Failed Attempt at Liberalization of Pakistan Power Sector

7/29/2019 Failed Attempt at Liberalization of Pakistan Power Sector

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HOW FAR DID THE LIBERALIZATION OF THE

ELECTRICITY INDUSTRY IN PAKISTAN ACHIEVE

ITS OBJECTIVES: CASE STUDY OF A CAPACITY

SHORT COUNTRY?

Asghar Khan

ABSTRACT: Pakistan is a typical case of a capacity short country with widespread blackouts

prevalent since 1980s. The Government of Pakistan embarked on a limited scope liberalizationprogram by introducing a Power Policy in 1994, creation of regulator (NEPRA) in 1997 and

unbundling of the vertically integrated state utility. The liberalization program of the mid 1990s

resulted in substantial private investment coming into Pakistan and the country became self sufficient

in generation capacity for a short period. The paper will discuss how liberalization was introduced in

Pakistan and how the initial gains of liberalization were not consolidated and Pakistan is again facing

the scourge of blackouts and load shedding since 2007. The paper will also give some

recommendations for coming out of the present situation.

The author holds a Bachelors Degree in Chemical Engineering and an MBA (Finance) Degreecomplemented by 12 years of work experience in Power, Oil & Gas and Fertilizer Sectors. Currently heis working as a Marketing Manager in BHP Petroleum (Pakistan) Pty Ltd a subsidiary company ofBHP Billiton. He has practical experience in project analysis, contracts and commercial negotiations in

the Energy sector of Pakistan. He is enrolled on the LLM Petroleum Law & Policy distance learningprogram at CEPMLP - University of Dundee. Email:[email protected]
mailto:[email protected]:[email protected]:[email protected]:[email protected]


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TABLE OF CONTENTS

LIST OF ABBREVIATIONS....................................................................................iii

1 INTRODUCTION.....1

2 ELECTRICITY INDUSTRY STRUCTURE IN PAKISTAN: PRE-

LIBERALISATION.....3

3 LIBERALISATION OF ELECTRICITY INDUSTRY IN PAKISTAN:

CASE STUDY OF A CAPACITY SHORT COUNTRY..........................................5

3.1 Power Policies of Pakistan6

3.1.1 Power Policy 1994....................................................................................6

3.1.2 Policy for New Private Independent Power Projects 1998......................7

3.1.3 Policy for Power Generation Projects 2002.............................................8

3.2 Regulatory Structures Introduced for Liberalisation.9

3.3 Structural Problems in Liberalisation..11

3.4 Liberalization Outcomes.13

4 PRIVATIZATION OF ELECTRICITY SECTOR IN PAKISTAN:

LINKAGES WITH LIBERALISATION.................................................................14

5 BACK TO BLACKOUTS: LIBERALISATION FAILURE OR

GOVERNMENT INACTION?.................................................................................16

6 CONCLUSIONS AND RECOMMENDATIONS18

BIBLIOGRAPHY


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ABBREVIATIONS

AEB Area Electricity Board

BOO Build Own Operate

DISCO Distribution Company

FESCO Faisalabad Electricity Supply Company

FSA Fuel Supply Agreement

GENCO Generation Company

GoP Government of Pakistan

IA Implementation Agreement

IPP Independent Power Producers

JPC Jamshoro Power CompanyKANUPP Karachi Nuclear Power Plant

KAPCO Kot Addu Power Company Limited

KESC Karachi Electric Supply Company

LOS Letter of Support

MYT Multi Year Tariff

NEPRA National Electric Power Regulatory Authority

NTDC National Transmission and Distribution Company

OGDCL Oil and Gas Development Company Limited

PAEC Pakistan Atomic Energy Commission

PC Privatisation Commission

PEPCO Pakistan Electric Power Company

PPA Power Purchase Agreement

PPIB Private Power Infrastructure Board

PPP Public Private Partnership

PPS Pakistan Power Sector

PSO Pakistan State Oil

SBP State Bank of Pakistan

T&D Transmission and Distribution

WAPDA Water and Power Development Authority


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1 INTRODUCTION

Pakistan is a country of 162 Million people with only 55% of population having

access to electricity. Since independence in 1947 the entire electricity sector including

generation was state owned. Pakistan is a typical case of a capacity short country and

the nation has been living with blackouts since mid 1980s. This is despite the fact

that the country is endowed with enormous potential for Hydro power generation.

In 1992, Government of Pakistan (GoP) decided to liberalize the electricity industry

and the first Power Policy was announced in 1994. Some of the reasons for the

country embarking on the course of liberalisation were poor reliability of state utility,

inadequate expansion of service to broader population, low collection rate, high

network losses, reduction of subsidies etc1. Liberalization of power industry was also

advocated by the international funding agencies.

