Business analysis of Pakistan Electric Power Company

The factors responsible for the shift in policies were: generation capacity could not be increased to meet demand; WAPDA's growth caused inefficiencies, 'demand suppression' and high tariff policy, proliferated theft. All these factors, over the years, adversely affected WAPDA's financial condition. As part of this programmed WAPDA's functions under its Water Wing and Power Wing were to be segregated. It was previously envisaged that all power generation, hydel as well as thermal, would be corporatized. However, later on it was decided that the hydel generation should remain part of the Water Wing or the remaining WAPDA. PEPCO has prepared the conceptual framework and is following a comprehensive strategy whereby WAPDA's vertical-monolithic Power Wing has been restructured into twelve (12) distinct autonomous entities under Companies Ordinance 1984. These are: three generation, one transmission and eight distribution corporate entities. The restructuring program of WAPDA's Power Wing is based on the new strategic policies of the GoP and endorsed and supported by the donor institutions. The aim of this transition is to install corporate and business culture through: adopting of good business practices, enhancing productivity and efficiency, including customer orientation and service culture, improving quality of services setting performance targets, reducing costs, theft and wastage. This will be based on extensive use of information technology, management information systems, monitoring and prudent decision making. It has been decided that some of the functions currently being performed by WAPDA will continue to remain with WAPDA/GoP in the largest interest of the country. These are:

Hydel Development Hydel Operations

It was also decided that some of the common facilities, being previously shared by the two wings and by various departments within the power wing, should be segregated. These would initially remain with WAPDA unless transferred to any other particular corporatized entity. These facilities include hospitals, schools, training facilities etc.

Power Sector Reforms

Over the past 15 years, Pakistan has been following a strategy of deregulation, privatization and transformation of its public sector entities (PSEs), including its two major power utilities Water and Power Development Authority (WAPDA) and Karachi Electric Supply Corporation (KESC). WAPDA was established in 1958 as a semi-autonomous agency to coordinate the development of Pakistan's water and power resources. WAPDAs Power Wing is responsible for the planning, construction and operation of power generation, transmission and distribution facilities throughout the country, except the Karachi area which is served by KESC.

Donor agencies like the World Bank (WB) and Asian Development Bank (ADB) have identified key shortcomings of Pakistans PSEs: poor governance; political and bureaucratic interference; institutional weakness; and lack of professional management. These multilateral development banks then convinced the government that the countrys fiscal situation could not improve unless and until the losses from PSEs are substantially curtailed or eliminated, and that this was only possible through a massive restructuring of PSEs leading to their privatization. Pakistans power sector has been beset with poor operational and financial performance since the mid-1990s; the government hence decided to restructure the sector from an inefficient state controlled monopoly to a competitive, market-driven system. The competitive power sector is envisioned to consist of (i) competitive generation with independent system operators and a bulk power market; (ii) unbundled, open, and undiscriminating access to transmission and distribution services; and (iii) an independent regulatory body for effective market governance. Some major reforms include the following: In 1994, the government formulated a power policy that allows the private sector to invest in the power sector to ensure sufficient generation capacity. The policy also allowed full flexibility to independent power producers (IPPs) to bring capacity on line as quickly as possible at predetermined power purchase prices. The government guaranteed implementation, fuel supply, and power purchase. (By 2001, the private sectors share of installed capacity reached 5,551MW, all of which were oil-fired thermal plants.) In 1997, the National Electric Power Regulatory Authority (NEPRA) was established. NEPRA is responsible for issuing licenses, franchising monopoly business, setting and enforcing performance standards and codes of practices, enforcing competitive policies, and setting charges for the monopoly parts of the power industry. It is also mandated to protect consumers against monopolistic prices, encourage efficiency in licensee operations through financial incentives, encourage economic efficiency by promoting competition, and eliminate crosssubsidies between regions and consumer groups. In December 1998, the WAPDA Act was amended, which allowed the creation of Pakistan Electric Power Company (PEPCO), and unbundling of WAPDAs Power Wing into: eight (9) distribution companies (formed from existing area boards); three (4) generating companies (comprising 11 of WAPDAs generating plants); and National Transmission and Dispatch Company (NTDC). In February 2005, KESC was finally privatized, although the winning bidder withdrew four months later.

