Mr Nawaz Sharif has made a royal mess of the IPP issue. He has done this by deliberately confusing the question of WAPDA’s internal inefficiencies and corruption with the tariffs obtained from the IPPs so that the PPP government can be blamed for his travails. In the process, Mr Sharif has seriously damaged his government’s credibility as a foreign-investment friendly regime.
WAPDA’s troubles are largely of its own making. A recent WAPDA-commissioned study pitches its yearly line losses at 37%, half of which is stolen by consumers (worth about Rs 24 billion annually). This colossal figure is hidden from view by WAPDA officials through a couple of sneaky devices: FATA’s flat rate consumption is booked at 25 times the national average; and flat rate tubewell consumption is booked at about twice the actual level (one study calculates that if all the tubewells in the country were run for 24 hours a day 365 days a year, the quantity of electricity consumed would still be under 2/3rds the quantity actually booked by WAPDA).
The federal and provincial governments are also to be blamed for WAPDA’s current cash crunch. From 1994 to 1997, the provincial governments’ electricity bills were deducted at source by Islamabad and paid to WAPDA. But this practice was discontinued in FY 1997-98, with the result that the provincial governments and related bodies have not cleared their WAPDA dues. Since 30% of WAPDA’s annual power sale is to the public sector (worth about Rs 25 billion), it is no small wonder that WAPDA’s revenue base is shrinking and its survival has become problematic.
In this context, the burden of the IPPs on WAPDA is insignificant. A WAPDA study estimates that WAPDA is suffering an additional yearly loss of about Rs 12 billion, partly on account of the high rates charged by the IPPs and partly because WAPDA lacks experience to implement the management contracts. If WAPDA had been able to control its own deficiencies, or if the provinces had coughed up their dues on time, or if federal government had demonstrated the same will to tackle WAPDA as it has demonstrated in the case of the public sector banks, such losses would not have become a burden at all.
The IPPs, of course, have got a good deal from the PPP government. At the centre of the storm are Hubco and KAPCO, which account for most of the private power available. Hubco’s rate was enhanced by the PPP government from 6.1 cents pkh negotiated under Mr Sharif’s first regime to over 11 centres today. And 36% of KAPCO’s shares were off-loaded to the National Power Company, UK, the manor shareholder of Hubco. The hurried sale of 10% additional shares, on the verbal instructions of Ms Bhutto and without clearance from the Economic Committee of the Cabinet, at below the rate obtained for the first installment of 26% shares, has rightly become the object of the Ehtesaab Cell’s wrath. The other IPPs currently on line hardly account for 600 mw.
In the event, the proper course of action would have been for the government to concentrate on getting rid of WAPDA’s internal, self-generated problems while quietly renegotiating terms with the IPPs. Furthermore, this renegotiations should have involved the major equity holders (who are all foreign financial institutions and private investors) instead of focussing on local businessmen with a mere 20% or less stake in the projects. Indeed, if the government had quietly started talking to National Power UK early last year and persuaded it to compromise, much of the Rs 12 billion additional yearly burden would have evaporated. After all, WAPDA pays nearly Rs 42 billion out of Rs 60 billion annually to Hubco and KAPCO alone.
The government’s current approach is to try and publicly arm-twist the IPPs into reducing their profit margins and rates by about 30%. This is misplaced. Unending legal battles, stock exchange hiccups and much loss of international goodwill are bound to result. The solution offered by the IPPs — export of surplus power to India — has also now become a non-starter. Nor can the government withdraw the fuel surcharge and reduce fuels costs to the IPP enabling them to reduce their rates accordingly because this would play havoc with its royalty formula with the NWFP. No, there is only one sensible way out.
While it goes about firmly restructuring WAPDA, the government should offer incentives to domestic consumers so that the 2000 mw excess capacity power available costing about US$ 400 million annually is mopped up swiftly. This should take the form of a downward sliding scale of electricity rates related to increased consumption by various types of users.
The advantages of this approach are obvious enough. It will help reduce the cost of excess power. It will make our industry more competitive in the international arena by reducing its power inputs costs. It will considerably enhance the value of the government’s moral pressure on the IPPs to voluntarily reduce their profit margins and power rates. Above all, the reduction of electricity rates across the board will yield a political bonanza to the Sharif government at a time of great difficulty.