What ails WAPDA?
By Shahid Kardar
IN A recent cabinet meeting, the Prime Minister, in
response to a plea for permission to increase the
electricity tariff, is alleged to have stated "I
couldn't care less if WAPDA ceases to exist. If it
is to die, so be it, and the sooner the better."
This is the solution proposed by the Chief
Executive of the country to WAPDA's, nay the
country's, problems, while he pours meagre national
resources down that huge hole, charitably called
the Motorway to Nowhere.
What ails WAPDA? Is it solely to blame for its
predicament? Or have external factors, over which
it has little control, contributed a fair measure
to its collapse. What is the nature and scale of
its financial bankruptcy? Such is the size of the
financial cesspool in which WAPDA finds itself that
its direction-less administration, because of the
rather casual approach of both the government and
the organization's senior management, has been
rendered irrelevant.
WAPDA's unsettled liabilities are currently
programmed to increase from Rs 25 billion in June
1997 to Rs 45 billion by the end of fiscal 1997/98
(close to 40% of WAPDA's revenues). Its major debts
include Rs 11 billion that it has not paid to its
suppliers of fuel-the oil and gas companies, while
Rs 8 billion is owed to other suppliers and
contractors. Then there is the drain on resources
caused by the:
* Subsidies to irrigation tubewells, AJK and FATA.
* Rural electrification programme.
* Overstaffing.
* Abject failure in meaningfully reducing
transmission and distribution losses.
* Continuing high level of receivables (44% of
billings) due from those of its consumers that
WAPDA cannot disconnect. For example, the biggest
defaulters are KESC (Rs 5 billion), the Federal
Government (Rs 5 billion) and the provincial
governments (Rs 10 billion).
Therefore, if to the above referred pending
liabilities we add the impact of these factors we
begin to get a flavour of the magnitude of the
problem confronting WAPDA's survival.
WAPDA's woes have also been magnified by the
problem of excess capacity (which is estimated to
rise to 3,000 MW by 1998/99), arising partly from
its own inefficiency and partly because of
government policy.
* It has been unable to lay 2,000 kilometers of
transmission lines to transmit the power being
produced by the Independent Power Producers. In
fact, many would argue that WAPDA, at least in the
foreseeable future, will neither have adequate
levels of own resources nor will it be able to gain
access to the financing required for constructing
these lines.
* Ever since some industrial consumers have made
their own arrangements for power there has been a
reduction in the consumption of power being
provided by WAPDA.
* The current industrial recession and the impact
of the high rates of domestic inflation on the
price elasticity of the demand for power have only
served to enlarge the scale of the problem.
At current tariff levels WAPDA estimates its
revenues for 1997/98 at around Rs 115 billion. Its
payments to the Independent Power Producers are
expected to total Rs 55 billion, while operating
costs are estimated at Rs 75 billion (including the
royalty of Rs 6 billion to the NWFP under the NFC
Award whereas the provincial government is
demanding Rs 9.6 billion). The net result is a
deficit of Rs 15 billion, if WADPA does not
undertake any capital expenditure. Add to it the
unpaid liabilities of Rs 25 billion (mentioned
above) and we have a cash deficit of Rs 40 billion,
without any development activity. This deficit
represents 35% of WAPDA's revenues for the year.
At first sight it may appear that the payments that
it has to make to the Independent Power Producers
has delivered a grievous body blow to WAPDA. The
Independent Power Producers have become the
favourite whipping boys of both WAPDA and the
present regime. The power purchase agreements are a
god-send opportunity to lay the entire blame of
WAPDA's agony at their door. That WAPDA finds
itself close to a precipice is not simply owing to
these agreements.
The truth is a bit more complicated than WAPDA and
the government would like us to believe. WAPDA has
a point when it complains about the absence of a
level playing field. The private power producers,
who would, in any case, be expected to be more
efficient producers of energy (in contrast with the
corruption, incompetence and low productivity
rampant in the public sector) enjoy the luxury of
not only being paid their generation charges in
foreign currency (and, hence, become insulated from
domestic inflation) but can also pass on all
increases in the price of oil to their consumer,
WAPDA. They are also entitled to a host of
concessions on duties and taxes not available to
WAPDA. Moreover, WAPDA also has to contend with
political patronage in staff appointments and
transfers and political interference in the
extension of distribution networks and in its
efforts to disconnect persistent defaulters.
However, it is the government that is largely to
blame for the rapid increase in costs of power
generation. By slapping on a huge surcharge on the
most important input in the production of thermal
power, fuel oil, the government has caused the
price of furnace oil to rise from Rs 2,800 (when
these agreements were signed) to in excess of Rs
6,500 (and lest you forget, it is this very
surcharge that has given a partial gloss to the
extremely dismal picture of government revenues
being presented to the visiting IMF team). The
devaluation of the rupee has made a smaller
contribution to this increase - adding a total of
Rs 4 billion to fuel costs and the charges of the
Independent Power Producers. The decision to levy
such a massive surcharge has induced heavy tariff
revisions.
In the light of the discussion above the obvious
question that arises is, can WAPDA raise funds for
financing its operations? The incontrovertible fact
is that, because of its dire financial straits,
WAPDA is unable to raise any resources in the
market without government guarantees considering
that it has already defaulted on two foreign loans,
which were repaid by the government as the
guarantor, (although WAPDA claims that Islamabad
had assured it that these loans would be rolled
over). In other words, it cannot finance its
deficit, including the massive sized backlog
without a hefty tariff increase (currently
estimated at a minimum of 20%), unless, of course,
the technically insolvent Federal Government can
ask the IMF to look the other way while its presses
roll out a few more photographs of the Quaid to
help clear WAPDA's deficit by paying its own and
provincial governments' outstanding bills of WAPDA
totalling Rs. 14billion.
