As Chairman FBR I was handling the issue of withdrawal of zero rating for sales tax on five export-oriented sectors it was then that I realized that price of electricity and subsidy thereon for industries is more important than many other things. I was not able to quantify, however, it was quite clear that a subsidy is warranted for such sectors. This leads me to the question of cost competitiveness of our export-oriented sectors. The issues that were discussed were tariffs in Lahore vs Karachi and many other such allied subjects. This shows the sensitivity of the subject of energy pricing and the compulsion for state intervention in this matter. The purpose of mentioning this instance is to exhibit that on one hand we desire ‘market-based considerations’ while on the other hand, for the same industry, we seek direct state intervention in a purely commercial subject. There is nothing wrong in this situation. This is our ground reality. What is needed is a transparent and equitable handling of this subject.
For example, we decide that on an overall basis there will be a subsidy of around Rs 1000 billion on the national level then the secondary question is who should bear it? At the moment it is completely borne by the federal government. In my view, this is not a correct system. This matter directly relates to people at large and provinces have to contribute towards that subsidy. If industries and agriculture are provincial subjects then why subsidy to be provided to these sectors in the form of cheap electricity should not be a provincial subject. This matter even if it requires reconsideration of NFC award then that should be done for fundamental correction of financial obligations of the Federation and the Provinces. There is no room to sweep contentious issues under the carpet. It is my suggestion that the whole subsidy on electricity cannot be borne by the Provincial Governments also. From fiscal 2021 Budget at least 50 percent of subsidy if any on national level be borne by the provincial governments. This would require representation of provinces on the Nepra board and full participation in determination of tariff. The federal and provincial governments will have to jointly decide on Nepra determinations if they have jointly pay for subsidy.
Once it is certain that there will be a subsidy of around Rs 1000 billion by the state then the ancillary question is whether in that case there is any case for privatization of Discos. This is a very sensitive subject. It is my firm view that Discos have to be run by the private sector. At present, there is clear discrimination against KE as it is a private sector company versus other Discos in public sector in the sense that all other Discos effectively enjoy a ‘Deemed Sovereign Guarantee’ except KE which has to borrow on the basis of its financial statements whereas other Discos do not have any such handicap because the government of Pakistan is there as effective guarantor for Discos. This discrimination cannot continue. In this situation I will again ask the question from the accountants whether or not the GENCOs and DISCOS in government sector are independent entities and going concerns for accounting purpose. This does not mean nationalization of KE. This requires protection to KE as an entity and not a return to its investor. KE and the owners of KE are two different juridical things which have been intermingled for ulterior reasons. It is my personal view that in the tariff considerations for KE some sort of deemed sovereign guarantee to KE has to be provided. If not, there cannot be any further investment in KE and Karachi, the country’s economic and financial hub, will suffer.
The question of equitable distribution of subsidy cannot be decided unless the question of use, valuation and distribution of inputs; viz: hydel, natural gas, imported LNG, furnace oil and coal is also equitably decided. Sometime we are told that LNG prices are unfair then we are told that coal as input is hazardous. Then we are told that wind power is the ultimate solution. The people at large are confused and conspiracy theories abound. I have been hearing about energy policy for years. I think that there is one in place already. Being an accountant I want to see the numbers. The first number is the total amount of subsidy we will be paying in the following ten years. If it is zero then we have a right to celebrate. Even if the same is Rs 2000 billion it is acceptable provided it is linked with improvement in other compensating sectors like industry and agriculture. It is my view, that policy, if any, has not been translated into numbers, otherwise even a small change in the underlying assumptions leads to undesirable change in the policy framework that destroys the whole structure. I reiterate that it is a national energy policy and not the energy policy of Shahbaz Sharif or Usman Buzdar. These persons become relevant only because as Chief Ministers they dealt with people on a day to day basis. I will give one example of the case under consideration. The input prices of coal, LNG and furnace oil directly affect the economics of energy in Pakistan. The question under consideration is whether there are adequate shock observers within the energy policy to bear those changes. If not, then like in the past, various governments will continue taking unrelated credit or blame for variation in international oil prices. In Pakistan, oil prices decide the fate of the government in power.
This summary discussion leads to the following conclusions:
- That there is a need to be more transparent in matters relating to decisions on manner of investment (public or private) and pricing of power. Nepra is also answerable to people for its action and inactions;
- On overall basis there is a gap between the cost of production and price of energy in the country. This gap is to be filled by the state. The amount in my view exceeds Rs. 1000 billion and it will continue to increase;
- The subsidy as stated above should be shared by the provincial governments with the federal government under the NFC as against Federal Government at present;
- Except for KE the whole power sector is still effectively unbundled. There is a need to work out financial statements on unbundled basis to reflect the true status. Wapda exists under a different mechanism. A privatized KE should not be discriminated against other entities in their borrowing capabilities;
- Present power policy be converted into an overall national plan with facts and figures elaborating a framework for another two to three decades;
- There should be public-private management system in non-privatized Discos and local bodies be given participation in the management;
- There is no expectation of private sector heavy investment from local or foreign investors in near future. An investment strategy by the state be decided where state’s role is not abused.
- There’s need for composition of a high-powered energy commission prescribing the future input for power in the country. Sourcing, price mechanism and allocation of inputs to various sectors be decided for next two to three decades; for example, allocation of gas for fertilizer or power, use of gas by provinces, use of gas as fuel, etc.