As part of the liberalisation effort National Electric Power Regulatory Authority

(NEPRA) was created in 1997 to regulate the Pakistans Electricity sector.

Unbundling of state utility into Generation, Transmission and Distribution segments

was also started as part of this process.

Liberalization resulted in substantial foreign investment coming into Pakistan in the

decade of 1990s and 14 Independent Power Producers (IPPs) were established under

the Power Policy 1994. Private Power & Infrastructure Board (PPIB) was established

in 1994 to act as one window facility for investment in the power sector. Power

1 Saleem Muhammad, Technical Efficiency in Electricity Generation Sector of Pakistan The Impactof Private and Public Ownership.


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Purchase Agreements (PPAs) were signed with the IPPs whereby the power

purchaser took the off take risk.

Critics of the liberalisationprocess argued that PPAs were signed at exorbitant tariffs

and were a burden on the national economy. Subsequently, due to problems faced by

the IPPs regarding payments from the power purchaser, inaction of Government to

sustain the liberalisation gains and failure of the subsequent power policy in 1998 to

attract foreign investment the country is back to the days of blackouts and load

shedding since 2007. Privatization of the newly created entities carved out of the state

monopoly has also seen negligible progress.

This research paper will analyze the liberalisation process in Pakistan and try to

evaluate its results. It will also try to analyze the subsequent situation that has

emerged and the causes leading Pakistan back to the days of blackouts. The paper will

also give some conclusions and recommendations on how the liberalisation process

can be carried forward to realize its original aims and objectives.


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2 ELECTRICITY INDUSTRY STRUCTURE IN PAKISTAN: PRE-LIBERALISATION

Electricity industry in Pakistan comprised of two vertically integrated public utility

companies i.e. Karachi Electric Supply Company (KESC) supplying electricity to the

city of Karachi and some parts of Balouchistan province and Water and Power

Development Authority (WAPDA) to all Pakistan excluding KESC supplied area2.

Besides WAPDA and KESC, electricity was also generated through Karachi Nuclear

Power Plant (KANUPP) owned by Pakistan Atomic Energy Commission (PAEC)3

and Transmitted and Distributed (T&D) by KESC.

Figure 1: Vertically Integrated Industry Structure -Pre-liberalisation

KESC was established in 1913 and nationalised in 19524. It was re-privatized as a

vertically integrated utility in November 2005. WAPDA was created in 1958 for

unified development of water and power sectors. Both the transmission systems are

connected by a 220 KV transmission line through which WAPDA exported power to

KESC. Being public sector entities both WAPDA and KESC were regarded as highly

bureaucratic, overstaffed and lacking professional management.

2Hamid Tariq, Role and Vision of WAPDA in Restructuring Electric Power Industry in Pakistan, June

2005.3http://www.paec.gov.pk/kanupp/kanupp-index.htm(last visited 17

thMar 2010).

4http://www.kesc.com.pk/en/article/ourcompany/whoweare-1.html(last visited 9

thMar 2010).

Generation (WAPDA)

Transmission (WAPDA)

Distribution (WAPDA)

Customers

Generation (KESC, PAEC)

Transmission (KESC)

Distribution (KESC)

Customers
http://www.paec.gov.pk/kanupp/kanupp-index.htmhttp://www.paec.gov.pk/kanupp/kanupp-index.htmhttp://www.paec.gov.pk/kanupp/kanupp-index.htmhttp://www.kesc.com.pk/en/article/ourcompany/whoweare-1.htmlhttp://www.kesc.com.pk/en/article/ourcompany/whoweare-1.htmlhttp://www.kesc.com.pk/en/article/ourcompany/whoweare-1.htmlhttp://www.kesc.com.pk/en/article/ourcompany/whoweare-1.htmlhttp://www.paec.gov.pk/kanupp/kanupp-index.htm


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By mid 1980s there was an increasing supply demand gap due to lack of funds for

installing additional generation capacity and investing in the transmission system5. In

1992 i.e. the year GoP decided to restructure the electricity industry in Pakistan the

demand gap has increased to approx. 2,000 MW at peak load levels and the total

generation capacity in Pakistan at the time is summarized as follows6:

Year WAPDA KESC PAEC Total

1992 7,463 MW (79.9%) 1,738 MW

(18.6%)

137 MW

(1.5%)

9,338 MW

(100%)

5

Malik Afia, Effectiveness of the Regulatory Structure in the Power Sector of Pakistan, PakistanInstitute of Development Economics, 2007 at page 1.6

WAPDA-Power System Statistics Twenty Ninth Issue


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3 LIBERALISATION OF ELECTRICITY INDUSTRY IN PAKISTAN: CASESTUDY OF A CAPACITY SHORT COUNTRY

Liberalization is introduction of competition in any sector of an industry. In electricity

industry Transmission and Distribution segments are natural monopolies while

Generation, Supply and Metering are considered more suitable for liberalisation7.