In 1993/94, against the supply cost of Rs 1.40 per
unit the average tariff was Rs 1.55/kwh. By 1997/98
the situation had reversed, with the corresponding
figures of Rs 2.90 and Rs 2.60/kwh respectively. It
is, therefore, patently clear that WAPDA's tariffs
have to be revised. This writer's estimates suggest
that any further postponement will eventually
require an additional increase of 2.5% per month of
delay. The rumour that the government has agreed to
an increase of 21% has still not been confirmed.
On the basis of the submissions made to date (even
if we accept its ambitious estimate that it can
save Rs. 5 billion through improvements in
operational efficiencies) WAPDA hopes to reduce its
deficit by Rs 16 billion, compared with the
estimated cumulative deficit of Rs 40 billion. In
these proposals are included the withdrawal of the
subsidy in the tariff rates for the irrigation
tubewells, Azad Jammu and Kashmir (AJK) and FATA,
from which it hopes to raise Rs 3 billion. The
balance additional revenues of approximately Rs 8
billion are expected to come from tariff increases.
Even if we accept WAPDA's highly optimistic revenue
projections there is still the matter of the
uncovered deficit of Rs 24 to Rs 25 billion. How on
earth will this deficit be financed, even if WAPDA
ceases to perform any developmental activity?
Under this package of proposals, the AJK is to be
charged Rs 3.25 per unit against the Rs 1.16 that
they are currently paying, a rate that was agreed
less than a year ago after lengthy deliberations.
The Government of AJK has reacted strongly to this
proposal. It is arguing that AJK's geographical
position, the terrain, WAPDA's failure to construct
grid stations (a factor which has contributed to
the high line losses), the wide dispersal of the
community of consumers, its paying capacity and the
overall consumption ratio (mostly domestic
consumers, 80% of whom fall in the lower tariff
slab-150 units/month) make it difficult for AJK to
service such a charge.
Moreover, their argument proceeds, since AJK is
supplied electricity from Mangla and Tarbela (i.e.
it gets its power from hydel sources) the inclusion
of the fuel adjustment charge in the tariff is
grossly unfair. They are also demanding royalties
from Mangla Dam on the same principles that govern
the payment of royalties to NWFP.
As for the subsidy to irrigation tubewells it is
not quite clear what will be the impact of such a
rationalisation in the tariff structure? Power
supply to agriculture is unmetered and the extent
of agricultural consumption is often a derived
figure, based on highly questionable assumptions.
More often, large thefts of power and transmission
and distribution losses are camouflaged as
agricultural consumption. It is fairly well known
by now that WAPDA is manipulating the energy sale
to tube-wells in the agricultural sector to hide
excessive transmission and distribution losses and
pilferage. In fact, WAPDA also pads its billings to
the federal and provincial governments to hide the
real extent of power pilferage.
No one would differ with the government that the
subsidies referred to above should be removed. The
disagreement relates to the overly optimistic
estimates being presented on the additional income
that WAPDA will earn from the elimination of these
subsidies. But, more importantly, it is the tariff
structure that requires correction. Currently,
industrial consumers partly cross-subsidise
agricultural and domestic consumers. Typically,
Pakistani industrial consumers are charged an
average rate of Rs 3.90/kwh, while domestic
consumers pay an average rate Rs 1.75/kwh.
Interestingly, this is exactly the opposite of the
situation in the United States where residential
consumers pay higher tariffs (Rs 2.70-Rs.3.90/kwh)
than industrial consumers (Rs. 1.50-Rs. 1.95/kwh).
It is economically efficient to charge low rates to
industrial consumers and high rates to rural,
agricultural and domestic consumers. In fact, for
some consumers, like those in the rural areas,
there may be other technologically better options
that suit the needs of dispersed communities with
moderate demands for electricity.
The future of WAPDA cannot be considered in a
vacuum. The political ethos in which the public
sector has had to function so far cannot be
ignored. It will be unfortunate if the complex
issues confronting the power sector, which is vital
for the development of the country, are examined
purely ideologically and with pre-conceived notions
that the problems can be solved by simply
privatising all the functions currently performed
by WAPDA. The merits and demerits of the proposed
restructuring of WAPDA will have to be examined by
jettisoning the political baggage; although, the
establishment of an independent regulatory
authority and the break up of the vertically
integrated utility will form the core of the reform
effort to address the daunting issues. And without
an objective review of the key issues in the power
sector as a whole we will end up like the
proverbial seven blind men and the elephant, with
none able to see the whole picture.
The ritual claim of the government that it is
making concerted efforts to address the endemic
systemic and institutional issues of power theft,
over-staffing and political appointments,
corruption and inefficiency, do not inspire
confidence and are routinely ignored as trite,
meaningless phrases. From the casual manner in
which its future (or for that matter the country's
future) is being discussed it is obvious that WAPDA
stands condemned to a slow, but certain, death. The
Prime Minister has made it patently obvious that
his government will take such an eventuality in its
stride. But let there be no doubt that if WAPDA
goes down (and go down it will), it will not only
take some of its suppliers but also one or two of
the smaller banks with it. And, if providence is
unkind to us, and the quality of leadership remains
the same, the country's economy will meet a similar
end.