Feisal Naqvi

Archive for July, 2010|Monthly archive page

Paved With Good Intentions

In Uncategorized on July 16, 2010 at 6:55 am

Most Pakistanis don’t know what Nepra is, let alone what Nepra does. This is a good thing for the Nepra people because otherwise there would be a mob right now outside their Islamabad offices, complete with pitchforks and burning staves.

What most Pakistanis do know is that their biggest problem (apart from minor issues like rampant inflation, exploding jihadis and imploding cricket teams) is lack of electricity. What most Pakistanis also know is that there is no good reason for us not to have electricity. We have enough coal for the next 500 years and enough hydro-electric potential to meet our current needs three times over. Why then are we stuck in load-shedding land?

One extremely important part of the answer is Nepra.

Nepra stands for the National Electric Power Regulatory Authority. What it does is regulate the entire electricity sector. If you want to set up a power plant, you need Nepra approval. If you want to sell the electricity you generate, that contract also needs to be approved by Nepra, including specifically, the price at which you can sell your electricity. And therein lies the rub.

When it comes to tariffs, Nepra’s default mode of analysis is something called “cost-plus.” In other words, what Nepra does is that it figures out what it should cost you to generate a particular amount of electricity and then gives you 15% more than your cost: hence the term “cost-plus.”

Cost-plus analysis is problematic, both from a macro perspective as well as from micro perspective.

From a micro perspective, the problem with a cost-plus approach is that it encourages generation companies to lie about their costs. Since they are the only ones who know exactly what their costs are, this is relatively easy for them. This then turns the Nepra gents into paranoid maniacs and results in farcical situations where Nepra tells the banks lending money to power projects that they should charge lower interest costs and the banks in turn tell Nepra to bugger off.

The big picture problem, though, is much worse. Since Nepra only looks at tariffs from a cost plus perspective, this results in different tariffs for different technologies. So, Nepra has an indicative tariff for coal plants, a different one for hydel, a different one for thermal and yet another one for wind. And in each case, Nepra’s basic goal is to make sure that the power producer doesn’t make a profit of more than 15%.

So what, you might ask? Well, to put it in very simple terms, the tariff for hydel is something like 6 cents (per kilowatthour), the tariff for coal is closer to 9 cents, and the tariff for thermal (including fuel) is something like 18 cents. Given that difference, I would rather take a bad deal on coal than a great deal on thermal because as a consumer, I don’t give a damn where my electricity comes from: units is units. But Nepra doesn’t agree.

What we have seen therefore over the past 13 years (since Nepra’s founding in 1997) is any number of missed opportunities. In 2002, I knew of one instance in which a tariff of 3.5 cents was turned down even though our marginal cost in those days was 6.6 cents. Last year, we apparently turned down an offer from the Chinese to build a 1000 MW coal plant at 6.5 cents and instead signed up thermal projects at 18 cents plus; in short, penny-wise and pound-foolish.

Does that mean that Nepra is the reason we have load-shedding? Well, yes and no. Nepra is a problem but it is only a problem because of the way it is being allowed to function. Change the way it functions and it can equally well be part of the solution. That sounds easy but it masks two hard facts: first, Nepra is not interested in changing the way it functions. And second, forcing change onto Nepra is, under current circumstances, very difficult.

Let’s start with the institutional neuroses of Nepra. You have to remember that Nepra was established by the second PML government of Mian Nawaz Sharif which had campaigned (and been elected) on the basis that the PPP’s 1994 power policy had been catastrophic for Pakistan (not true) and had been marked by gross corruption (no comment). Nepra was thus the result of the PML following through on its promise to the nation that the 1994 Power Policy would be permanently buried with a stake through its heart. That is why when the first Nepra employees took office back in 1997, their instructions were very clear: make sure that nobody sneaks a fast one past us ever again.

After that, lots of governments came and went (actually, mostly went) with nobody paying Nepra much attention for the simple reason that the last PPP government had binged so much on thermal power that nobody bothered to worry about where the next bunch of megawatts was going to come from. And since oil was cheap back then, thermal energy (which BB & Co. had bought by the cartload) was also cheap. So, the Nepra chaps sat around, picking their noses all day, pausing only to say no to whichever fool of an investor had bothered to show up.

Starting around 2006, the shit finally hit the fan. This was for a couple of reasons. First, Pakistan’s recovery under the economic tutelage of Shaukat Aziz caused energy demands to balloon way beyond everybody’s expectations. Secondly, oil prices went through the roof. The net result was that Pakistan was staring an energy crisis in the face while rapidly going broke. And the Nepra boys were still sitting in their offices, telling investors to sod off.

Ever since then, it has to be conceded that various federal governments (and ministers and secretaries) have been running around trying to fix “The Power Crisis.” In the case of the current incumbent, this takes the form of making pronouncements along the lines of “Power Crisis Be Gone!” I may be wrong in that he also precedes his periodic announcements with the head of a black chicken (or goat) but so far at least, the policy formulation qua exorcism/fatwa endeavour has been somewhat of a disappointment.  Still, the point here is not to rag on the gent but to concede that Efforts Have Been Made. Unfortunately, those efforts have failed. Repeatedly. They have failed, in large part because the boys at Nepra continue to do what they were originally programmed to do, i.e. tell investors to bugger off, much like those fanatical Japanese soldiers who continued fighting on remote pacific islands for the grory of the Chrysanthemum Throne well after Hiroshima had been nuked and Hirohito had announced to his nation that he would endure the unendurable.

So, having identified the problem, what can be done to fix it? Why doesn’t the Federal Government wave a magic wand, and tell the Nepra boys to behave themselves?

The short answer is that, for two reasons, Nepra doesn’t need to listen to anybody.

Firstly, the Nepra Act itself walls off Nepra from any direct interference by the Federal Government. The idea behind this was that it would prevent corruption. But a barrier against negative interference is also a barrier against positive interference. Thus, while the Federal Government can prescribe guidelines to Nepra, the interpretation and application of those guidelines is up to Nepra.

The second answer to this problem lies in the Rules of Business. The Rules of Business provide in detail which Ministry does what things and which organizations are governed by which ministry. And in this case, the Rules of Business provide that Nepra lies under Cabinet Division, not under the Ministry of Water & Power.

What that means in turn is that so far as Nepra is concerned, the “Federal Government” does not mean the Ministry of Water but only the Cabinet Division. Therefore, Nepra does not have to listen to the Ministry of Water & Power. Instead, Nepra only needs to listen to the Secretary, Cabinet Division (who has three hundred million other things to worry about) or to the Prime Minister (ditto). The end result is that one part of the Federal Government (i.e, the Ministry of Water and Power) makes policies regarding electricity (or the lack thereof) and another part of the Federal Government (Nepra) make sure those polices fail.

I could end this extended foray into our dysfunctional status with a quip about how the road to hell is paved with good intentions. That may well be true but it also misses the point. Policies have consequences. Bad policies have bad consequences. It may be that setting up Nepra in the way that it was done made sense 13 years ago, but it certainly makes no sense now. What the Federal Government needs to do first of all is to shift Nepra under the Ministry of Water & Power so the current impasse is resolved. Policy-making has to be done in a coherent fashion, not in the current manner where Wapda proposes and Nepra disposes. Given the various firewalls built into the Nepra Act, that may or may not be sufficient. It may, for example, be necessary to amend the Nepra Act and make them less independent (and more realistic). But it would certainly be a good start.