriate Technology which has been installing mini hydel power (MHP) plants in the NWFP and Northern Areas since 1976. The 184 MHPs so far installed have an approximate capacity of 2.2 MW each, with a total cost of 15.17 million upto June 1995. The MHP plants are economical and their cost is approximately Rs. 18,000 per KW.

Thermal power plants

There was no meaningful enhancement in the power generation capacity of the power sector which achieved only 3,500 MW upto 1980; the targets of 10,000 MW remained elusive. Even the forecasts for the rate of increase in power consumption were pessimistic and only 17,700 Mwh were supposed to be the requirement by 1994 by the Sixth Five-Year Plan document.

Thermal power generation had a share of only 51% in total power generation of 7,400 Gwh in 1971-72, which increased to 55% in the total power generation of 40,300 Gwh in 1990-91 and was, almost 60% of the total 53,000 Gwh power generated in 1994-95. The cost of production of hydel power is only Rs. 0.02 to 0.08 per Kwh, far cheaper than thermal power but the WAPDA claims Rs. 3 to 5 from commercial and industrial consumers and Rs. 1.5 to 2.78 from domestic consumers, for reasons stated later.

Having been denied the authorization to enhance the hydel power capacity, WAPDA went for development of thermal power plants which, though expensive, have a low gestation period. The Hub Power Project was conceived in 1985 as a result of the long-term energy strategy developed by the World Bank to involve private sector funding in power generation. The Kot Addu Thermal Power Station was the latest unit of the WAPDA network producing 924 MW electricity at Rs. 0.85 per unit and making profits. Its debt burden of $756 million or Rs. 23.436 billion was passed on to the buyer at an increased mark-up of 14%, when it was privatized. Going in for thermal power has upset the hydel: thermal balance and raised the cost of production, which is the main reason for holding WAPDA responsible for its not prioritizing hydel power generation.

Consumption-oriented society

The installed capacity for power generation at the time of independence was only 119 MW while it is now 12,883 MW. The commercial energy supply has increased from 7,572 Gwh in 1971-72 to 53,545 Gwh in 1994-95. The number of consumers has increased rapidly from 0.31 million in 1959-60 to 9.6 million as of January 1996. The number of electrified villages stood at a mere 6000 at the time of independence, which has now increased to 60,000.

It may be noticed from the following table that the consumption of electricity by various economic groups has assumed a pattern characteristic of the consumer society. The domestic consumption which was only 17.7% in 1978-79 has increased to 40.4% in 1996 while the share of its use in industry and agriculture has in the meantime declined from 39.7% and 23.8% to 28.9 and 18.3% respectively. This, by all standards of a developing society, is a dangerous trend. It may indicate prosperity and give the impression of enhancing the quality of life, but in real terms it reflects on the unproductive use of electricity, which is a characteristic feature of a pseudo-affluent society.

The social setup of this country has unfortunately become consumer-oriented during the last 25 years and the trend is clearly towards its becoming a consumers' market, as part of the New Economic Order which requires that all economies be aimed at an open market system. Pakistanis have responded very positively by importing, or else smuggling commodities, instead of manufacturing them locally. It is this consumerism which has filled each home in the rural and urban areas with electrical appliances.

The increase in communication facilities and the consequent increase in the mobility of people has resulted in the purchase of electrical items. The purchase of such appliances and gadgets has been promoted by the remittances from the Pakistanis working abroad. Factors such as these have raised the expectations of the people and promoted the consumer behaviour. The beneficiaries are the industrialized countries which market their commodities.

Consumer behaviour has given rise to evasion of taxes, adoption of short cut methods to get electricity. Several hundred thousand units of electricity are being consumed every month through corrupt practices but are shown as power losses. The heavy load to meet the domestic requirements and of illegal connections is responsible for power breakdown and loadshedding. The overall inefficiency in management allows pilferage in the distribution system, which is compensated for by the WAPDA by raising the tariff but attributing it to the pressure from the World Bank which asked it to discontinue its practice of supplying power at concessional rates, or face disqualification from borrowing. The lending institutions have indeed been pressing WAPDA for the end of distortions and subsidy in the tariff structure.

