Power sector reforms

EDITORIAL (October 07 2010): The federal government is under considerable pressure from development financial institutions (DFIs) to reform the power sector. Notable amongst the DFIs is the International Monetary Fund (IMF) that has emerged as the single largest lender to Pakistan in the last two years and has extended 11.3 billion dollars under its Stand-By Arrangement (SBA).One of the critical conditions of this support was the reformation of the power sector along the lines earmarked by the World Bank and the Asian Development Bank (ADB). The nature of reforms proposed by the DFIs and accepted by the federal government, regarded as standard normal DFI conditions, ranged from ensuring full cost recovery, (by eliminating subsidies through raising utility rates as well as ending cross subsidies), improving efficiency, (Pakistan suffers from the heaviest transmission losses within the region), as well as eliminating the large inter-circular debt.These reforms have the capacity to allow the power sector to operate at full capacity which, it was argued, if implemented would automatically reduce the massive power shortfall in evidence for the third year running. The government however needs to guard against recommendations that have a feel good factor but have not been implausible in the past. One such recommendation made most recently by the Deputy Chairman Planning Commission Nadeemul Haq is to reduce transmission losses and inefficiencies within the power sector.

No one would challenge the government premise that had these reforms been carried out according to the timelines identified in the loan agreement, they would have had severe political repercussions. However critics would automatically point out that the federal government could have better negotiated the terms and conditions to the loans from DFIs, including the SBA, instead of blindly agreeing to a set of conditions that was tantamount to political suicide.Pakistan has emerged as the largest single borrower of ADB and instead of exercising its considerable clout because of this status it continues to fritter it all away by blindly agreeing to all conditions due to a misplaced fear that the Bank would then suspend all assistance.

It is therefore hoped that the relevant ministries as well as the Economic Affairs Division take cognisance of how best to exercise clout as a major DFI client by looking at how China and India successfully dealt with DFIs like ADB and negotiated loan agreements that benefited their country instead of supporting the career of DFI staff.ADB has threatened to cancel a loan agreement on the energy savers project because the government has yet to sign an agreement with the Agence Francaise de Development (AFD). One would hope, though it is doubtful, that the reason for the delay in signing is because the government is having second thoughts about purchasing energy savers valued at a little less than a billion dollars from abroad; and is considering setting up a plant to manufacture them locally.

It is unfortunate that the present government’s focus in meeting the large energy shortfall is on the controversial rental power projects (RPPs) or on new generation, with the highest inherent cost, which would further increase utility rates, instead of optimising operational capacity of existing units. Pepco was rendered dysfunctional as a consequence of the power sector reforms, however it is alleged that the reason for this was the increasing friction between the Pepco Chairman and senior officials at the Ministry of Water and Power including the Federal Minister.The issue was simple: Pepco Chairman’s insistence that those RPPs, which failed to commence operations in spite of the 14 percent advance must pay a penalty as well as his reservations on the RPPs themselves. What lends credence to this view is the fact that while Pepco has been dissolved yet its functions would now be carried out by the ministry – Brecorder