A tale of two energy supply chains

It is getting increasingly difficult to ignore the fact that there are now not one but two distinct, albeit interlinked, energy supply chains in the country. One is owned by the government and the other by the private sector. And the privately owned part of the energy sector is handily outperforming the state-owned portion.

At each stage of the energy supply chain, the parts that are not owned by the government are doing a far better job. Let us start with the heart of the current crisis, the oil marketing companies responsible for owning and supplying the petrol pumps from which all of us get our fuel. Nearly every petrol pump owned by the government-owned Pakistan State Oil (PSO) in Punjab has been closed for the last few days. Meanwhile, the only places in Islamabad-Rawalpindi, as well as other parts of Punjab, where you can still get a little bit of petrol are the pumps owned or supplied by Shell, Hascol, and other private sector players. PSO and petroleum ministry officials have been consistently blaming the private sector players for their role in the crisis, and they are indeed not blameless in the whole situation. But their performance is still better than PSO.

When it comes to power generation, particularly thermal power, the state-owned sector has an even worse performance. On Saturday, Water and Power Minister Khawaja Muhammad Asif tweeted that the thermal power plants owned by the federal government were producing just 700 megawatts (MW) of electricity, less than 10% of an installed capacity of 7,217 MW. Meanwhile, the privately owned independent power producers (IPPs) were producing 6,180 MW, which is nearly 80% of their installed capacity of 7,894 MW.

On the electricity distribution side, the Abraaj Capital-owned K-Electric has been consistently reducing transmission and distribution losses, reducing from their peak of over 40% during the last year the company was owned by the government to 25.3% today. Meanwhile, the state-owned electricity distribution companies have continually been plagued by allegations that they are severely understating the true scale of their losses.

In other words, in every segment of the energy sector where private companies directly compete with state-owned ones, the privately owned companies are invariably winning. Perhaps it is time for Pakistanis to get used to the idea that, while there may well be many governments around the world that can competently run businesses, ours is not one of them.

Part of Pakistan’s problem appears to be the hybrid nature of the energy regime. For example, oil and natural gas exploration and production is an activity in which both government and private entities compete, leading the government to adopt a pricing mechanism designed to incentivise more exploration and production activity. However, the gas distribution network is still completely state-owned, so even though the government has increased the price it is paying the gas production companies, it has not increased the price it can charge consumers, leading to a severe financial crisis at the state-owned Sui Southern Gas Company and Sui Northern Gas Pipelines, both of which have not issued financial statements in nearly two years.

As a result of the poor management of those two state-owned gas distributors, compressed natural gas (CNG) stations throughout Punjab have had to be closed as part of a rationing policy, which in turn exacerbated the supply situation for petrol as more people switch over from CNG to petrol.

It is tempting in times of crisis for governments to want to take action, but perhaps – given the structure of Pakistan’s energy problem – the solution lies in government inaction. Suspending the head of PSO while the company is facing a severe liquidity crisis is a clear example of an action that looks tough, but in reality will only worsen the problem. Perhaps the government needs to stop thinking it can do everything, spin off its energy sector holdings to the private sector, and restrict itself to a regulatory role. The whole country works well when the government focuses on what it should do, and does not try to do everything.

Published in The Express Tribune, January 18th, 2015

Farooq Tirmizi

CEO, Elphinstone

Farooq Tirmizi is the founder and CEO of Elphinstone, the financial services firm that operates SmartRupee.

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