THE government is planning to privatise three electricity distribution companies (DISCOS) this year. This writer has been a vocal proponent for a deregulated, open market-based management of the Pakistan economy, but regards privatisation as just one of the instruments to achieve this objective. This article argues there are enough reasons to be less sanguine about the ability of the private sector and competition to provide affordable electricity to all given the predominant objective of providing reliable and assured energy to all Pakistanis.

The key issue afflicting the sector is governance, in the form of collusion between the personnel of the DISCOS and consumers in the theft of electricity (through either underreporting of consumption or its parking under some other head), followed by the high level of technical losses — owing to inadequate investment in the transmission and distribution infrastructure.

Resultantly, the majority of DISCOS (established with literally no equity base) are not financially solvent and unable to upgrade their infrastructure, expand capacity and manage distribution systems to ensure reliability of electricity supply. The extent of their insolvency has been adding to the debt profile of the government.

The privatisation of DISCOS will check the financial hemorrhaging and supposedly improve efficiencies and competitiveness in the sector and in the economy as a whole with increased competition having a beneficial impact on the sector, through both better customer services and lower prices.

The most important aspect following privatisation will be the need for a strong regulatory capacity.

In the foreseeable future, however, competition in distribution will never be more than a marginal phenomenon in improving the capacity and quality of service delivery of Pakistan’s electricity sector. The privatisation and market model is being imported from countries that do not suffer from scarcity of electricity. This model needs to undergo major revisions before it can be adapted to our conditions, as has been discovered in the case of K-Electric.

To this end, the most important aspect following privatisation will be the need for a very strong regulatory capacity so that consumers do not suffer from the kind of tariff hikes and consequent problems that were experienced in California. For us the challenges will be the quality of regulatory oversight and inter-agency coordination (because of multiple agencies operating in the sector).

Since electricity distribution through a DISCO (even if it is driven by a market-based model) would be a monopolistic situation (incentivising lethargy) it would require, for safeguarding public interest and smoothness in service delivery, economic and social regulation. However, our regulatory oversight is highly politicised with governmental interventions playing to the gallery rather than focusing on consumer rights on service standards, efficiency and economic considerations.

There is also a proliferation of regulatory agencies, driven by donor funding (around the time that there was a worldwide impetus for the need to establish and empower independent regulatory agencies) and the opportunities for employment it provides to retiring well-connected/ ‘loyal’ bureaucrats, most of whom have limited technical and market expertise.

Resultantly, our regulatory institutional endowment is miserably inadequate at the technical level (compared with the human and financial resources that the private sector will have at its command) as well as with respect to the ability to obtain and absorb information in a timely fashion on global good practices on auditing, benchmarking and changing production costs. These aspects are not getting adequate attention in plans to privatise DISCOS.

Moreover, there is an ad hoc and arbitrary division of powers within the government which has caused sub-optimal outcomes for the country in general and the sector in particular, requiring the merger of Nepra and Ogra. Neither of these institutions is autonomous, with powers given in the legislation taken away from them by the executive. This makes them ineffectual, and they function purely as a subordinate agency to the water and power ministry.

The degree of autonomy to be granted to such a merged body and empowering it with the essential regulatory tools will be a sensitive subject given the distaste of our political leadership for any institutional autonomy, borne out by experience of governmental/political intervention which renders them no more than rubber-stamping entities.

Moreover, since electricity is a concurrent subject under the Constitution we need to ensure that there is a consensus over the institutional arrangement, especially to avoid regulatory overlapping, confusion and a conflict-ridden environment for settling disputes. This is a formidable agenda for completing an action plan to avoid the kind of confusion, uncertainty and bitterness that has overwhelmed ties between the government, the regulator and K-Electric.

Perceptions, instead of a serious third-party authoritative evaluation of performance and compliance with the rather favourable terms of the 2009 licensing agreement (secured by dragging out senior bureaucrats from their beds past midnight to sign on the dotted line), are driving the debate on the success or otherwise of privatisation of KESC in a politically sensitive market attuned to theft (largely through the kunda system) with state institutions looking the other way.

Following privatisation, the engagement and implementation of regulatory disciplines will determine the quality of service delivery and efficiency of operations. And for an informed decision on the way forward we need to examine and evaluate the experiences of other countries where these solutions have been employed. Particularly instructive would be the case of the UK, where many of these utilities have been reconsolidated into a few vertically integrated enterprises and transferred back to the public sector.

The relationship between the private service provider and the regulator will necessarily evolve over time. There will be a longish transition period (given our admittedly short history and tradition of regulatory practices) in terms of the level of transparency of the consultation process, independence and discretion (with the risks of inconsistency and subjectivity that could change with a change in senior personnel) with which the regulator would, or should, be vested (the UK model).

This will have to be tempered by the stringent application of laws, rules and procedures that may well drive the temperament and attitude of the regulator (the German model). Striking the right balance between the two models will depend on our institutional capacities, presently rather weak, which will influence regulatory styles and the maturity that comes through experience.

The writer is a former governor of the State Bank of Pakistan.

Published in Dawn, July 7th, 2015

On a mobile phone? Get the Dawn Mobile App: Apple Store | Google Play