NATIONAL 4 - (Spotlight Weekly)

‘Private-Sector Participation Vital To Energy Restructuring'

— ALI NAWAZ MEMON

ALI NAWAZ MEMON, a senior financial and institutional consultant, worked with the World Bank for 29 years before retiring in 1996. He also served as a chairman of the Power Commission of Pakistan for 15 months. Memon was recently in Kathmandu to address a seminar on "Energy Restructuring and Private-Sector Participation" organized under South Asia Regional Initiative\Energy (SARI\E) and Academy of Education Development and USAID. Memon spoke to KESHAB POUDEL on various energy-related issues. Excerpts:

How do you define energy restructuring and private-sector participation?

It is important that consumers who are very important stakeholders should know exactly what is happening in the energy sector. Consumers should understand the pros and cons of different things so that they can act accordingly. We are looking at worldwide experiences of power structuring. People from different countries have had an opportunity to exchange the views on their own. We know that there are problems in electricity in particular and the energy sector in general. The energy we are talking about includes petroleum, electricity and many others forms. But it particularly focuses on electricity.

Why do we need to reform the energy sector?

We know that nobody is satisfied. The government is not satisfied because it hasn't been able to ensure hundred percent coverage of the population. In the case of Nepal, it is 15-20 percent. Sri Lanka has 60 percent, Pakistan 50 percent, India 50 percent and Bangladesh has 15-20 percent coverage. So the public is not served properly. Despite the low coverage, the cost is already high as the prices of electricity are going up on the component basis of the international market price. The price of oil and machinery goes up, whereas consumers' income in developing countries remains low. They are supposed to pay for international output, but their own income reflects local conditions. So affordability is a problem.

Will reform bring beneficial changes in the present structure?

There are many specific issues to address. Power losses are very high and the system is not very reliable. Rural electrification and cost recovery are lacking. The loss of the system is so high that the governments are in no position to recover it. Investment requirement is so much that the government doesn't have the financial viability to borrow money. International lending agencies have changed their policies and they want to involve private parties in this business. All these factors necessitate reform in the energy sector. In order to get financial resources, one has to admit these problems and see how each of them can be solved.

What does restructuring mean?

It is looking at the basic structural system and to see what are the ways to address it. That can be internal restructuring where the state enterprises will be simply restructured from inside to make it more acceptable. Regulatory agencies, which can be introduced to protect the interest of the consumers, are needed. The state-owned companies, investors and government demand restructuring.

What are the tools for restructuring?

There are different tools for restructuring. Private-sector participation is one. In the United States, Europe and Japan, electricity is generally handled by the private sector. Why are they performing better than bodies in developing countries? If the private sector has something to offer, we must develop a plan to derive benefits. We are looking at each of the options we have and are trying to find ways of addressing the issue.

What are the challenges of the energy sector in countries like Nepal and what are the options available?

Although I have had the opportunity to look at the experiences of different countries, I am not very familiar with the issues of the energy sector in Nepal. I was here about 18 months ago to look at the Melamchi Water Supply Project on behalf of the Asian Development Bank. I can say the issue here is more or less similar to that in many developing countries. You have state-owned enterprises that are not performing well. I hear that only 15 percent of the population have access to electricity, which is shameful. The world has gone quite far ahead. If you don't have electricity, how can you have industry and commerce, schools and colleges? Increasing electricity supply is important for development. Quality and system reliability, stable voltage, reducing power loss, relying more on internal cash generation are among the major issues.

In Nepal, it is said that multilateral donor agencies often force the government switch structures. The government nationalized the private power sector to get foreign aid. Then it set up the Nepal Electricity Authority to seek another loan. How do you look at these changes?

As I have already said, I don't have first-hand experience of Nepal. But I can understand what you say. There are other countries that have switched from one system to another. For instance, Jamaica privatized the electricity sector. Then the government and people became unhappy that private sector did not make adequate investments. The dispute ended after the government bought back the companies. The state-owned enterprises later showed similar problems. Now the people are returning the companies to the private sector. I think this is a natural problem. Certain policies rejected five years ago may be more acceptable today. When the world had two super powers, there was competition between the United States and the Soviet Union to win friends. Since the collapse of communism, there is only one super power now. Sonobody is competing to give aid. Since new independent states have been born, the demand for capital has grown. Germany is spending a lot of money to improve infrastructure in the eastern parts of the country. Poor countries like Nepal have to find resources on their own. There is also a philosophical shift in the world. Now everyone is talking about the private sector.

After the energy sector was opened to private participation, many Independent Power Producers (IPPs) have come up in South Asia. What are the new challenges for a country like Nepal?

IPPs are commonly known as a group of private investors including national and international investors. IPPs are investing capital hoping for a very high level of return. They feel that greater the risk, greater should be the rate of return. IPPs want their money to be protected in US dollars. Documentation of this transaction is very complicated as you may find 20\30 different agreements ranging from power purchasing to transfer of technology and management. The challenge is to negotiate with these IPPs in such a way that you are not giving away your house.

What are your experiences with IPPs in Pakistan?

In the case of Pakistan, there were a few fundamental errors in signing the technical agreements. The agreements were not reviewed properly. After all, the IPPs have lawyers who are getting five hundred times more money than the government lawyers of Pakistan. Because of high salaries, the quality of IPPs' lawyers is higher than that of government lawyers. In signing the agreement, those who represented Pakistan did not safeguard the interests of the country. Some may have had a personal interest. Many of the people are facing jail terms. IPPs that are willing to set up companies know the ins and outs of the work. Countries like Nepal, which are using IPPs for the first time, don't know about their capabilities. International agencies have an obligation to guide developing countries. But the burden is on the part of developing countries. It is the responsibility of Nepal to make sure it signs agreements that suit its interest.

What suggestions do you have for Nepal in terms of private-sector participation?

The national economy is not different from the household economy. We have to see what income level we have, what expenses we have, and which expenses need to be given priority and which need to be curtailed. If there is shortage of resources, we have to borrow money. If we have relatives, we will go those who will not charge interest. How much can the national economy afford? The government has to invite private participation by judging its needs. There is a huge loss of electricity in almost all developing countries. Because of high losses, you are paying the price for the energy you are not using. This has to be reduced. Electricity is sold but bills are not collect properly. So many consumers owe money and no one takes initiative to recover it. There is corruption in the system and the government procurement is fairly high. If the government improves the system, the procurement may change. Foreign investment is still needed. For this, one has to go shopping. First, one has to get one's house in order. Use internal capital if it is available. If not, private parties have to go to foreign countries. If funds are available with donors, go there.

Is there any reason to split generation, transmission and distribution into different systems?

Again, it is a world trend to break a large integrated company into small and manageable companies. The reason is to increase competition between different entities. Let there be competition between the generation, transmission and distribution sides. It will show who can be more efficient. It will also help us to know the cost of producing the electricity and the costs of transmission and distribution.