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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 
 
¶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