Daily Times

Prime Minister’s Adviser on Finance Dr Abdul Hafeez Shaikh announced on June 1that raising power rates and natural gas tariffs was “the only option before the government.”

One cannot blame him alone because he, though not unfamiliar with the major issues of our power sector, is new to his current position. But can his government, which has now been in office for almost a year, evade the blame for not acting effectively to cure the power sector woes?

Raising electricity rates is not a prudent decision. It hasn’t worked in the past, and there are reasons to believe, it won’t work this time, either. Besides, there were other options available to the government.

The electricity rates are already hard to afford. Most residential consumers are forced to compromise on other basic needs to pay their bills. There is evidence that average consumption in the country is declining. The decline is more pronounced for industrial and agricultural consumers who are finding it difficult to keep their products competitive and are compelled to seek alternatives to electricity from the grid. Additional rate hikes may drive away some more. Thus, if the government is hoping to raise revenues by raising tariffs, it may be up for a big disappointment.

Dr Shaikh said that raising rates was the only option left for his government. He should have looked around. In its State of the Industry Report 2017, the National Electric Power Regulatory Authority had identified widespread leakage, malpractice, and inefficiency and suggested several ways to cure these. The government should have acted on NEPRA’s advice. It has not. To illustrate the point, let’s discuss just three of the options.

Transmission and distribution losses (excluding K-Electric) are around 20 per cent today. For a well-managed utility, the acceptable range is 7 to 11 per cent. Thus, the losses under the PEPCO system are 8 to 9 per cent too high. This option alone could have released around 8,786 GWh of energy worth 107 billion rupees annually (valued using Rs 12.20 per kWh average sale price of electricity in 2017).

Raising electricity rates hasn’t worked in the past. There are reasons to believe that it will not work this time, either

Improving the collection of distribution companies’ billed amount was another option that could have been used to ameliorate the cash crunch. The current collection rate in the country is roughly 90 per cent, meaning that 10 per cent of the electricity sold, worth Rs 95 billion annually, does not show up in the accounts. Most of the uncollected revenues relate to unpaid bills of public-sector entities. The government needs to set its own house in order, before shifting the burden on to poor citizens.

System load factor is an indicator used in the power industry to gauge the extent of utilization of supply facilities. Since electricity cannot be stored easily, it must be produced and delivered the moment it is demanded. A high load factor means that the supply facilities are being used efficiently. It reflects positively on costs. A low load factor implies that supply facilities are being kept to serve demand, but used only sparingly. Good utilities maintain load factors in the 75 to 80 per cent range.

The load factor in PEPCO system is around 65 per cent at present, down from 73 per cent a decade ago, meaning that the share of the round-the-clock industrial and similar loads is either going down or that of the non-productive sectors is on the rise. Another option for the government could have been to improve the system load factor by incentivizing industrial and agricultural consumers. A five per cent improvement could have added additional 8,000 GWh worth Rs 103 billion annually, lessening the severity of the present crisis.

Together, these three options alone held the potential to add over Rs 300 billion to PEPCO’s revenues (roughly 30 per cent of its current base) and should have been tried before opting for the rate hike.

The NEPRA report also highlights another alarming fact. It found the performance of all the GENCOs under PEPCO “unsatisfactory.” If that was not enough, it also found that many of the GENCOs’ plants were being kept as “stand bys”, consuming a lot of fuel but contributing very little to serve demand. This indicates that independent power producers are not just serving the electricity demand at high costs; they are also eating away the GENCOs’ share thus, imposing a double cost on consumers.

The main issue in the power sector, however, is not of resource crunch, circular debt, high losses, or widespread inefficiencies. It is essentially a crisis of leadership – a failure by successive governments to entrust the technical business to a professional team and give it a free hand. The power sector entities, as a result, have become dysfunctional hubs of corruption, incompetence, and inefficiency. As management guru Peter Drucker had noted, “Only three things happen naturally in organisations: friction, confusion, and underperformance. Everything else requires leadership.”

No one expected the new government to set everything right in the power sector within a year, but there is no excuse for inaction either. By this time, it should have deployed a competent team that would be at work fighting its ills. Instead, all we get to hear is having no option but to surrender to the IMF while the power sector continues to bleed.

It is never too late. The government can still act to set things right. The first action it must take is to entrust the power sector’s management to a team of competent and professional hands – selected strictly on merit, with a clear action plan, and with their compensation also tied to achieving the agreed targets – and then allow this team a free hand to run their affairs at least for the next four years.

Pakistan may be short on many things, but it has never been short in capable people. It’s high time the government called some of them to duty.

The writer is a freelance consultant specializing in sustainable energy and power system planning and development