Strange things never seize to happen in Pakistan’s economic environment! A recent briefing by NEPRA’s Chairman to the World Bank, the Prime Minister and his Advisors where he called upon the government to declare a Power Emergency in the country not only fits the bill on these constant gaffes by Pakistan’s SOE (State Owned Enterprises) Managers, but also raises a host of questions. The contents of his proposal aside, which we will discuss later, the fact remains that such public outburst (after all it is common knowledge now) by any senior management level person is against the elementary principles of sound management practices, since not only do they tend to expose the institution to operational and financial risks by creating a negative public perception, in-turn, panicking its stakeholders (including customers/consumers) and adversely affecting its market cap and financing threshold (perhaps sometimes not overtly visible in case of the SOEs), but also in the process end up jeopardizing the very underlying operational sustainability of that institution.

So naturally Mr. Siddiqui’s statement has also generated a lot of anxiety, both in the markets and amongst the general public. The problem with discussing corporate problems in public arena is that not everyone understands business nuisances and therefore draws his/her own conclusions leading to speculations, fears and subsequently discontent with the government – something that PTI can currently ill afford.

Such needless and ultimately damaging publicity aside, what exactly is Siddiqui Sahib looking for. Briefly, the power regulator has advised the government to declare a power emergency in which to take a series of steps on an urgent basis: A ban on labor unions; No imported fuel-based power projects; All power companies to switch to strict compliance of the laid down codes of corporate governance, albeit under the stewardship of professionally competent board of directors; Re-structuring of loans on certain power plants, where possible, namely, 8 thermal power plants, 3 LNG-based plants, 3 coal-based plants and 2 nuclear power plants; any type of dividend/collection transfers to provinces should be stopped; inefficient power producing plants to be shut down with immediate effect; removal of surcharges & taxes from power bills to instead provide a lower electricity tariff rate to industry and domestic consumers; re-negotiation with IPPs on payment of mark-up to them on delayed payments; fast tracking renewable energy policy; re-negotiating LNG Contracts; abolishing the ‘take or pay’ contracts with the IPPs; Market based determination of Thar coal; promotion of hydropower projects; privatization of loss making Discos; outsourcing billing; forcing industry to also operate night shifts; Discos’ scope of services to be further broken up into smaller categories; Outsourcing loss making feeders on a complete project basis; and last but not least, industrial power demand to be somehow increased by the government. Well, not withstanding the fact that a) NEPRA itself is the culprit in some of these areas (so why complain elsewhere) and b) a good number of these proposals, under the prevailing cirandstances, just don’t make much sense, one must nevertheless confess that on the whole one cannot find too much wrong with most of the steps on the Chairman’s wish list.

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However, the million-dollar question is that by whom and how will all these recommendations be implemented? Not only is the economy headed in the wrong direction, but also for now there seems a general lack of political will to tackle any difficult and contentious issues. For example, how do you force industries to run night shifts in a contracting economic environment and how exactly do you spur desirable demand when in reality industrial growth is stuttering? Today in Pakistan only 40% of the power produced is consumed by industry & agriculture, whereas, in India it is 60%, Bangladesh 55%, China 70% and Myanmar 75%. Then, there are certain proposals given by Chairman NEPRA that simply cannot be solved on a fast track basis, as they are invariably tied into long-term sovereign guarantees or are subject to certain prevailing political & security limitations (e.g. Projects under CPEC).

In addition, to make matters worse, it appears that the Chairman and his political bosses don’t see eye to eye. There exists a constant squabble over differences between the statistics of the government vs. that of NEPRA. For example, to start with they cannot even agree on basics, as both present starkly different numbers on the sector’s actual overall debt, as it stands today. Further, according to NEPRA the net receivables of energy companies increased by almost 30 percent in the last 18 months but the government disputes this; similarly they disagree on the actual outstanding amount of circular debt, as it stands at present, and also on the rate at which it is rising per month. And last but not least, is the saga of an on-going dispute on what constitutes a prudent price/tariff determination – A difficult one to call in either side’s favor, because both seem to have it wrong and perhaps are barking up the wrong tree: Despite a whopping 41 percent increase in electricity tariff in less than 18 months, the circular debt keeps on rising – meaning, the malaise is much deeper and simple tariff revisions will just not do! And this very deduction in fact takes us to the fundamental problem afflicting the management structure of state-owned enterprises per se in Pakistan, that wherein both operational and investment decisions are generally made through an unhealthy combination of political expediency partnered by an ingrained bureaucratic culture based on total disregard on adherence to the IFC and market principles. So much so that in some cases the disconnect with sustainability has been found to be starkly glaring and obvious: For example, some SOEs or semi-government institutions continue to operate with financial statements where expenses at best match or even exceed revenues OR where private sector Board Members (of SOEs) are sometimes refused advance access to meeting’s working papers in the name of confidentiality relating to state matters – so much for board’s oversight!

So really, what Mr. Siddiqui should instead be recommending to his bosses is the dire need for undertaking some wholesale fifth generation reforms in Pakistan’s power sector, if it indeed has to successfully attain self-sustainability and stop being a burden on the national exchequer or its consumers – Open up the domain to fair competition and the rest automatically falls into place. While admittedly there is always an important role for the SOEs to play in an economy and there are a number of countries that continue to use their SOEs efficiently to gain global economic advantage (not to forget East India Company here), however, Pakistan’s history with SOEs has almost always been marked with failure. A story of corruption, incompetence, lack of merit and a feudal mindset to decision making has overtime led to a situation where the more you expand the role of the public sector the more you lose. The last ten years of PML-N in Punjab and their last 5 years both in the center and Punjab are laden this same mistake being repeated again and again. As the Sharifs expanded the government’s footprint on the economy (perhaps in quite a few instances merely to gain cheap political mileage), the country’s plunged deeper into a debt trap, finding itself stuck with a high number of idealistic and un-sustainable projects put up at costs much more than necessary and left with a complete vacuum in their operational managements structures, a pre-requisite to run any project successfully – and now a good number of these stand abandoned by the present government, simply lying dormant, more like ticking economic time bombs. The trouble though is that while previous investments still remain stalled, this government appears to be taking on its own new favorite expenditures and thereby falling in the same trap.

Ironically, during PTI’s tenure of (almost) 2 years the government’s footprint on the economy has in fact been steadily rising, both in terms of borrowings and size! For any visionary interested in the long-term fix, the real solution to power sector woes lies in embarking on structural reforms that gradually allow an increase in space to the private sector and ensure an environment where the state-owned power sector would need to compete on a level playing field and be assessed purely on its operational efficiencies. The draconian and lop-sided legislations giving undue and skewed powers and rights to state’s power company will need to be revised. And this is neither going to be easy nor quick. Unwinding an infestation spread over nearly half a century is not going to be without pain. In order to successfully undertake such reforms a consensus will need to be developed amongst all the political parties, as otherwise somewhere down the line the process will just fall prey to political opportunism. Finally, as a history lesson, it took Margaret Thatcher’s strong will and iron hand to ring key reforms in UK’s power sector, back in the late 70s, the fruits of which the British people are enjoying today: Power rates in the UK (in real terms) are lower today than in the 70s (50 years on) and in London a consumer can switch his supply source to any of the 5 different utility companies, right from the comfort of his home, and by simply a click of a button – All this thanks to Thatcher’s resolve in providing a competing space to the private sector and creating an enabling environment. And even more interestingly, the state run company, British Gas (Power) still occupies the largest market share in the UK and has turned itself around to operate profitably!