Privatization, Liberalization and Competition were the objectives for the global

energy policies of 1980s and 1990s8. Liberalization schemes are usually country

specific but have some common characteristics.

The aims of introducing liberalisation in countries having sufficient capacity and

capacity short countries are different. Industrial countries with sufficient capacity

have aims to reduce electricity prices and promote economic efficiency. In capacity

short developing countries liberalisation is aimed at attracting foreign private

investment to provide the needed capacity and thus attain sufficient capacity 9. The

later is true in the case of Pakistan as GoP was constrained to invest in the power

sector due to high levels of national debt and persistent budget deficits10.

Liberalization in Pakistan has been partial in scope aimed at attracting foreign and

local private investment in the generation sector and limited to competition for the

right to build a power plant. In 1992, GoP approved the strategic plan for restructuring

of the Pakistan Power Sector (PPS)11. In 1993, an Energy Task Force was constituted

to look at the power sector situation in the country and come out with its

recommendations. The Power Policy 1994 was based on its recommendations duly

7 Dow Stephen, Downstream Energy Law and Policy Study Guide, Unit 5 Electricity Trading,Privatization, Liberalization and Contracting.8

Helm Dieter, The New Energy Paradigm, 2007 at 18.9

Dahl Carol A, International Energy Markets: Understanding Pricing, Policies and Profits 2004 at 131.10Power Sector Situation in Pakistan by AEDB and GTZ, Sept 2005.

11Supra 2.


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approved by GoP12. Prior to announcement of 1994 policy, Hub Power Company had

started construction in 1993 based on a negotiated tariff based on the cost plus

approach.

3.1 Power Policies of Pakistan3.1.1 Power Policy 1994Power Policy announced in March 1994 was the first comprehensive policy of its kind

in Pakistan. There was previously a policy for setting up private sector power plants

on Build, Own and Operate (BOO) basis but was unable to achieve any success13. The

main aim of this policy was to include the private sector in power generation.

The salient features of 1994 power policy are summarized below:

Investors were given the choice of site, technology and selection of fuel source forpower generation.

A bulk power tariff of US cents 6.5/kWh for the first 10 years and a levelizedtariff of US cents 5.91/kWh over the project life was offered.

The tariff was comprised of two components capacity price and energy price (withfuel cost as a pass through component).

Exemption from corporate income tax, customs duty and other import taxes. Free repatriation of equity and dividends. Foreign exchange risk insurance provided by State Bank of Pakistan (SBP). Model agreements and contracts prepared for ease of negotiations. Fuel supply and power off-take performance guarantees provided by GoP.

The 1994 power policy was successful in bringing foreign investment into Pakistan

worth US$ 4.0 Billion. It also resulted in 14 Independent Power Projects (IPPs) being

12

Policy Framework and Package of Incentives for Private Sector Power Generation Projects inPakistan, 199413

Ibid 12.


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installed having a combined capacity greater than 4,500 MW14. These projects were

applied for in 1994 and commissioned during 1996-2000. This resulted in a brief

period ofsurplus power in Pakistan in the late 1990s.

In 2002 the year 3rd power policy was announced, IPPs commissioned under the

1994 policy were contributing 1/3rd of Pakistans installed capacity base as shown

below15:

Year WAPDA KESC PAEC IPPs Total

2002 9,749 MW(54.2%)

1,756 MW(9.8%)

462 MW(2.6%)

6,007 MW(33.4%)

17,974 MW(100%)

3.1.2 Policy for New Private Independent Power Projects 1998One of the aims of this policy was to create a competitive power market in Pakistan. It

talked about restructuring and privatizing the electrical power generation units in the

public sector along with the newly yet to be formed distribution companies while the

transmission company was to remain in the public sector. It also envisaged the

creation of the regulatory body NEPRA16.

The main differences between 1998 policy versus 1994 policy were as follows:

Introduction of competitive tariff regime based on lowest tariff offered throughinternational competitive bidding instead of an upfront tariff as in 1994 policy.

Focus of GoP shifted to indigenous coal and hydro resources instead of oil/gas. Removal of blanket exemptions from all duties and taxes.

14http://www.ppib.gov.pk/CommissionedIPPs.htm(last visited 9

thMay 2010)

15

Supra 616Policy for New Private Independent Power Projects, 1998
http://www.ppib.gov.pk/CommissionedIPPs.htmhttp://www.ppib.gov.pk/CommissionedIPPs.htmhttp://www.ppib.gov.pk/CommissionedIPPs.htmhttp://www.ppib.gov.pk/CommissionedIPPs.htm


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1998 power policy was a failure as only one of its stated aims (i.e. creation of

NEPRA) materialized. The privatization of generation and distribution segment can at

best be categorized as stalled which shall be discussed in detail in the next chapter.

