The FESCO experiment

I am still not entirely sure if Prime Minister Nawaz Sharif has the guts to pull the trigger on the privatisation of the Faisalabad Electric Supply Company (Fesco), but if he does, the results of that transaction will allow us to settle the debate about who has the better energy policy: the PTI or the PML-N.

The Pakistani electricity grid is a vast and complex beast, and arguments over how best to run it will determine not only the economic fate of this country but, in my view, also a significant portion of its social and political fate. Understanding it, and the central policy arguments surrounding it, therefore, is absolutely critical. In a nutshell, the country has a total installed power generation capacity of 23,538 megawatts (MW). Even though there are 127 private sector companies in the power sector, the 12 state-owned companies control nearly 62 per cent of total power generation capacity. However, on any given day, the state-owned power companies are producing from anywhere between 10 per cent and 50 per cent of the country’s electricity needs. There is only one purely transmission company, 11 purely distribution companies, and one company that does all three functions: K-Electric.

The PTI’s policy wonks — and by that I mean Asad Umar and his merry band of interns — argue that the government should privatise the four largest state-owned power generation companies first. The PML-N’s policy appears to be to privatise the distribution companies first. Asad Umar’s core argument is that the problem with the state-owned power generation companies is a lack of expertise and professional competence, whereas the problem with distribution companies is mostly theft caused by poor law and order. He argues that the private sector is perfectly capable of solving the former problem, whereas the latter is better left in the realm of the government. That argument is perfectly rational, especially when one considers the fact that the four largest state-owned thermal power generation companies, with a combined capacity of 6,378MW, are effectively offline largely due to corruption and grossly incompetent management. Were these plants placed in private hands, it is entirely possible that they would be far more functional and efficient than they are today.

However, were the PML-N to properly articulate its policy case, it would suggest that privatising the distribution companies is more necessary because the core problem in Pakistan’s electricity grid is not just theft, but the fact that there is currently no disincentive against theft. State-owned companies are bound by court order to have uniform load-shedding throughout the country, whereas privately owned companies are under no such constraint. As a result, despite an incredibly difficult operating environment, K-Electric has been able to significantly reduce its losses due to theft. Meanwhile in Punjab, which has far lower rates of theft (though higher than the government claims), load-shedding is far worse. If Lesco and Fesco were allowed to do what K-Electric does — have greater load-shedding in areas of high theft and lower or even no load-shedding in areas of low theft — the urban core of Lahore and Faisalabad would have no load-shedding at all.

The problem would be pushed out to the suburban and rural areas of Punjab, which is where most of the theft in that province occurs anyway. There would still be painful load-shedding in many parts of the country, but at least bill paying consumers would be minimally affected by it.

To be honest, I am not sure which of these two paths is better than the other, which is why the privatisation of Fesco — likely the first major utility to be privatised — would be a natural experiment in a way that K-Electric never could be, since K-Electric, being Pakistan’s only integrated utility, is unlike any of the other distribution companies. If Fesco is able to replicate the K-Electric model in Faisalabad, then the PML-N is right and it should proceed with privatising all of the other electricity distribution companies. If, however, Fesco finds that not owning its own power stations is a significant handicap, then perhaps the PTI’s solution may be better. Or perhaps, both are only half right and the real solution lies in selling off all of the government’s energy companies.

Published in The Express Tribune, February 20th,  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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