The World Bank news release, announcing approval of
$500 million IDA credit on 11th June 2002 in support of Pakistan's
ongoing PRSP, emphasized the acceleration of power sector reforms by
restoring the sector's financial viability and facilitating its
expansion. Reliable power at affordable rates is the key to industrial
growth, employment generation and poverty reduction. This paper reviews
ongoing power sector reforms and related critical issues.
WAPDA and KESC, besides generation, are engaged in
transmission and distribution of electricity throughout the country.
PAEC and IPPs also generate power but sell it in bulk to WAPDA or KESC.
Total nominal generation capacity at present is 18,062 MW (Wapda 9,
930MW, KESC 1, 756 MW, PAEC 462 MW and IPPs 5, 914 MW). Public sector
owns two-third of the generation capacity. The share of hydel is 28%
whereas the rest of the capacity is thermal. Originally about 70% of
total electricity generated in the country was hydel. However, due to
different reasons more of thermal generation was added and thus reduced
share of hydel, a cheaper source of electricity. Now there are efforts
to promote more of hydel generation.
Number of electricity consumers in Pakistan has
increased to 12.5 million: household 46%, industry 28%, agriculture 12%,
bulk supply 9% and commercial 5%. For faster economic growth, Pakistan
needs more generation capacity (of high reliability), particularly for
Information Technology and for producing quality value-added products,
of critical importance for earning foreign exchange for the country.
POWER SECTOR REFORMS IN PROGRESS:
Power Wing of Wapda has been restructured into
independent companies, i.e. eight distribution companies (DISCOs), three
power generation companies (GENCOs) and the National Transmission and
Dispatch Company (NTDC). The Pakistan Electronic Power Company (PEPCO)
may oversee all these corporatised entities. Ultimately, the DISCOs and
GENCOs will be privatised. As regards KESC, its privatisation is
underway. KESC balance sheet is being cleaned with a view to make it
more attractive to the prospective private bidders.
The government has extended significant financial
support to WAPDA and KESC. The government picked up KESC accumulated
losses and injected Rs 15 billion to keep it going. In case of Wapda,
the government converted Rs 30 billion of its debt into equity. The
government may consider tackling the following critical issues in order
to have better success with the power sector reforms.
CRITICAL ISSUES INHIBITING POWER SECTOR REFORMS:
PREVAILING CONDITIONS IN WAPDA AND
As against nominal thermal capacity of Wapda and KESC
at 5009 MW and 1756 MW respectively, available capacity is less, as some
of the plants are old. Due to this, there are more breakdowns /
interruptions. T&D losses are abnormally high and the utility
operations are in the red. Wapda and KESC are said to have invoked
vigorous measures to improve operational and management efficiency to
reduce power loss and theft.
Actual demand for electricity is more but the
consumers are not getting connections. Recently the industrial and
irrigation tube-well applicants brought this position to the attention
of Wapda authorities. Complaints of billing and breakdowns are not
uncommon. Attitude of employees of Wapda / KESC towards customers is
bureaucratic. The Chairman Wapda, while inaugurating a Service Centre
urged the staff to be pro-active in service matters. Training and
motivation of the personnel, with transparent procedures and quick
accountability may help improve the situation.
WAPDA RESTRUCTURING CHALLENGES AND COMPLEXITIES:
Proper restructuring of Wapda, to my understanding, will
involve careful decisions in the following:
ARRANGEMENTS FOR PURCHASE / SALE OF POWER IN BULK:
Wapda will be selling hydel power to NTDC. GENCOs and the IPPs will sell
power to NTDC. The NTDC is expected to substitute Wapda in the earlier
arrangements with the IPPs and the PAEC. The GOP / NEPRA has to ensure
that the purchase and sale are at-arms-length. Wapda or PEPCO or any
other entity should not be making undue profit.
NTDC will be selling power in bulk to the DISCOs as well as to KESC.
NTDC may expect some profit in addition to recovery of transmission
charges and the adjustment for the transmission losses. The sale price
to be cleared by NEPRA.
The DISCOs, within their respective areas, should recover the purchase
price, distribution cost, adjustment for reasonable transmission and
distribution losses, and some profit margin for growth. NEPRA to have
reliable data on all aspects of the transaction, to be used as basis for
future tariff determinations.
Distribution of Wapda assets to new companies:
Distribution of assets among PEPCO, NTDC, GENCOs and DISCOs has to be
fair and transparent. Matters may be discussed among the Government /
MW&P / MOF/ Wapda / NEPRA, possibly with the help from technical and
CAPITAL STRUCTURE OF THE NEW ENTITIES:
Fair and transparent basis may be used for valuation of assets being
transferred to each new company. Matching liabilities will also come.
Each company has to be so capitalized that it can sustain itself in
future without being a drain on Wapda / PEPCO or the government.