The creation of a wholesale competitive market is many years away as only a

despatch order is currently in vogue which despatches generation plants based on

lowest variable cost.

3.1.3 Policy for Power Generation Projects 2002After the failure of 1998 policy the Power Policy 2002 aimed to provide new

incentives for investors and to keep the consumer prices at affordable levels17. Its

main objectives are summarized as follows18:

To provide sufficient capacity for power generation at least cost throughcompetitive bidding (solicited proposals) and negotiation with NEPRA (raw sites).

To ensure maximum utilization of indigenous resources. To look after the interest of all stakeholders To safeguard the environment.

This policy covered both private and public sector projects as well as Public-Private

Partnership (PPP) projects. Investors response to the 2002 policy was better than

1998 policy but there were a lot of procedural delays. The policy stipulated a schedule

from pre-qualification to issuance of Letter of Support (LOS) of 490 days for solicited

proposals (with feasibility studies provided by GoP) and 465 days with additional 12-

24 months for conducting feasibility study for raw sites.

17Policy for Power Generation Projects 2002

18Ibid, at 8


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Three IPPs have been commissioned till Dec 2009 under this policy with a combined

capacity of 611 MW. 13 additional projects have achieved financial close having a

combined capacity of 2,660 MW19. By 2009, including KESC ~41% of generation

capacity was in the private sector.

Year PEPCO

Ex-

WAPDA

KESC

Privatized

PAEC IPPs Total

2009 11,343 MW

(56.8%)

1,756 MW

(8.8%)

462 MW

(2.3%)

6,421 MW

(32.1%)

19,982 MW

(100%)

3.2 Regulatory Structures Introduced for LiberalisationPPIB was established in 1994 to act as a one window facility for private sector

investors interested in establishing power projects in Pakistan20. It also facilitated in

the negotiations of Implementation Agreement (IA), Fuel Supply Agreement (FSA)

and Power Purchase Agreement (PPA). PPIB also provided guarantee for the

performance of state owned entities e.g. power purchaser (WAPDA/KESC) and fuel

suppliers Pakistan State Oil (PSO) and Oil and Gas Development Company Limited

(OGDCL).

The government created NEPRA in 1997 to regulate the electricity sector in Pakistan.

NEPRA was authorised to grant licenses and determine tariffs for generation,

transmission and distribution, prescribe and enforce performance standards and

protect the interests of the consumers and companies providing power services21.

GoP amended the WAPDA Act in December 1998 which established Pakistan

Electric Power Company (PEPCO) for unbundling of WAPDAs Power wing into 08

19

http://www.ppib.gov.pk/fc_ia_status.htm(last visited 9th

May 2010)20http://www.ppib.gov.pk/aboutppib.htm(last visited 21

stApril 2010).

21Regulation of Generation, Transmission and Distribution of Electric Power Act, 1997
http://www.ppib.gov.pk/fc_ia_status.htmhttp://www.ppib.gov.pk/fc_ia_status.htmhttp://www.ppib.gov.pk/fc_ia_status.htmhttp://www.ppib.gov.pk/aboutppib.htmhttp://www.ppib.gov.pk/aboutppib.htmhttp://www.ppib.gov.pk/aboutppib.htmhttp://www.ppib.gov.pk/aboutppib.htmhttp://www.ppib.gov.pk/fc_ia_status.htm


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Distribution Companies (DISCO) successors of former Area Electricity Boards

(AEB), 03 Generation Companies (GENCO) and a National Transmission and

Distribution Company (NTDC)22. It was planned that these companies except NTDC

shall be privatized but all of them are still operating in the public sector. DISCOs are

regional monopolies and also perform the supply and metering functions. The Hydro

wing of WAPDA has been kept as state owned.

Liberalization of the electricity market was also envisaged in two phases. In phase 1,

the system would be a single buyer market (i.e. NTDC) which would buy all the

electricity from GENCOs, State owned hydro units and IPPs. In phase 2, the system

would transform to a multiple buyer/seller type in which large consumers would have

a choice to select the generating company to buy electricity from 23. The progress on

this front has been minimal as only a dispatch order based on variable costs has been

implemented with the creation of wholesale market still many years away.

Figure 2: Current Electricity Market Structure in Pakistan

22

Violeta P. Corral, ADB & Pakistan Power, Public Services International Research Unit (PSIRU-Asia) June 2005.23

Ibid at 2

WAPDA / PEPCO

IPPs + KESC


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Source: Technical Efficiency in Electricity Generation Sector of Pakistan (Modified)

3.3 Structural Problems in LiberalisationHistorically, the power sector in Pakistan was both centrally planned and vertically

integrated, characteristics which are considered as barriers to liberalisation. Even after

unbundling of WAPDA and creation of 12 new corporate entities some vital functions

e.g. Power System Planning and Backbone Transmission Systems were retained

within WAPDA and not transferred to the new entities24. This provided WAPDA with

an opportunity to exercise control over these newly created entities.

