Caretaker Government May Decide Provincialization of DISCOs

Special Report

ISLAMABAD:

The caretaker Prime Minister, Anwar-Ul-Haq Kakar has given go ahead to present the crucial issue of the transfer of ownership and management of electricity distribution companies (DISCOs) from the federal government to provincial governments to the federal cabinet once it has been formed.

Premier Kakar’s intent to present the pivotal matter of transfer of DISCOs to the provincial governments from the federal government before the federal cabinet once it is constituted was disclosed in a letter issued by the Prime Minister’s Office (PMO) on 15^th August 2023. The letter was sent to the Secretary Power Division.

The Prime Minister has seen and is pleased to desire that after formulation of the federal cabinet, the instant matter shall be placed before its meeting, for consideration, said a letter issued by PMO.

There are ten Distribution Companies (DISCOs) under the administrative control of Ministry of Energy (Power Division). Recovery against the electricity bills by DISCOs has been a consistent challenge since long. This has resulted in development of the circular debt which has already swelled up to 2.631 trillion rupees. It is apprehended that owing to the theft and non-recovery against billing, the circular debt will be on an upward trajectory.

The current legal and administrative structure of electricity distribution business entails a pivotal role of the provincial governments including but not limited to enforcement through police, coordination through district administration and legal role of the provincial departments in recovery against the billing including recovery of the receivables from the provincial government. The provincial government do not lend the requisite support to these DISCOs in collection of the electricity bills from the defaulters viewing this function purely as federal subject. Whereas, the fact is that performance of DISCOs can not improve without active support of the provincial governments.

Earlier, the former Prime Minister Shahbaz Sharif constituted a committee under the Chairmanship of the Minister for Defence on transfer of DISCOs to province. The committee took deliberations on various points raised by the provinces and Ministries of Law and Justice, Privatization and Council of Common Interests during its three meetings held on 24-03-2023, 17-04-2023, 25-05-2023 & 21-06-2023. The committee observed that the provinces require more time for due diligence. However, the Government of Sindh is at advanced stage and has also hired Transactional Advisor for transfer of HESCO and SEPCO. The committee during its meetings held on 25-05-2023 & 21-06-2023 agreed that a principle approval by the CCI is required before further steps are taken. It was also recommended that the process of due diligence by the federal government as well as provincial governments shall continue for saving time. The committee recommended that after approval by CCI, Transaction Advisors shall be hired by the federal and provincial governments. Reports by the Transaction Advisors shall become the basis for terms of engagement and eventual agreements. Such agreements will be approved by the respective governments with implementation kicking off accordingly. The committee also decided that the recommendations of the committee may be placed before the Prime Minister for approval.

According to sources, power division has proposed that the federal government may accord its in-principle approval/concurrence as per Schedule-II of the Rules of Procedure of the Council of Common Interest, 2010 required for placement of the summary to CCI as per recommendations of the committee for transfer of ownership of these DISCOs to the provincial governments based on subsequent agreement between the respective provinces may be governed under the draft policy which may also be approved by the Council of Common Interest (CCI).

Available documents transpire that all distribution companies are beset by serious governance and commercial challenges. Efforts to improve performance through better corporate management, private sector participation and greater oversight by the Ministry of Energy have so far not yielded the desired outcomes. The situation deteriorates, on the contrary. The companies have suffered Aggregate Technical & Commercial Losses of more than PKR 292 billion. These can be attributed to range of factors-technical infrastructure issues, theft and illegal connections, non-technical losses related to billing and revenue collection, inaccurate metering, voltage fluctuations and power quality issues, operational inefficiencies, and inadequate investment and maintenance.

According to documents, the federal government has provided subsidies of PKR 596 billion and PKR 535 bln in FY 2022 and FY 2023 respectively, to the power sector to ensure affordable electricity prices for consumers. Despite these subsidies, the tariffs are unsustainably high. The inter-corporate circular debt also piles up and presently stands at PKR 2631 billion. The subsidies have strained government’s finances and hampered the development and maintenance of power infrastructure. Additionally, high tariff is enhancing cost of doing business and placing huge burden on the household budget. The sustainability and financial viability of power sector is seriously in serious jeopardy.

Because of such factors, the federal government has expressed intentions to transfer the ownership and control of DISCOs to the respective provincial governments, subject to provincial concurrence. The rationale is that provincial governments are better positioned to manage the distribution companies, given their presence and resources in the field. Provincial governments can more effectively address issues of electricity theft and recovery of outstanding dues due to their control on local administration and police. Additionally, provincializing DISCOs would decentralize power and decision-making in the electricity sector to enhance local governance, customer care and accountability.

