Paved With Good Intentions

By Feisal H. Naqvi

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.

7 Comments

Filed under Law, Pakistan, Power, public policy, Regulatory Affairs

7 responses to “Paved With Good Intentions

  1. YLH

    Moderators- please give this article breathing space and schedule all others for tomorrow . Hopefuly the trolls will stay away and we can have an honest exchange of views on this very critical issue in Pakistan.

    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.

    It is also this statist communist mentality that is at work here … the government thinks it must control everything… Limited liberal government with only the most minimal regulatory control is the answer.

  2. OMLK

    I dont know the details of the cost-plus formula, but on the face of it another flaw which can be pointed out is that investors are actually interested in the return on their invested capital, which is not just determined by the excesss of price over cost, but also by the ratio of total revenue to the total assets and the leveraging of the balance sheet.

  3. Rabia

    brilliant article.

  4. Rabia

    on a related note (and related to YLH’s comment about the statist mentality) I wish someone would also write a similar article about the role of the government through the TCP in contributing to high commodity prices due to delays and restrictions in imports in times of high demand.

    Here’s one column by Shahid Kardar: http://www.pkcolumns.com/2010/03/20/tackling-food-inflation-by-shahid-kardar/

  5. YLH

    TCP is a particularly bad idea.

  6. AZW

    Excellent article, and I believe PTH and its readership benefits from these articles highlighting inefficient and stale bureaucracy that compounds misery for the everyday Pakistani.

    I would say a few words here based on discussions I have had with my dear father who worked in the Government of Pakistan for almost 35 years.

    The problem in Pakistan bureaucracy is the problem with any slow moving bureaucracy anywhere in the world. In this world of secure and routine jobs, the shared responsibilities are assumed by no one. Status quo becomes the king, and any change or any critical thinking is discouraged. Many of new blood comes in to the civil services and within a few years starts fossilizing the same way their peers have before them.

    You would assume that cost plus formula seems like a very bad idea. But this idea will only be revised until the pressure from the outside becomes too much to bear with the government officers who show up for work on a daily basis. Of course there are many bright and hard working people in the government offices, but most of the atmosphere is stale, slow, and uncritical.

    The federal and provincial governments are bloated pieces of bureaucracy. NAPRA’s awful management of the electricity business in Pakistan is just one example. In various Ministries like Housing, Finance, many a projects took years to take shape just due to the slow pace of their planning and approval phases.

    This thinking and way to do things will not go away automatically. But there ought to be accountability in the government offices. NAPRA’s problem seems to be a stark lack of leadership or vision. But senior bureaucrats have nothing to fear from their inaction. Their ultimate bosses, the ministers come and go, and by the time the new boss gets to understand their inaction (if he is ever capable of doing that), the boss is gone.

    Being a huge fan of capitalist entrepreneurship, I am all for efficiency and entrepreneurial drive. However government role cannot be completely “enterpreneurized”. It is a necessary part of society administration and government is necessary as the big brother hand in developing infrastructure and keeping society working under the aegis of the rule of law. That being said, there is a curse called too much government and third world countries like Pakistan suffer from it day in and out. A bloated government machinery consumes way too much of Pakistani resources, its inaction causes us billions in additional output that would have been made otherwise.

    Articles like these are an excellent start to keep pressure on the stale government machinery that has faced no pressure from the Pakistani media as it keeps obsessed with India, the West, and the “sharpasands” who were called Jihadis not too long ago. I will try to post the similar articles as they appear in the Pakistani print media.

  7. Mustafa Shaban

    Good article. Definitely Nepra needs to be made accountable so that it can change its behaviour. The author recommended that it be placed under the authority of the government. In another country this can be seen as reasonable solution, but I dont think with the corruption and incompetence of our politicians that this could be done. YLH statement is true for companies and services except for those that are necessary like, water, power, transport etc. Things like these should be under government. Regulation of these things should also be with government. In general government should not be big and be given too much control as this leads to corruption and incompetence.