Traditionally the liberalisation of the electricity sector in any country is usually a long

drawn process one which has not been fully completed anywhere in the world 25. Even

by these standards the power sector reforms have been slow in Pakistan and are far

from taking root despite the passage of 17 years since their introduction. None of the

WAPDA unbundled entities have been privatized so far.

The tariff paid to IPPs under the 1994 policy was higher than that received from

electricity sold to the end-users. This created substantial financial burden for the

public sector off-taker. In 1997, GoP started proceedings for alleged corruption

against some IPPs e.g. Hubco was especially targeted. International Power of UK

was its main project sponsor. At the intervention of donor agencies and UK

government, GoP dropped its case and a revised price was agreed between the parties

in 2000. The revised price was lower than the tariff agreed under the PPA26. This

however, gave a negative signal to the international investors about the sanctity of

contracts.

24

http://www.pepco.gov.pk/index_2.php(last visited 27th

April, 2010).25International Energy Agency, Lessons from Liberalised Electricity Markets, 2005

26Supra 22.
http://www.pepco.gov.pk/index_2.phphttp://www.pepco.gov.pk/index_2.phphttp://www.pepco.gov.pk/index_2.phphttp://www.pepco.gov.pk/index_2.php


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Both PEPCO and the privatised KESC are making financial losses and lack funds for

investment in the T&D sector of Pakistan. One reason for this is the circular debt

(cross receivables between various government entities) prevalent in the industry.

PEPCO is also dependent on yearly budgetary allocation from GoP.

The independence of the regulator NEPRA is debatable as it directly attached to the

Cabinet Division and all its decisions e.g. tariff determination and performance

standards needs government approval. NEPRA Chairman and its four members are

also appointed by the government which hinders the image of its independence27.

The tariff structure in Pakistan divided by consumption levels (tariff slabs) and for

industrial consumers is further divided into peak and off-peak rates28. Cross subsidies

are provided to some segment of consumers e.g. industry and commercial sectors

subsidise the household sector. This subsidy varies from Rs 1.44/kwh (IESCO) to Rs.

5.04/kwh (QESCO) with all DISCOs giving various levels of subsidy29.

There have been tariff disputes between government and NEPRA. Both PEPCO and

KESC are also not fully satisfied with their tariff determinations. All the DISCOs are

charging at the tariff notified by GoP and not at the tariff determined by NEPRA.

27Supra 5, at 10

28

Ibid at 1229http://www.pepco.gov.pk/subsidy.php(last visited 27

thApril, 2010).
http://www.pepco.gov.pk/subsidy.phphttp://www.pepco.gov.pk/subsidy.phphttp://www.pepco.gov.pk/subsidy.phphttp://www.pepco.gov.pk/subsidy.php


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3.4 Liberalization OutcomesThere have been some positive outcomes after introduction of liberalisation in

Pakistans electricity industry. During the decade of 1990s it resulted in investment

of approx. US$ 4.0 Billion in new generation capacity which resulted in Pakistan

overcoming the supply shortages in the short term.

In 2002, NEPRA introduced a Multi Year Tariff (MYT), CPI-X based for KESC for a

period of seven years. In 2004, a similar exercise was carried out for Faisalabad

Electricity Supply Company (FESCO) one of the better performing DISCO and a five

year tariff was determined. In the generation sector MYT has been determined for one

of the three GENCOs i.e. Jamshoro Power Company (JPC). This is a change from

rate of return regulation to performance based regulation in Pakistans power sector30.

The cross subsidies have also been reduced gradually by increasing the rates of the

subsidised categories of consumers with NEPRA aiming to eliminate them completely

in future. The elimination of subsidies has been advocated by the international donor

agencies for a long time.

This has resulted in reduced budgetary subsidy support to WAPDA and KESC, in FY

2009-10 budget (KESC: Rs 3.8 Billion & WAPDA: Rs 62 Billion) as compared to FY

2008-09 budget (KESC: Rs 18.8 Billion & WAPDA: Rs 92 Billion)31. Privatisation of

KESC has also contributed in reducing the burden of budgetary support over the

years.

30Supra 5 at 13

31Power Sector Outlook in Pakistan, Challenges and Issues (KESC Presentation May 2010)


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4 PRIVATIZATION OF ELECTRICITY SECTOR IN PAKISTAN: LINKAGESWITH LIBERALISATION

As part of the unbundling of WAPDA the aim was initially to carve out and

ultimately privatize the new entities (i.e. 3 GENCOs and 8 DISCOs) created in

1998. Currently four of the original eight DISCOs and one GENCO are on the active

list of Privatization Commission (PC) to be privatized on the basis of Public-Private

Partnership (PPP)32. The privatization effort has seriously lagged and despite first

being put on the privatization list in 2002 none of these companies have been

privatized so far.

