Authorities in the energy sector are back to their same old work ahead of the arrival of the International Monetary Fund (IMF) staff mission later this week for discussions about another possible bailout package.
The government has already increased average tariffs for electricity and gas by 11 per cent and 30pc, respectively, and devalued the currency by over 10pc as prior actions.
Before the economic team opens up talks with the IMF mission, Finance Minister Asad Umar will have already lined up additional bucks from the Chinese platter and have a clear idea of what support he needs from the lender of last resort. But as he has repeatedly said, he needs the Fund programme more for an institutional oversight for other lenders and capital markets to bank upon than the money per se.
Banks have stopped lending to the power sector because of overexposure. Chinese investors have compelled the authorities to have a revolving fund for a standby letter of credit to ensure payment of their bills irrespective of what happens to domestic operators
The minister has already removed most of the loss-making entities, particularly all power distribution and generation companies, Pakistan Steel Mills, PIA and Pakistan Railways, from the privatisation list. The argument is fair enough: their placement on the privatisation list for more than a decade had been detrimental to their operations. These entities could be neither privatised nor revitalised.
This is evident from the fact that distribution companies currently face a shortage of more than 53,000 staffers against a sanctioned strength of 171,341. This is because of a ban on fresh recruitment over the past few years as these entities have been on the privatisation list. To be fair, with more than a 30pc staff shortage, nobody should expect wonders from power companies in the given culture and circumstances.
Therefore, the drastically curtailed privatisation list now contains two LNG-based power projects of 1,230 megawatts each, which were set up by the PML-N in Punjab. It also includes some other small entities like SME Bank Ltd, First Women Bank Ltd, Jinnah Convention Centre, Islamabad, Lakhra Coal Development Company and Services International Hotel, Lahore.
Files are being dusted off from the time when the IMF said goodbye to Pakistan on the completion of the Extended Fund Facility (EFF) two years ago. One wishes the IMF had stayed on as a monitor to ensure fiscal responsibility and improvement in the energy sector, notwithstanding its failure to pursue structural reforms.
Soon after the IMF’s departure, the authorities stopped working on quarterly monitoring reports they used to make public as one of the benchmarks to show improvement in the functioning and performance of the power sector. The three-year circular debt–capping plan put in place more with the support of the trio of international lending institutions — the World Bank, the Asian Development Bank and the IMF — slipped out of hand immediately.
The capping plan promised a reduction in the flow of the power-sector debt build-up from Rs314bn at the end of June 2015 to Rs212bn at the end of June 2018 as well as a decrease in the debt stock (parked in Power Holding Company (PHPL) of the Power Division) from Rs335bn to Rs220bn during the same period. This put the total circular debt at about Rs650bn.
This was to be achieved through a combination of efficiency gains, privatisation, private-sector participation in bill collection and clearance of government bills along with a rationalisation (increase) in power tariff. In a nutshell, collections were targeted to be improved by 5pc, technical losses reduced by 1.7pc and subsidy contained below 0.4pc of GDP (Rs128bn) at the time.
Consumer tariff was significantly increased to pass on about Rs145bn annual losses and inadequate recoveries to people through a series of surcharges. In addition, the regulator was forced to allow higher technical losses and relaxed efficiency standards in tariff worth around Rs95bn. After some initial success, the bureaucracy put the efforts to improve the sector on the backburner as the PML-N’s focus shifted to political challenges and elections.
The Rs120bn annual debt build-up in the meantime swelled to Rs350bn or so as the crackdown against theft, non-payments and inefficiencies slowed down coupled with a substantial capacity addition. No wonder then the bill collection that had improved from about 88-89pc in 2015 to 93-94pc in 2016 could not be sustained and technical losses stood firm over 18.2pc.
Three years down the road, the total debt now stands at about Rs1.3 trillion — double the figure from three years ago. This includes a fresh flow of Rs682bn and about Rs618bn of stock with PHPL as defaults by consumers stood at Rs400bn as of September 2018, which contains Rs100bn worth of permanently disconnected consumers, and total receivables touching Rs800bn.
Not surprisingly, the domestic banking sector has stopped lending to the power sector because of overexposure. Chinese investors have compelled the authorities to have a revolving fund for a standby letter of credit to ensure payment of their bills irrespective of what happens to domestic operators.
The circular debt–capping plan is being re-worked out ahead of the IMF visit. The target again remains almost unchanged — 5pc reduction in technical losses and 5pc improvement in bill recovery in five years. This means the aim is to reduce system losses to 13.2pc and improve recoveries again to 94-95pc. Past experience shows this is no guarantee as the monthly build-up hovers around Rs30-35bn — a whopping Rs360bn a year.
For the success of any future programme and reforms, one can only hope that the IMF will learn from its past experience. Asad Umar and Omar Ayub Khan should go through the files of the PML-N era to ensure that the energy-sector bureaucracy delivers whatever it commits to deliver instead of repeating the Power Division’s past tricks. Consumers have no more capacity to bear.