Identifier
Created
Classification
Origin
10ISLAMABAD14
2010-01-05 14:33:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Islamabad
Cable title:  

CPPA WOULD BRING TRANSPARENCY AND FISCAL AUTONOMY

Tags:  EFIN ECON EAID ENRG PK 
pdf how-to read a cable
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UNCLAS SECTION 01 OF 03 ISLAMABAD 000014 

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EFIN ECON EAID ENRG PK
SUBJECT: CPPA WOULD BRING TRANSPARENCY AND FISCAL AUTONOMY
TO PAKISTAN'S POWER SECTOR PLAYERS

REF: A. 09 ISLAMABAD 2628

B. 09 ISLAMABAD 2541

UNCLAS SECTION 01 OF 03 ISLAMABAD 000014

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EFIN ECON EAID ENRG PK
SUBJECT: CPPA WOULD BRING TRANSPARENCY AND FISCAL AUTONOMY
TO PAKISTAN'S POWER SECTOR PLAYERS

REF: A. 09 ISLAMABAD 2628

B. 09 ISLAMABAD 2541


1. (SBU) Summary: According to WAPDA Chairman Durrani, PEPCO,
the power sector holding company, is morphing into a new
WAPDA, taking financial, technical, and human resources
control away from Pakistan's public sector distribution and
generation companies. PEPCO's metamorphosis is based on the
power of the purse, as it controls the flow of payments
through the power sector. To overcome this, Durrani has put
his support behind the Asian Development Bank's plan to
create an independent Central Power Purchasing Authority
(CPPA). The CPPA would collect power purchase payments from
distribution companies and ensure payments to power producers
through transparent accounts. As a conduit for energy sector
payments independent from PEPCO, the CPPA would curtail
PEPCO's ability to pool distribution company collections,
cross-subsidize power sector players, and bury energy sector
arrears through financial slight of hand. While there was
broad support for the CPPA at the U.S.-Pakistan Energy
Dialogue (ref A),Embassy interlocutors agree there will be
political resistance to its creation, especially from PEPCO,
and resolution of Pakistan's so-called "circular debt" is a
necessary precondition to the CPPA's success. Nevertheless,
Post concurs with and will actively support the ADB's plan to
put the CPPA in place by the GOP's own deadline of April

2010. End Summary.

The Pros and Cons of PEPCO
--------------


2. (SBU) In a series of separate meetings with Deputy
EconCounselor, GOP interlocutors complained that the Pakistan
Electric Power Company (PEPCO) was rapidly becoming the new
WAPDA, taking human resources, technical, and, most
importantly, financial control from public sector
distribution (DISCOS) and generation companies (GENCOS).
Water and Power Development Authority (WAPDA) Chairman Shakil
Durrani noted that PEPCO was originally created as a power
sector holding company with a skeleton staff of 10 employees
to oversee the unbundling and eventual privatization of the
DISCOS and GENCOS (which had previously been controlled by
WAPDA). However, beginning in earnest in 2007, PEPCO began
adding staff (it now has over 250 employees),creating new

bureaucratic divisions that have supplanted their WAPDA
equivalents, and taking financial control of the distribution
companies. Durrani maintains that the power sector will
never turn itself around if PEPCO is allowed to complete the
construction of its "empire."


3. (SBU) Lahore Electric Supply Company (LESCO) CEO Izhar ul
Haq echoed Durrani's concerns. He said his DISCO had
financial autonomy until a year ago when PEPCO took full
control of revenue collections. He estimated that, if PEPCO
had not required all tariff collections to go through its
coffers, LESCO would have had $1.1 billion available for
maintaining and improving its operations. However, PEPCO
only authorized $500 million for such activities, and then
approved each activity on a line-by-line basis. He said
PEPCO uses the power of the purse to control procurements,
contracting and human resource management. A bit
melodramatically, ul Haq said that "when we try to fly, PEPCO
cuts our wings."


4. (SBU) PEPCO Managing Director Taheer Cheema denied that
PEPCO was trying to increase its control of the power sector,
adding that PEPCO controlled tariff receipts to ensure the
overall viability of the sector. He said the DISCOS,
including LESCO, maintained financial autonomy, but did admit
that PEPCO had a large role to play in "coordinating" the
sector. Durrani, however, noted that tariff collections have
fallen since PEPCO took control of them, and the DISCOS lack
the market incentive to improve. Durrani emphasized that the
DISCOS and GENCOS are "autonomous in word, not in deed,"

ISLAMABAD 00000014 002 OF 003


adding that the "most serious problem is that PEPCO won't
allow the CPPA to develop."

CPPA: Unbundling PEPCO and restoring market signals
-------------- --------------


5. (SBU) WAPDA Member Finance Abdul Qadeer explained that the
Asian Development Bank (ADB) is also concerned about PEPCO's
encroachment and unhelpful role in Pakistan's beleaguered
power sector. Under a plan agreed with the ADB, the GOP
would create a Central Power Purchasing Authority (CPPA) as
an autonomous clearing house for power purchases and single
purchaser on behalf of the DISCOS. Each DISCO would place
funds in individual escrow accounts with the CPPA; the CPPA
would, in turn, pay the GENCOS, independent power producers
(IPPs),and WAPDA (for hydropower). Each escrow account
would have either a cash float or line of credit (LC) to
cover two months of power purchases and allow for payment
delays in the billing cycle.