A couple of transactions in power sector e.g. Kot Addu Power Company (KAPCO)

and KESC have materialized and their salient features are tabulated below33:

S

No

Name Shares

Sold (%)

Sales Price

(Rs Million)

Transfer

Date

Buyer

1 KAPCO 36% 10,151.0 Nov 1996 National Power Kot

Addu Limited2 KAPCO

Escrow A/cNot

available900.7 Apr 2002 -do-

3 KAPCO -IPO

18% 4,814.8 Apr 2005 General Public ThruStock Exchange

4 KESC 73% 15,859.7US$ 258 MM

Nov 2005 Hassan AssociatesConsortium

Total 31,726.2

KAPCO is the largest IPP in Pakistan having a capacity of 1,600 MW. After

Privatisation the management control of KAPCO has been transferred to the buyer

(International Power group) but still the majority shareholding remains with WAPDA

i.e. 45.7% which is recently been announced for privatization34.

32http://www.privatisation.gov.pk/power/power.htm(last visited 23

rdApril 2010).

33

http://www.privatisation.gov.pk/about/Completed%20Transactions%20(new).htm(last visited 23rd

April 2010).34

http://www.privatisation.gov.pk/power/KAPCO.pdf(last visited 23rd

April 2010).
http://www.privatisation.gov.pk/power/power.htmhttp://www.privatisation.gov.pk/power/power.htmhttp://www.privatisation.gov.pk/power/power.htmhttp://www.privatisation.gov.pk/about/Completed%20Transactions%20(new).htmhttp://www.privatisation.gov.pk/about/Completed%20Transactions%20(new).htmhttp://www.privatisation.gov.pk/about/Completed%20Transactions%20(new).htmhttp://www.privatisation.gov.pk/power/KAPCO.pdfhttp://www.privatisation.gov.pk/power/KAPCO.pdfhttp://www.privatisation.gov.pk/power/KAPCO.pdfhttp://www.privatisation.gov.pk/power/KAPCO.pdfhttp://www.privatisation.gov.pk/about/Completed%20Transactions%20(new).htmhttp://www.privatisation.gov.pk/power/power.htm


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The privatization of KESC on the other hand has been both controversial and failed to

bring any significant change. Initially KESC was privatized in Feb 2005 and bought

by Kanooz Al-Watan group of Saudi Arabia by offering Rs. 1.65/share. The group

failed to deposit the token money and the transaction was subsequently offered to the

second highest bidding consortium of Hassan Associates, Al-Jomaih Holding Co.

Saudi Arabia and Premier Mercantile Services with the condition to match the bid of

the initial successful bidder35.

After privatisation KESC remained as the only vertically integrated utility in Pakistan

having 2.1 Million consumers36. KESC has remained problematic with high T&D

losses amounting to 34.12% (2008) and is dependent on PEPCO which exports

~500MW to KESC. There has been talk of re-nationalisation of KESC due to its

continued sub-par performance but there is little concrete evidence that government

will reverse its decision which would be seen as a major setback to its privatisation

program.

In September 2008, Abraaj group took over management control of KESC from Al

Jomiah group with fresh equity injection amounting to US$ 361 MM over three years

in KES Power the holding company of KESC37. Taking into account GoPs 25.5%

shareholding and proportional equity the total investment shall be US$ 500 Million38.

This investment has come at a time when it is desperately needed by KESC as it has

been facing problems like obsolete transmission system and heavy financial losses

due to theft of power and non payment of dues by customers.

35http://www.privatisation.gov.pk.htm (last visited 27

thApril, 2010).

36

http://www.kesc.com.pk/en/article/ourcompany/whatwedo-1.html(last visited 26th

May 2010)37http://www.abraaj.com/mediacenter/Files/KESC_15Apr2009_05.pdfl(last visited 26

thMay 2010)

38http://teabreak.pk/kesc-starts-new-220-megawatts-plant-253/33009/(last visited 26

thMay 2010)
http://www.privatisation.gov.pk.htm/http://www.privatisation.gov.pk.htm/http://www.privatisation.gov.pk.htm/http://www.kesc.com.pk/en/article/ourcompany/whatwedo-1.htmlhttp://www.kesc.com.pk/en/article/ourcompany/whatwedo-1.htmlhttp://www.kesc.com.pk/en/article/ourcompany/whatwedo-1.htmlhttp://www.kesc.com.pk/en/article/investorrelations/kesc-incorporation.htmlhttp://www.kesc.com.pk/en/article/investorrelations/kesc-incorporation.htmlhttp://www.kesc.com.pk/en/article/investorrelations/kesc-incorporation.htmlhttp://teabreak.pk/kesc-starts-new-220-megawatts-plant-253/33009/http://teabreak.pk/kesc-starts-new-220-megawatts-plant-253/33009/http://teabreak.pk/kesc-starts-new-220-megawatts-plant-253/33009/http://teabreak.pk/kesc-starts-new-220-megawatts-plant-253/33009/http://www.kesc.com.pk/en/article/investorrelations/kesc-incorporation.htmlhttp://www.kesc.com.pk/en/article/ourcompany/whatwedo-1.htmlhttp://www.privatisation.gov.pk.htm/


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5 BACK TO BLACKOUTS: LIBERALISATION FAILURE OR GOVERNMENTINACTION?

