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Re-positioning for power projects in Pakistan!

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The current financial crunch and near meltdown, specially of the financial sector in the developed world, makes all serious viewers to ponder. That controlled economics like that of the ever-growing China have floundered is another reason to stop and think.

On the other hand, the bailout packages totalling above US $3.0 trillion in all, definitely makes us feel wobbly and look towards the probability that it all could not have been corrected at our end. It was also a moment of deep thought for us to see the corporate sector being nearly brought into the public or the governmental domain in the USA.

And more so to see the CEOs concerned being required to testify before the government before being benefited by US Treasury’s Troubled Asset Relief Programme (TARP). But as such a crunch can befall Pakistan, our earlier ways of doing business would have to be redone. The financial sector would need to be put on a tight leash, with the State Bank keeping a watchful eye.

Reportedly consumer finance once a galloping horse and the main reason for the 15% or so load growth in the power sector, is slowing down and should be reaching manageable levels soon. The interest rates keeping with the inflation (so as to slow it down) are high and so should be the cost of doing business in the Country.

The last of the issues is important and can make or break a business. In case we wish to compete with the imports, extra cost of local inputs to business would go to the advantage of the outsiders and necessarily get transferred to the buyer or the end-users. The case in point is the high cost of arranging for badly needed power capacity on the emergency basis and also in the medium and long runs.

The average cost of an IPP MW contracted through the PPIB is US $1.25 million. This incidentally, in nearly double than the negotiated prices for new generation capacity in the public sector. It is also seen that the price of an NWD call through the erstwhile T&T (before privatisation) was ten times of what it became a little while before it being put on the block.

Although, the communication sector is an aberration to the normal, due to induction of cutting edge technology in this industry, but still the conclusion could be that competition is needed to reduce the rates/price of production in favour of the end-users or the public. Interestingly, much is being at presently put on the private sector’s plate without any chance of competition from the public sector.

Incidentally, it was exactly opposite in the past when the public sector of yore operated at will and without competition from anywhere. Then the private sector cried for it to be given the chance to compete and also show its prowess in the shape of lower rates etc.

Looking back in history, we see the size of the Pakistani public sector investments starting from the meager 13% of the economy in 1969-70 surge to a huge 82% in 1977-78.

This led it to capture 78% share of the National Economy – consequently, its viability became a requirement to ensure economic health for the country. This was the time when the power sector in the public domain saw a gain of 1545 MW or 136 % to the level of 2685 MW, starting from a lowly 1140 MW only. That it could have grown even more heftily had the ill-fated KBD Project also took-off in 1977-78 as programmed with its 3600 MW of proposed capacity.

The scenario changed when it was decided in 1987 to ban the public sector to install any new thermal power stations, while on papers it could take-up hydel generation – a preposition which till yet has to see the light of the day, but for the 1350 MW Ghazi Barotha HPP (a run of the river marvel) which eventually got commissioned in August 2003 after a delay of three years and accumulated losses of a colossal US $1.00 billion (calculated at US $1.0 million of lost cheap generation per day).

WAPDA engineers who came up with this run of the river project and who conceived many more of such projects, including the now under construction 970 MW Neelam Jehlum HPP (after a delay of seven years), need to be felicitated and the then policy makers castigated for the delay.

With the relegation of the public sector from the scene, there seems to be drought like condition till 1994, when a new power policy was issued. This put a permanent cap on public sector’s participation in putting up thermal generation – a must in absence of any chance for quick addition of hydel power. On the basis of this policy, we saw the advent of IPPs with 5728 MW of badly needed power.

This also included the 1200 MW Hubco Power Plant which in fact, had come on bar under a different concept. The IPPs, at one time, were considered as inopportune and the main reason for expensive power. However, fact of the matter remains that it is the only worthwhile investment in the power sector since 1994 viz for the last fifteen years. Now when the country in facing its biggest power crises with shortages of up to 5,000 MW in summer of 2008, once again we had to lean on induction of more IPPs.

According to the PPIB, we would be adding 27 IPPs with a total of 5305 MW to the system by 2012. These would be serviced by a tariff-based primarily on the cost of the projects and the fuel these would use. The average cost per mega watt of plant is seen to be in the vicinity of US $1.20 to 1.30 million.

This is considered to be extremely high while keeping the price of only US $0.67 million per mega-watt for PEPCO’s recently contracted 450 MW Nandipur and the 525 MW Chicho ki Millian thermal power plants. On the other hand, it too is a fact that the IPP prices are seen to be cleared and accepted by NEPRA while determining tariffs – surely after due diligence.

This leads us to a point where an answer is required for the above anomaly. Is the private sector taking the nation for a ride. Is it politically and socially correct to carry on with the ban on public sector to set-up new thermal power plants. We would try to come to a moot point in the coming paras. Looking at the whole canvas, we see that the power sector in the public domain actually means only WAPDA – the solely legislated development body for water and power projects in the country.

The Authority, after its inception in 1958, has taken the country from only 119 MW to 12,500 MW in just thirty years and surely could have done even better had it not been denied public funds from 1987 onwards. It had the depth, the manpower, the ability and the thrust to take-up any challenge. Actually, the World Bank led so-called reforms in a way punished it through the de-bundling process.

Similarly, the near ban also stays, while the World Bank and other lending agencies are no more averse to the putting-up thermal power plants in the public domain. It is good to note this visible tilt. Previously, both the World Bank and IMF had almost one point agenda of providing assistance in exchange for the commitment to restore macroeconomic stability. Now a great degree of importance is also attached to provide succour to the disadvantaged groups of people in order to ensure social stability.

Thus, the least that needs to be done now to allow the public sector to act as competition, which incidentally is not there for the wayward private sector (note the difference in per megawatt prices between the sectors). To further prove the point, it is worthwhile to point out the asking current wind power installation price of US $2.1 million per mega-watt against US $1.4 million per mega-watt of quotations available in the market.

Actually, no one wishes to invest his money and the equity has to necessarily come out of over-invoicing and the project itself. To ensure that least cost solutions are available, it is the time for the public sector to re-position itself with good governance and then offer competition to the private sector. As this is destined to bring the prices of electricity down, the earlier it is done the better.

Because the public sector has also learnt the hard way, it is sure to attract some part of the private sector towards its forays into the power sector bidding. This would result in formation of the badly needed joint-ventures and also to PPPs. As the later of the arrangements is alluding us since long, public sector’s thrust into bidding for thermal power plants would provide the country the required thrust and impetus for such arrangement(s).

According to experts, the PPPs would create an amalgam, whereby public sector’s accountability and auditability would add in to the traditional efficiency of the private entrepreneur. This would result in lesser rates of power for the people and a basis for eventual phase-out of the public sector from the power sector (a distant prospect considering the requirement for the sector to support the socio-political obligations of governments).

The re-positioning of the public sector in Pakistan is also important in the light of the failure of the corporate sector in the developed world. This is needed because a country like Pakistan may not be able to arrange for a bailout on the lines of that being offered by the USA, Germany, France and China.

Japan is another story, where the government has saved the private sector as a servant many times in the past. How can the public sector be repositioned. We need to adopt the processes adopted by comparative economics. India would be a good example, where the state owned NTC (National Transmission Company) was allowed to compete with the corporate sector.

According to the details available, NTC was able to ward-off the private sector till it maintained lower prices and the ability to take-up new projects on the fast track. And presently the corporate sector seems to have out-bid it through posting extremely competitive rates. In other words, public sector participation in the process of awards for contracts of power projects ensured affordability of power rates for India and so could be the case for Pakistan too.


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