The demand for electrical power, compounded by the illegal losses, is estimated to require a capital cost of Rs. 700 to 1,000 billion for thermal power generation of the magnitude of 54,000 MW by the year 2018. The running cost in terms of fuel only will be $2.5 billion i.e. 13 times higher than the present. Additionally, it will pose the problems of handling, transportation and infrastructure. It was this depressing scenario that prompted the government in 1985 to work out a long-term strategy, in collaboration with the World Bank for private investment in the energy sector and to privatize the thermal power plants so that it could provide electricity and launch on meaningful industrialization.

The present government, while looking for the augmentation of the power generation capacity through private investment, adopted an Energy Policy in March 1994 and established the Private Power and Infrastructure Board to encourage private sector participation which had been inhibited in the past as a result of nationalization of a large number of units in the 1970s. The Board received 116 applications for a total generation capacity of 26,000 MW since the Policy is quite ambitious and the incentives offered are very liberal, attractive and internationally competitive. The Policy offered bulk power purchase by WAPDA and KESC at the rate of $0.065 per kwh and guaranteed a real rate of return of 18% in foreign exchange. The import of plant and machinery has been exempted from customs duty, but not sales tax. The foreign exchange risk cover is provided by State Bank of Pakistan and there is an indefinite tax holiday.

Letters of support were issued for 31 projects for generation of a total of 7245 MW. WAPDA signed power purchase agreement with 17 firms for 5,382 MW and KESC signed with 10 firms for 2,513 MW. By March 1996, 33 projects had been issued letters of support for the production of 7,637 MW to meet the targets of the Eighth Five-Year-Plan. Financial close marking the start of construction has been achieved by 12 firms to generate 2,150 MW at a cost (capital) of $2.4 billion. The issue of a letter of support to and signing of power purchase agreement with Consolidated Electric Power Asia (CEPA) for the establishment of a 1320 MW coal-fired power plant at Keti Bunder at a cost of $7.4 billion, is besides the above projects. The government also included the partial privatization of the thermal units of the energy sector and has privatized the Kot Addu Thermal Power plant through the sale of 26% of its shares.

The positive response from foreign investors has been considered a success of the Power Policy. The high tariff rate that will be a deterrent factor for the user of energy in industry which is faced already with high cost of input, resulting from the devaluation of the rupee and increase in the cost of POL, has been disregarded. It has been argued that India, Indonesia and Philippines are already offering higher rates of 7 to 9 cents per Kwh. Transparency of the processing of the deal and the adoption of a standardized procedure are claimed to be responsible for the massive investment. Transparency of the process has been evolved by straightforward handling and apprising the investor of the terms and conditions of the contract. This has not been the experience of the investors so far in other countries. Whatever may be the reason, the fact remains that the investor has been guaranteed safety for his investment and a substantial return and that is what any investor will be interested in.

The attainment of a production of 7,000 MW by thermal power plants by the end of the Eighth Five-Year Plan is ambitious and based on liberal estimates. The rush to achieve the target through thermal power may bring about a situation in which production could be far in excess of demand. Besides deteriorating the thermal: hydel balance further which will enhance the back-breaking tariff rates for the consumers, it will require massive transportation of 1.78 million tons of oil for which the government is seeking the private sector to use the Pakistan Railways track and transport the oil to the 7 power plants that are likely to be commissioned within the next three years.

The present position is that the balance of payments situation has deteriorated and dipped to the low of over $3 billion. The growth of large-scale manufacturing units has registered a low rate of 3.1% rising from 0.5% last year, and over 5,000 factories have been listed as sick. With the inflation rate above 10%, and the cost of production of conventional items rendered uncompetitive in the export market, the possibility of utilization of the power from the power plants, being established by foreign investors, is being viewed by some (maybe the pessimists) as an exercise in futility. By contracting foreign investors to enhance the power production by 3,000 to 7,000 MW, the GOP will acquire an annual debt servicing burden of another $1.5 to 3.2 billion, which will be besides the trade deficit of over $3 billion due to a stagnant growth of the exports and a steep rise in the imports.

The investment in power sector, though guaranteed to yield massive return will, if the power is not utilized, be considered a bad loan which the tax payer will regret, the functionaries will claim as another feather in the cap, the investor will enjoy the return but will land the country deeper down into the debt trap.B

The writer is a former Director General (P&D), PCSIR