Private investment was attracted by 1994 policy but gains from liberalisation were not

consolidated. GoP solely relied on the private sector and no new public sector project

came online between 1994-2003. GoP was aware of the looming supply shortages as

evidenced by its own projections but no investment was made for about a decade.

Figure 3: Generation Capacity & Demand Forecast

A second failure was to harness the enormous hydro potential of Pakistan

~40,000MW of which 24,000MW is considered exploitable. Only Ghazi Barotha

hydel project (1,450MW) started production in 2003 in last two decades. In 2009

hydro capacity was 6,444MW (27% of exploitable resource).

Liberalisation also suffered because of non-economic tariff set by NEPRA (due to

subsidies), government inaction in face of circular debt currently amounting to Rs 216

billion (~US$ 2.5 billion), large T&D losses and failure to create a liberalised market.

All this resulted in a return to load shedding and blackouts being faced by the people

since 2007. The current shortfall is ~3,500MW. Faced with the prospects of 8-10


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hours of daily load shedding people with resources have resorted to expensive micro

self generation by installing petrol/gas generators.

Lack of electricity supply has started hurting the economic growth of the country

since last two years. A drastic rethink is required as situation will only get worse

keeping in view the current demand forecast.

Figure 4: Demand Forecast Country

Source: NTDC Report


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6 CONCLUSIONS AND RECOMMENDATIONSIn order to sustain the long term viability of the industry, government needs to take

consistent and bold measures to support its liberalisation policy:

The GENCOs and DISCOs should be privatised in a transparent manner tocreate efficiency in the power sector.

Tariff subsidy policy of the government needs to be changed as it is not in linewith economic trends. GoP has slowly reduced electricity subsidy it needs to

provide indirect subsidy for the life line consumers as income support instead of

direct subsidy which distorts the tariffs.

NEPRA shall play its role in a more efficient and predictable manner. It shouldassert its independence and the government should realise that only an

independent regulator can provide assurance to the investors regarding arbitrary

changes in pricing etc.

IPPs installed under the 1994 and 2002 policies have signed PPAs having a termof upto 25 years. The competition in the generation sector will be restricted till the

term of the PPA expires as it segments the market.

Growth in demand indicates that investment would be required not only ingeneration but also in T&D which have been neglected over the years which

would help in reducing the high level of losses.

Exploit the hydro potential of the country by embarking on all major hydro powerprojects.

In the end Jaskow words ring true for Pakistan Electricity restructuringis likely to

involve both costs and benefits. If the restructuring is done rightthe benefitscan


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significantly outweigh the costs. But the jury is still out on whether policymakers

have the will to implement the necessary reforms effectively39.

39Jaskow, Paul L. Restructuring Competition and Regulation Reform in the U.S. Electricity Sector.

The Journal of Economic Perspectives 1997 at Page 136


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BIBLIOGRAPHY

PRIMARY SOURCES

National Legislation

Regulation of Generation, Transmission and Distribution of Electric Power Act, 1997:ACT NO XL OF 1997.

Policy Framework and Package of Incentives for Private sector Power GenerationProjects in Pakistan, March 1994.

Policy for New Private Independent Power Projects, July 1998

Policy for Power Generation Projects Year 2002

SECONDARY SOURCES

Books / Publications

Helm Dieter, The New Energy Paradigm, 2007

Dahl Carol A, International Energy Markets: Understanding Pricing, Policies andProfits 2004

International Energy Agency, Lessons from Liberalised Electricity Markets, 2005.

Articles / Papers

Saleem Muhammad, Technical Efficiency in Electricity Generation Sector of

PakistanThe Impact of Private and Public Ownership.

Hamid Tariq, Role and Vision of WAPDA in Restructuring Electric Power Industryin Pakistan, June 2005.

Malik Afia, Effectiveness of the Regulatory Structure in the Power Sector of Pakistan,Pakistan Institute of Development Economics, 2007.

Dow Stephen, Downstream Energy Law and Policy Study Guide, Unit 5 ElectricityTrading, Privatization, Liberalization and Contracting.

Jaskow, Paul L. Restructuring Competition and Regulation Reform in the U.S.Electricity Sector. The Journal of Economic Perspectives 1997.


