On Power Sector Reform

Foreword to the PC Cirdular Debt Report

Power sector inefficiencies have cost us well over 7% of GDP in direct budget costs in the last 5 years. In addition, growth has been slowed down by at least 2% per annum i.e., over 10% foregone output in the last 5 years. Yet the problem is far from behind us.

The restructuring and reform of the power sector has been held up for over 2 decades leading the costs to accelerate in recent years. The important question that needs wide debate is “why are we incapable of addressing such a big problem?” I would like to put forward 2 major propositions relating to this issue.

1. The problem requires careful study and research which can only happen if time and resources are devoted to the problem. Resources would include the assembling of independent expertise with adequate funding to develop perspectives on reform.
2. With enough independent expertise and research for developing a body of knowledge on the required reform, a process of reform must be developed. The process followed thus far—repeated ministerial committees informed only by the ministry which is in need of reform—has only led to increasing difficulties not a furtherance of restructuring. Reform must not be left up to the ministry that needs reform, nor should it be the domain of any one individual either a secretary or a minister.

Reform of the power sector involves restructuring of all the involved entities including the policymaking ministry and the regulatory body NEPRA. It will, of necessity, involve a change in administrative and functional relationships. It will involve setting up market mechanisms which can only happen with decentralization. The ministry that is in severe need of reform cannot be expected to make it on its own with no expertise or monitoring. Similarly no ministerial committee can take charge of the reform unless backed fully by expertise and research. But then on such a large issue the cabinet should be the place where reform happens assisted by an agency that on behalf of the cabinet is pushing the reform agenda on the ministry and the sector.

The Planning Commission (PC) is in charge of economic growth and was envisaged to be responsible for asking for reform to remove constraints for growth. The reform was picking up pace when the PC was taking the lead and working with the ministry of water and power to make reform (August 2010).

The Framework for Economic Growth (FEG) that was based on extensive research and consultation was approved by the National Economic Commission in 2011, has emphasized that if we want to achieve high growth the emphasis in the coming period must be on the “software” (economic reform, management and productivity improvements) rather than the “hardware” (brick and mortar investments) of growth. The widely respected FEG argues for mainstreaming reform especially that of public sector management, regulatory improvements, and more competitive markets for innovation and entrepreneurship.

FEG has argued for moving away from our current input based (projects, brick and mortar funding) to new results-based economic management (RBM) that will allow objectives and their instruments –reform- to be monitored. This requires a deep reform of administration which should occupy cabinet and parliament for the coming years. It will involve

• Entry of specific skills in ministries and a move away from the current generalist civil service system
• Better identification of objectives and reform instruments at an early stage and a commitment of ministries and public sector entities to efforts toward them.
• The role of the PC as the manager of the RBM system for economic growth and reform. PC would then develop studies such as this continually and report to cabinet and parliament. It would then be responsible for containing this loss at an early stage and push the concerned ministry to undertake reform.

This report which USAID has prepared in collaboration with the PC is an attempt to inform reform with some research. In my view such research is an urgent requirement and should be widely discussed to see make reform an urgent priority. The report informs us in several important areas.

• Building a decentralized system of governance is at the heart of the problem. Efficient power sector reform cannot happen if a centralized system continues to be run by a ministry.
• Decentralized and independent entities must be run on corporate lines with corporate management without government or ministerial interference.
• Technology is part of the solution as it allows for improved monitoring, measurement and payments.
• The decentralized system needs an able, competent, independent and empowered regulator who is responsible and accountable for the efficiency of the system and not just tariffs.
• The tariff system must be reviewed continuously to ensure that due costs must be passed on to consumers eliminating cross subsidies, untimely fuel price adjustments and artificial and exaggerated loss provisions.
• The question of regional differentiated tariffs has to be developed through careful planning and research.
• Subsidy if any should be targeted to the poor only and not as currently available to all.

With these improvements the system can be made solvent over a period of time. Then investments will start flowing in not only for increase of capacity but also for more efficiency including a better fuel mix.

We have again tried to identify the problem and find steps to its resolution. I compliment our teams at USAID and the Planning Commission on a worthy study that does indeed delineate a road map to tackle the circular debt issue.

But this is only one beginning. Unless this report is taken seriously and a reform process built, we will continue to see this problem stretched out at a huge cost to the country.