6. (SBU) The CPPA would be incorporated directly under the
Ministry of Water and Power. The Secretary of Water and
Power would chair the corporate board, which would include a
member each from the Ministry of Finance, the DISCOS, the
GENCOS and IPPs, and the banks. (Comment: This corporate
arrangement leaves the CPPA under GOP control. A preferable
option would be to establish it as an independent corporation
following the model for NEPRA, the independent power
regulator. End comment.)


7. (SBU) Under the CPPA, Qadeer said the DISCOS would have
market incentives they currently lack under PEPCO leadership
to reduce losses and increase collection, as they would keep
all revenue in excess of that needed to purchase power. The
DISCOS would also have the financial autonomy to decide how
best to allocate these revenues to improve power delivery and
further increase collections. GENCOS and IPPs would also
gain financial autonomy as they would no longer depend on
PEPCO for funds.


8. (SBU) The CPPA would also set the stage for the unbundling
of PEPCO. Financial autonomy would remove PEPCO's power of
the purse and result in greater DISCO and GENCO control over
their operations, human resources, and capital investments.
PEPCO would begin the return to its original function as a
temporary holding company for public sector utilities
awaiting privatization.

No More Circular Debt?
--------------


9. (SBU) Qadeer explained that circular debt would no longer
be passed through the energy sector. He explained that
arrears currently filter through the system, as PEPCO demands
that power generators and fuel suppliers provide service
without full payment. Under the CPPA, all arrears would stop
in the DISCO's escrow accounts: short-term arrears would be
covered by the two-month float and the transparency of the
escrow payment system would alert the GOP if a DISCO was on
the verge of exceeding its float. Unlike the current system,
PEPCO would not be able to divert payments from successful
DISCOS to failing ones, nor hide losses on the books of its
constituent parts.


10. (SBU) Qadeer said the energy sector's $4 billion
"circular debt" would need to be removed from the DISCOS and
GENCOS books for the CPPA to be successful. The resolution
of the debt would need to be combined with tariff increases
to ensure that the DISCOS have the financial wherewithal for
power purchases, as well as the ability to secure LCs from
the banks.

Technical Hurdles for the Creation of the CPPA
-------------- -

ISLAMABAD 00000014 003 OF 003




11. (SBU) Qadeer said that four of the nine DISCOS have
sufficient collections to cover power purchases. The others
would have varying degrees of difficulty covering power
purchases, and might require either a GOP or provincial
subsidy or a higher tariff until they reduced losses and
increased collections. Qadeer said the GOP would also have
to guarantee a subsidy for the Tribal Electric Supply Company
(TESCO) which provides free power to the FATA, but noted that
the GOP had already budgeted support for TESCO in FY09-10.


12. (SBU) With the finances straightened, the CPPA could, in
theory, be established by April. The GOP would need to take
the following technical steps:

-- Incorporate the CPPA under the Ministry of Water and Power;

-- Name the CPPA Managing Director and appoint the corporate
board;

-- Amend the National Transmission and Despatch Company
(NTDC) license to move the authority for power purchases to
the CPPA;

-- Create DISCO escrow accounts and provide a two-month power
purchase float;

-- Provide "seed" money for establishing CPPA operations.

Political Hurdles to the CPPA
--------------


13. (SBU) WAPDA Chairman Durrani and Finance Member Qadeer
clearly back the establishment of the CPPA, seeing it as the
first step to break up PEPCO. Qadeer, who is the front
runner to head the new CPPA, has an obvious professional
interest in its establishment. (Comment: The ADB believes
Qadeer would not be an effective CPPA head; we agree, but
believe he could be a useful champion for its establishment.)
PEPCO Managing Director Cheema would lose his empire if the
CPPA were established. But some of his lieutenants are more
favorable to it -- most notably, PEPCO CFO Razi Abbas, who,
as a former joint secretary at the Ministry of Finance,
understands the need to make the sector's finances more
transparent. Finance Minister Shaukat Tarin is also keen to
see the energy sector players interact on a commercial basis.
Moreover, at the October 23-24 Energy Dialogue, the GOP
delegation headed by Minister of Water and Power Raja Pervez
Ashraf expressed their intent to establish the CPPA by April

2010.


14. (SBU) Comment: In the coming months, we should focus our
energy policy recommendations on three main points: the
resolution of the circular debt, the increase in tariffs to
cover the full costs of generation and distribution, and the
establishment of the CPPA. These three elements are
inter-related and incorporated in the World Bank and ADB's
plan for reforming the sector, improving its finances,
unbundling PEPCO, and ensuring that the sector's constituent
parts interact as independent commercial entities. The
Pakistani private sector (which depends on power delivery)
and the banks (which fear power sector debt will continue to
mount) are potential allies in pushing for reform, as are
other bilateral donors. End comment.
PATTERSON