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Reports

Power Sector Situation in Pakistan, by Alternate Energy Development Board andGTZ Germany, September 2005.

Violeta P. Corral, ADB & Pakistan Power, Public Services International ResearchUnit (PSIRU-Asia) June 2005.

Power Sector Outlook in Pakistan, Challenges and Issues (KESC Presentation May2010)

WAPDA-Power System Statistics Twenty Ninth Issue

OTHERS

Internet Sources

http://www.paec.gov.pk/kanupp/kanupp-index.htm (last visited 17th Mar 2010).

http://www.kesc.com.pk/en/article/ourcompany/whoweare-1.html (last visited 9th Mar2010).

http://www.ppib.gov.pk/CommissionedIPPs.htm(last visited 9th May 2010)

http://www.ppib.gov.pk/fc_ia_status.htm(last visited 9

th

May 2010)

http://www.ppib.gov.pk/aboutppib.htm(last visited 21st April 2010).

http://www.pepco.gov.pk/index_2.php(last visited 27th April, 2010).

http://www.pepco.gov.pk/subsidy.php(last visited 27th April, 2010).

http://www.privatisation.gov.pk/power/power.htm(last visited 23rd April 2010).

http://www.privatisation.gov.pk/about/Completed%20Transactions%20(new).htm

(last visited 23rd

April 2010).

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http://www.privatisation.gov.pk.htm (last visited 23rd April 2010).

http://www.kesc.com.pk/en/article/ourcompany/whatwedo-1.html (last visited 26thMay 2010)

http://www.abraaj.com/mediacenter/Files/KESC_15Apr2009_05.pdfl (last visited 26thMay 2010)
http://www.paec.gov.pk/kanupp/kanupp-index.htmhttp://www.paec.gov.pk/kanupp/kanupp-index.htmhttp://www.kesc.com.pk/en/article/ourcompany/whoweare-1.htmlhttp://www.kesc.com.pk/en/article/ourcompany/whoweare-1.htmlhttp://www.ppib.gov.pk/CommissionedIPPs.htmhttp://www.ppib.gov.pk/CommissionedIPPs.htmhttp://www.ppib.gov.pk/fc_ia_status.htmhttp://www.ppib.gov.pk/fc_ia_status.htmhttp://www.ppib.gov.pk/aboutppib.htmhttp://www.ppib.gov.pk/aboutppib.htmhttp://www.pepco.gov.pk/index_2.phphttp://www.pepco.gov.pk/index_2.phphttp://www.pepco.gov.pk/subsidy.phphttp://www.pepco.gov.pk/subsidy.phphttp://www.privatisation.gov.pk/power/power.htmhttp://www.privatisation.gov.pk/power/power.htmhttp://www.privatisation.gov.pk/about/Completed%20Transactions%20(new).htmhttp://www.privatisation.gov.pk/about/Completed%20Transactions%20(new).htmhttp://www.privatisation.gov.pk/power/KAPCO.pdfhttp://www.privatisation.gov.pk/power/KAPCO.pdfhttp://www.privatisation.gov.pk.htm/http://www.privatisation.gov.pk.htm/http://www.kesc.com.pk/en/article/ourcompany/whatwedo-1.htmlhttp://www.kesc.com.pk/en/article/ourcompany/whatwedo-1.htmlhttp://www.kesc.com.pk/en/article/investorrelations/kesc-incorporation.htmlhttp://www.kesc.com.pk/en/article/investorrelations/kesc-incorporation.htmlhttp://www.kesc.com.pk/en/article/investorrelations/kesc-incorporation.htmlhttp://www.kesc.com.pk/en/article/ourcompany/whatwedo-1.htmlhttp://www.privatisation.gov.pk.htm/http://www.privatisation.gov.pk/power/KAPCO.pdfhttp://www.privatisation.gov.pk/about/Completed%20Transactions%20(new).htmhttp://www.privatisation.gov.pk/power/power.htmhttp://www.pepco.gov.pk/subsidy.phphttp://www.pepco.gov.pk/index_2.phphttp://www.ppib.gov.pk/aboutppib.htmhttp://www.ppib.gov.pk/fc_ia_status.htmhttp://www.ppib.gov.pk/CommissionedIPPs.htmhttp://www.kesc.com.pk/en/article/ourcompany/whoweare-1.htmlhttp://www.paec.gov.pk/kanupp/kanupp-index.htm


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http://teabreak.pk/kesc-starts-new-220-megawatts-plant-253/33009/ (last visited 26thMay 2010)
http://teabreak.pk/kesc-starts-new-220-megawatts-plant-253/33009/http://teabreak.pk/kesc-starts-new-220-megawatts-plant-253/33009/http://teabreak.pk/kesc-starts-new-220-megawatts-plant-253/33009/

Failed Attempt at Liberalization of Pakistan Power Sector

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