Economic reforms

In the first part of this series that was published last week, we had explained the notion of economic reforms. One of the key messages was that, despite the beneficial nature of reforms, economic managers are hardly motivated to own the process. If at all they show keenness, it is to secure loans.

Once the need is met, the process is terminated or not pursued to its logical conclusion, which results in a distortion of its own. To be fair, the multilateral agencies also have agendas and, not too infrequently, push reforms that may not always coincide with the interests of the country or be feasible under conditions on the ground.

An area that illustrates the full spectrum of malice afflicting our reform programmes is the power sector. USAID had initially encouraged the induction of the private sector in power generation. The wind to dismantle infrastructure monopolies, which was hitherto the exclusive preserve of governmentowned entities, had started blowing in the 1980s under the ReaganThatcher administrations. A defining characteristic of these sectors was widespread shortages ( for example, in telephone and electricity connections). New investments were constrained, however, as the traditional sources of financing - official development assistance (ODA) - dried up, opening the door for private capital to venture into these lucrative sectors.

As these realities were shaping up, the deeply-entrenched economic establishment of such monopolies saw the power sector's interests threat- ened. It, therefore, rolled its sleeves to oppose private investment.

In July 1992, the government approved a strategic plan for the privatisation of Pakistan's power sector, which envisaged that the power wing of Wapda would be corporatised through the formation of companies in three groups - generation companies (Gencos), distribution companies (Discos) and the National Transmission and Dispatch Company (NTDC). A regulatory body, the National Electric Power Regulatory Authority (Nepra), was also established. A supervisory company, known as the Pakistan Electric Power Company (Pepco), was formed to initially hold the shares for the corporatised companies.

The next step of reforms entailed the privatisation of these corporatised entities. Wapda would not invest in power generation, except in large hydro projects. Private investment would be invited for new generation capacity. Additionally, a 500 KV transmission line was to be constructed in the private sector and an area electricity board together with two generation projects Kot Addu (1,600 MW) and Jamshoro (800 MW) were to be privatised.

The World Bank spearheaded the work on policy formulation and implementation and approved several loans. In 1985, the first proposal for the establishment of an independent power project (IPP) for 1,292 MW was submitted by a Saudi investor. The project came to be known as the Hub Power Company (Hubco). It was the largest private sector project at the time. A consortium of several dozen international commercial banks arranged its financing. The World Bank established an energy development fund (EDF) where numerous export development agencies also contributed resources in addition to a $250 million partial risk guarantee for Pakistan. The government took five years to give its first approval (1990) to the project while the subsequent documentation took another five years to complete (1995).

A major push to induct the private sector came under the second Benazir government, which introduced the 1994 energy policy that attracted considerable investments. This laid the groundwork for agreements for power purchase (PPA), fuel supplies (FSA) and government assurances during implementation (IA), which were hailed as best international practice. An upfront tariff of six cents/kwh was given and investors invited on a firstcome-first-served basis. Projects worth 3,400 MW (excluding Hubco) were signed. Initially, there was some overshooting of the required capacity and there was surplus power in 1998. The government erred in disregarding arguments for spacing private investment and bringing some kind of competitive bidding.

There was a massive backlash from the politicians as well as those who saw their displacement after the arrival of private power. Soon, the entire process was politicised and after the removal of the Benazir government, both officials and investors faced accusations of corruption and notices for cancellation/renegotiations.

Foreign investors awoke to a rude shock of the risks associated with large investments. Curiously, nearly all projects survived without effectively conceding any reduction in tariff: A 10-percent average tariff reduction was compensated by an extension in the power purchase agreement from 20 years to 30 years. Indeed, these plants became the mainstay of power supply during early 2000, as old capacity was worn out and new foreign investment stopped after the IPP experience. The dispute was resolved when we faced a major economic crisis after nuclear tests and a subsequent rush to the Paris Club.

The problems that unravelled in the power sector were the high cost of new generation, which came to fruition simultaneously as compared with the old Wapda mix, and the government's decision not to pass on the increased cost to consumers. This is the classic risk in carrying out reforms. Policymakers would like to have their cake and eat it too.

Future investments in the power sector were suspended for nearly a decade and the ugly monster of loadshedding once again started rearing its head.