INDEPENDENCE OF THE BOARD OF DIRECTORS OF THE NEW
government as majority shareholder will decide composition of the Board
of Directors. It is suggested that the Boards may be broad-based. Wapda
/ PEPCO may have fair representation but not the majority. The
government may consider opting more independent directors. The Board
should be given powers to independently run the companies on business
COLLABORATIVE AND FAIR APPROACH:
All the stakeholders to realize that the unbundling of Power Wing of
Wapda is not an easy task. The division of assets and allocation of
liabilities have to be judicious and fair to all parties. Contractual
arrangements pertaining to supply of fuel to generation companies, sale
of bulk power to the NTDC and /or the distribution companies, etc.
should be reasonable, efficient, transparent and fair to all counter
On privatisation, generation, transmission and
distribution will remain part of KESC. Presently KESC is experiencing
abnormally high T&D losses. In my view, these can be largely
controlled if distribution function is privatised first. Based on the
areas served by different Grid Stations, four to five private sector
distribution companies may be inducted. KESC-Gencos may be incorporated
later for subsequent privatisation. The Transmission and Dispatch in
KESC area may be merged with NTDC. There is need to compare the
privatisation being pursued in respect of Wapda and KESC.
The Managing Director, KESC, in a meeting recently
with the PHMA, quoted power demand in Karachi between 1300 MW and 1800
MW, out of which 450 MW was obtained from Wapda while KESC capacity was
1400MW. In case of KESC privatisation, as per press reports Wapda has
not agreed to give an assurance that it will continue supplying power to
KESC as in the past. The issue needs early resolution for the
privatisation of KESC.
POWER POLICY- 2002:
It is suggested that work on up-dating the Power
Policy is initiated at the earliest. The government may allow
participation by public / industry. The following matters may also be
The original tariff to the IPPs did not reflect the fiscal and other
incentives allowed to the IPPs. The real tariff paid by the country is
much higher, if the impact of these incentives is factored in the
nominal tariff. Careful review of the risks earlier assumed by the
government will be useful for future.
There is need to re-assess roles of different institutions involved with
the power sector such as PPIB, LTCF, WAPDA, and NEPRA.
The matter of uniform tariff to all DISCOs or separate tariff for each
DISCO needs to be considered.
There are problems of circular debts among different energy companies.
As there are now more GENCOs and DISCOs there is possibility of more
such debts and possibly more friction, as each entity will be protecting
its own interest. The Policy may provide for amicable Dispute
POWER DEMAND / SUPPLY PROJECTIONS:
As against nominal capacity at 18,062 MW, available
capacity is less, as some of the public sector thermal plants are old.
Also, there has been less water in the rivers for the past few years.
Additional thermal capacity (particularly based on imported fuel oil)
shall have to be justified on basis of demand-supply projections under
different scenarios and using a set of probable annual load growth
rates. Additional generation capacity, fuel mix, public-private share
and similar other matters may be covered in the New Policy.
ROLE OF LONG TERM CREDIT FUND
The government, with the assistance of the World Bank
and other donors had set up the Private Sector Energy Development Fund (PSEDF)
in 1988. The IPPs could use loans out of PSEFD for up to 30% capital
cost. PSEDF, originally administered by NDFC, was later named as LTCF.
On merger of NDFC with the National Bank of Pakistan (NBP), the LTCF is
now managed by NBP. It is not clear how far the LTCF financing is now
relevant. In the past the LTCF played substantial role in the financing
of large IPPs, though similar generation capacity was added by some IPPs
without LTCF financing.
WAPDA AND NEPRA RELATIONS:
Nepra is committed to provide a fair return to the
investor while ensuring safe and reliable service at competitive rates
to the consumers. Nepra has since issued generation and distribution
licenses to a number DISCOs, GENCOs, the IPPs and the SPPs. Nepra has
made a number of determinations for increase in tariff per kwh. Wapda
and KESC have not been happy with Nepra in respect of tariff
determinations. A special committee has been formed to look into the
matter. It takes lot of time, money and dedicated efforts to establish
an independent and fair regulatory authority. The government and the
other stakeholders are urged to look this matter objectively and help
the regulatory system to evolve on sound lines.
ECONOMIC DISPATCH ORDER AND DEALINGS WITH THE
In my view, the strategy should be that the system
gets the cheapest electricity, from whatever sources, whether GENCOs,
Wapda, PAEC or the IPPs. Wapda has certain arrangements on tariff with
the IPPs. To the IPPs, Wapda pays 100 % CPP at a specified Load Factor,
say 60%. If Wapda asks the IPP to supply power below that Load Factor,
Wapda will be paying higher total average price per unit. However, if
electricity is purchased more than specified Load Factor, it will be
cheaper for Wapda per unit. An exercise needs to be carried out to see
if the cheapest electricity was purchased in the past.
Pakistan has to attract local and foreign investors
for additional capacity and for the privatisation of the capacity now in
the public sector. Conducive atmosphere with fair, transparent and open
procedures can help us meet power needs at reasonable cost.
The restructuring of Wapda and the privatisation of
KESC are part of the reforms of the power sector. Technical help and
financial resources may be required for successful implementation of
reforms. The government may consider continued liaison with the IFIs on
financing of additional generation capacity. The IFIs would most
probably want the new thermal capacity to be in the private sector or
perhaps agree to joint venture between private sector and GENCOs. This
may be another step in public-private participation and may be
We wish Wapda, all IPPs, GENCOs, DISCOs, NTDC, KESC,
LTCF, NEPRA, fuel suppliers, etc. to be profitable. However, none should
be unfairly making money at the cost of others or the general public.
New IPPs have also to be attracted for additional power needs.