As per documents, the provincial government can play a crucial role in the management and administration of the distribution companies. Some areas are:

1. Policy input and implementation: While the overall policy framework for the electricity sector would be determined at the CCI (federal-provincial) level, the provincial governments will have the autonomy to implement measures specific to their jurisdiction. This will allow them to address local challenges and promote sustainable and efficient electricity distribution.
2. Local Administration and Oversight: Provincial governments will have the authority to oversee distribution companies within their respective jurisdiction, also through local administration. This will include monitoring operations, ensuring compliance with regulations, and addressing issues specific to the local context.
3. Anti-Theft Measures:

They will be responsible for implementing robust measures to detect and prevent theft, such as conducting regular inspections, employing advanced metering systems, and strengthening law enforcement efforts to deter illegal connections.

 

1. Revenue Management: Enhancing the recovery of outstanding dues is another vital aspect of the provincial government’s role. They will employ strategies to improve revenue collection, including introducing efficient billing systems, addressing billing discrepancies, and implementing effective debt recovery mechanisms.
2. Infrastructure Development and Maintenance:

Provincial governments will be entrusted with the task of infrastructure development and maintenance within the distribution companies. This involves investing in modernizing the distribution network, upgrading equipment, and ensuring regular maintenance to minimize technical losses.

 

1. Consumer Service and Grievance Handling: Being closer to the customers, provincial governments will be responsible for ensuring quality consumers service and handling grievances. This includes addressing consumer complaints, establishing effective customer service mechanisms, and promoting transparency in billing and metering processes.
2. Collaboration and Coordination: The provincial governments will collaborate with the federal government, regulatory authorities, and other stakeholders to ensure effective coordination in the functioning of the electricity distribution system. This includes sharing information, aligning strategies, and collaborating on broader sectoral goals.

 

The success of the provincial governments in managing DISCOs will depend on their capacity to effectively execute these responsibilities, allocate adequate resources, and establish transparent and accountable mechanisms for governance and operations.

 

Draft Policy Framework

 

In view of the foregoing considerations, the Government of Pakistan (GoP) has decided to transfer the shareholding and control of the DISCOs to the provincial governments under the following policy framework:

 

1. The government (GoP) shall transfer the shareholding of the DISCOs located in each province to the respective provincial governments on the basis of mutual agreement with each provincial government including agreement on the number and/or sequence of each transfer.
2. The modalities of transfer shall be worked out between the government (GoP) and each provincial government, including inter alia:
3. Commercial terms of transfer;
4. Asset and liabilities of each DISCO;
5. Agreement on allocation of current and future liabilities of each DISCO;
6. Agreement on present commitments of the DISCOs with the GoP, etc.;
7. Agreement on present and future capacity commitments, transmission related issues, electricity trade, and compliance with national power policies and the generation capacity expansion plans;
8. Agreement with respect to past and current employees of the DISCOs;

 

1. The GoP shall make necessary amendments to the NEPRA Act, the rules/regulations made thereunder, and any other laws, rules, or regulations if required any to affect the transfer.
2. The GoP and the provincial governments shall obtain the necessary regulatory approvals to carry out the transfer.
3. After the transfer, the DISCOs will continue with their existing licensing regime and other contractual arrangements as per their respective terms.

 

Monitoring, Application, Review, Implementation, Updating & Conflict Resolution Mechanism

The Ministry of Energy (Power Division) shall be responsible, among other matters for the implementation of this policy. All respective entities, including the provincial governments shall provide necessary support to the Ministry of Energy (Power Division) to implement this policy. The Ministry of Energy (Power Division) will submit a detailed report on a quarterly basis on the progress and implementation under this policy to the CCI.

For the purpose of this policy, the Ministry of Energy (Power Division) may designate any entity(ies) to perform the task assigned to its hereunder.

This policy shall come into force immediately. The National Power Policy 2021 shall remain in force to the extent not in conflict with this policy.

The GoP, on its own motion, or on the request of a provincial government, may review and propose revisions/amendments to this policy by the CCI from time to time.

There shall be an Implementation Committee constituted by power division with appropriate representation of all stakeholders to review progress on implementation of this policy, identify the bottle-necks, hampering the progress on implementation and also to resolve all such issues but not limited to difference of opinion(s) and conflict(s). In case, any conflict being complex or involving complex issues is not/can not be resolved by the Implementation Committee, the Implementation Committee may refer the same to the Ministry of Inter Provincial Coordination for appropriate resolution.