Power Policy 2002 A. Introduction

1. Electricity constitutes one of the most important components of infrastructure and plays a key role in national growth and development. With only about half of nearly 140.5 million people (2001 population estimate) having access to electricity, a huge population base provides an ideal opportunity for expansion of electricity generation. The growing pace of urbanization and

industrialization also puts a premium on demand for electricity. 2. Demands for augmenting the power infrastructure, unsatisfactory performance of public sector entities, ever-squeezing budgets in the public sector, the need to make the tariff free from subsidies and cross-subsidies and reflect market prices etc., provide motivation for resource mobilization, improving efficiency through involvement of the private sector, to reduce the burden on budgetary resources caused by ailing enterprises and more importantly, to meet consumer expectations within affordable limits of tariff. 3. Reform of the power sector through restructuring and deregulation is high on the agenda of the Government of Pakistan (GOP). The GOP is committed to pursue a farreaching reform programme for the power sector and to help meet the country's future power needs. Implementation of the envisaged programme will bring about a gradual transition of the power system from integrated, state-owned utilities to a decentralized system with separate generation, transmission and distribution entities, having substantial private ownership and management, reflecting and encouraging a commercial and competitive operating environment.

B. Objectives
The main objectives of the Policy are: To provide sufficient capacity for power generation at the least cost, and to avoid capacity shortfalls; To encourage and ensure exploitation of indigenous resources, which include renewable energy resources, human resources, participation of local engineering and manufacturing capabilities; To ensure that all stakeholders are looked after in the process, i.e. a win-win situation for all; and To be attuned to safeguarding the environment.

C. Scope
The scope of the Policy covers: Private sector projects; Public sector projects; Public-private partnership projects; and Projects developed by the public sector and then divested.

Salient Features of THE Power Policy 2002

Scope of the Policy covers private, public-private and public sector projects; Invitation of bids on tariff through International Competitive Bidding (ICB); Encourage exploitation of indigenous resources including hydel, coal, gas and renewable resources through active involvement of the local engineering, design and manufacturing capabilities. Customs duty at the rate of 5% on the import of plant and equipment not manufactured locally.

To enhance share of Renewable Energy Sources, hydel and fuels other then oil-based fuels, full levy of income tax on oil-fired power projects. For projects above 50 MW One Window support to be provided at the Federal level. For projects below and upto 50 MW One Window support to be provided at the respective Provincial/AJK level. Ministry of Water and Power (through PPIB) to remain the focal point at Federal level. To develop raw sites whose feasibility studies are not available, unsolicited bids would be welcomed. The sponsors of feasibility studies on raw sites will have first right of refusal. Two-part tariff structure consisting of fixed capacity and variable energy component is recommended with the proviso that fixed capacity payment for Hydel projects would fall between 60% to 66% of the total tariff; Hydrological Risk to be borne by power purchaser (WAPDA/NTDC/KESC).

PEPCO Promotion Policy

PEPCO management has been adopted mutatis mutandis the Promotion Policy of the Establishment Division, Government of Pakistan issued vide Office Memorandum. The Promotion Policy has been drawn on the revised comprehensive criteria, based on tangible service portfolio comprising the C.R Dossiers, Training(s) evaluations and assessment of the Selection Board for Promotion /Deferment/ Supersession. The criterion is capable to produce Objective Comparison for inter-se performance amongst the officers on the panel of candidates for promotion. The Power Policy, currently in vogue in the country is policy for Power Generation 2002. It provides handsome incentives to the private sector. The salient features of the policy are:

Strategic Plan for Pakistan Power Sector Objective

Establish a competitive electric power system consisting of autonomous, financially viable, efficiently operated and largely privately owned entities for generation, transmission and distribution, governed by an independent regulatory authority Two-pronged strategy. a) Encourage private sector investments in new thermal energy supply facilities. b) Restructuring and partial privatization of the energy utilities.

The core operations of the company are

To act as a managing agent in respect of all business, assets, properties and right of the Power Wing.

To carry on, expand, extend, privatize or restructure all businesses, assets, properties. The company is responsible for restructuring WAPDA Power Functions into 12 (now 14) companies, establishing business relationship amongst them, help them become administratively and financially self-sufficient, improving their efficiency and preparing them for privatization and reporting to Secretary, Ministry of Water and Power (Government of Pakistan). There is a manual system of recording all the transactions under double entry system according to companies ordinance 1984.

Corporatization
Corporatization of entities is first phase object of PEPCO which is in process and various Milestones have been achieved and after corporatization second phase will be commercialization and then finally all entities will privatize.

Corporatization Objectives
Efficiency through corporate management for saving the organization from the bureaucratic governance. Compliance with the corporate governance and Company Ordinance Promoting professionalism in the organization for finding right man for the right job. Adoption of dynamic and vibrant HR concepts in the organization Incorporation of Entities under Companies Ordinance Legal transfer of assets and liabilities to the corporate entities Manpower Transfer to the corporate entities and delegation of financial and administrative powers ensuring autonomy of these entities. Assignment of independent tariffs based on the cost of service Introduction of market structure capable of evolving (gradually) towards a competitive regime 1Financial Restructuring PEPCO is focusing on preparing the companies for their future autonomous role. All Corporatized Entities have their own BODs and are operating as corporate entities. The managements of the companies have been urged to look ahead and chart out their own business course in line with their company fundamentals and environment.