Nawaz sets energy plan in motion

Across the country, the smart-phones of high-ranking engineers and energy sector corporate executives are buzzing with e-mails, texts or phone calls, all emanating from one place: Raiwind. All of them are getting the same message: the prime minister-elect would like to interview you to be part of the team to revamp the state-owned part of the energy sector.

Even before he has been formally sworn in as prime minister, Nawaz Sharif and his team appear to have begun to implement what appears to be a highly detailed plan to solve Pakistan’s energy crisis, according to sources familiar with the matter. The victorious Pakistan Muslim League Nawaz has a week-by-week plan on measures that their government will take in trying to fulfill their single biggest electoral promise: getting the lights back on.

“The new government is going to be ruthless in its management of all the public-sector energy companies,” said Zafar Iqbal Sobani, who was CEO of Hub Power Company until a couple of weeks ago. “Expect to see many people summarily fired from these organisations as well as the ministry of water and power. After all, if he is seen as removing incompetent management of the power sector, who will complain?”

The PML-N appears to have done its homework with respect to the power sector. Over the past week, the party’s senior leadership has met with the CEOs of virtually all privately owned power generation companies in a bid to gauge the exact levels of circular debt in the energy sector.

According to sources familiar with the matter, Nawaz is not simply asking them how much they have stuck in circular debt: he is matching their figures against numbers that the party has collected from other sources, suggesting a degree of thoroughness in research.

Circular debt is currently in the range of Rs500 billion. If the government can get that down by even 60-70% with a long-term loan from Saudi Arabia or even by issuing treasury bonds, that should be enough to get about 3,000 megawatts of idle power generation capacity back online, which would reduce loadshedding by half,” said Sobani. “That would fulfill the immediate campaign promise to reduce power outages while also buying time to put in place long-term reforms.”

The headhunting for new management of the state-owned power generation and distribution companies is one element of that multi-stage strategy.

In the first stage, the Nawaz government will just want to get the power plants going, all of them, regardless of their levels of efficiency, just to get the confidence of the people in their plan.

In the second stage, the state-owned power companies will get new management teams, and will see a wholesale sacking of large segments of their staff. The new managements will crack down on things like fuel theft and supplying electricity to people who have not paid their bills, as well as power theft. They are expected to invest in improving the efficiency of the machinery by conducting long-neglected repairs.

The idea behind this phase, expected to last between six months and a year, is to get the power sector as it currently exists to perform at maximum efficiency to reduce circular debt accumulation and the need for subsidies.

Having thus built up its credibility, the Nawaz administration is then expected to launch the third phase to further reduce the need for subsidies: increasing power tariffs while simultaneously investing in cheaper sources of electricity. State-owned power companies are expected to invest in hydroelectric power generation, in the hopes of spurring more private sector firms to set up run-of-the-river hydropower plants.

Private sector companies will likely be pressured to invest in converting away from their oil-fired power plants to coal-fired turbines. First in line for coal conversion is likely to be the Nishat Group-owned AES Lalpir.

This phase is expected to last between two-and-a-half and three years. The financing for this phase is likely to come from the Chinese engineering and construction companies that will likely get the contracts for the coal-conversions. “Western firms, and western finance institutions no longer finance coal-fired power plants owing to their negative environmental impact,” said Sobani.

In the final stage, the Nawaz administration is expected to seal the benefits of this proposed transformation by privatising what they hope by then will be a highly profitable state-owned energy sector. The removal of state ownership is hoped to remove the temptation for future governments from trying to implement populist measures at the expense of the energy sector.

Published in The Express Tribune, May 28th, 2013

Farooq Tirmizi

CEO, Elphinstone

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

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