Sunday, 9 June 2013

On Power Sector Reform

Foreword to the PC Cirdular Debt Report
Power sector inefficiencies have cost us well over 7% of GDP in direct budget costs in the last 5 years. In addition, growth has been slowed down by at least 2% per annum i.e., over 10% foregone output in the last 5 years. Yet the problem is far from behind us.
The restructuring and reform of the power sector has been held up for over 2 decades leading the costs to accelerate in recent years. The important question that needs wide debate is “why are we incapable of addressing such a big problem?” I would like to put forward 2 major propositions relating to this issue.
  1. The problem requires careful study and research which can only happen if time and resources are devoted to the problem. Resources would include the assembling of independent expertise with adequate funding to develop perspectives on reform.
  2. With enough independent expertise and research for developing a body of knowledge on the required reform, a process of reform must be developed. The process followed thus far—repeated ministerial committees informed only by the ministry which is in need of reform—has only led to increasing difficulties not a furtherance of restructuring. Reform must not be left up to the ministry that needs reform, nor should it be the domain of any one individual either a secretary or a minister.
Reform of the power sector involves restructuring of all the involved entities including the policymaking ministry and the regulatory body NEPRA. It will, of necessity, involve a change in administrative and functional relationships. It will involve setting up market mechanisms which can only happen with decentralization. The ministry that is in severe need of reform cannot be expected to make it on its own with no expertise or monitoring. Similarly no ministerial committee can take charge of the reform unless backed fully by expertise and research. But then on such a large issue the cabinet should be the place where reform happens assisted by an agency that on behalf of the cabinet is pushing the reform agenda on the ministry and the sector.
The Planning Commission (PC) is in charge of economic growth and was envisaged to be responsible for asking for reform to remove constraints for growth. The reform was picking up pace when the PC was taking the lead and working with the ministry of water and power to make reform (August 2010).
The Framework for Economic Growth (FEG) that was based on extensive research and consultation was approved by the National Economic Commission in 2011, has emphasized that if we want to achieve high growth the emphasis in the coming period must be on the “software” (economic reform, management and productivity improvements) rather than the “hardware” (brick and mortar investments) of growth. The widely respected FEG argues for mainstreaming reform especially that of public sector management, regulatory improvements, and more competitive markets for innovation and entrepreneurship.
FEG has argued for moving away from our current input based (projects, brick and mortar funding) to new results-based economic management (RBM) that will allow objectives and their instruments –reform- to be monitored. This requires a deep reform of administration which should occupy cabinet and parliament for the coming years. It will involve
  • Entry of specific skills in ministries and a move away from the current generalist civil service system
  • Better identification of objectives and reform instruments at an early stage and a commitment of ministries and public sector entities to efforts toward them.
  • The role of the PC as the manager of the RBM system for economic growth and reform. PC would then develop studies such as this continually and report to cabinet and parliament. It would then be responsible for containing this loss at an early stage and push the concerned ministry to undertake reform.
This report which USAID has prepared in collaboration with the PC is an attempt to inform reform with some research. In my view such research is an urgent requirement and should be widely discussed to see make reform an urgent priority. The report informs us in several important areas.
  • Building a decentralized system of governance is at the heart of the problem. Efficient power sector reform cannot happen if a centralized system continues to be run by a ministry.
  • Decentralized and independent entities must be run on corporate lines with corporate management without government or ministerial interference.
  • Technology is part of the solution as it allows for improved monitoring, measurement and payments.
  • The decentralized system needs an able, competent, independent and empowered regulator who is responsible and accountable for the efficiency of the system and not just tariffs.
  • The tariff system must be reviewed continuously to ensure that due costs must be passed on to consumers eliminating cross subsidies, untimely fuel price adjustments and artificial and exaggerated loss provisions.
  • The question of regional differentiated tariffs has to be developed through careful planning and research.
  • Subsidy if any should be targeted to the poor only and not as currently available to all.
With these improvements the system can be made solvent over a period of time. Then investments will start flowing in not only for increase of capacity but also for more efficiency including a better fuel mix.
We have again tried to identify the problem and find steps to its resolution. I compliment our teams at USAID and the Planning Commission on a worthy study that does indeed delineate a road map to tackle the circular debt issue.
But this is only one beginning. Unless this report is taken seriously and a reform process built, we will continue to see this problem stretched out at a huge cost to the country.

Saturday, 8 June 2013

Restore the Planning Process!

Restoring the Planning Process
  1. The Planning commission is the apex body for making visions and plans for the future of the country as well as for coordinating the medium-term Macroeconomic framework. The vision and plans for the future gave all departments in all levels of government guidance and direction for policy making and planning in all aspects of the economy. The medium term macro framework defines the longer term resource base as well as guidelines for fiscal discipline and planning.
  2. The planning process instills a certain discipline in government economic policymaking. Both these activities are based on a widespread consolation at all levels and hence the development of coherence and coordination in government. In conducting these activities, the planning process collectively identifies the opportunities and constraints for the coming period.
  3. Sadly we lost the planning process and focused only on projects. In the early days, when the country was young with limited infrastructure and in a post war environment where aid was a newly developed phenomenon and socialism was in the air, our planning relied heavily on borrowing and developing infrastructure projects. There was a strict project appraisal and implementation process. Over time, various government departments felt that the discipline of planning which placed pressure on coordinating, research, sequencing, coherence to be too cumbersome. it was far easier to work in silos.
  4. It was easier to push a policy on an ad-hoc basis. Besides every ministry looked good presenting a policy. Today we have a huge proliferation of policies often contradicting each other and confusing the regulatory structures while feeding legal suits. Most of the policies also tend to be transactional and giveaways and hence against the spirit of policymaking.
  5. As planning processes weakened so did the project appraisal and implementation process. No longer did the departments want to concede to project appraisal and implementation norms. Without the planning process they felt gut feeling was enough! In addition politics was allowed to enter the planning process in the 70s providing further impetus to denuding the project appraisal and implementation processes. The result is
    1. Projects are approved without due diligence.
    2. Projects are seldom completed on time
    3. Projects frequently have large cost overruns.
    4. Projects focus on brick and mortar
    5. Completion on time is not a focus
    6. Project quality is poor
    7. Seldom is there a provision for maintenance after the completion of the projects.
    8. Often current budgets do not even provide for the running of a completed project
    9. Completed projects especially of a social and educational nature are severely underutilized.
    10. There is an inordinately high pressure to build roads contrary to appraisal norms.
    11. Gas and electricity grids are stretched way beyond efficiency evens at huge cost to the economy.
    12. Consequently, the realized gain from projects is far less than that which was originally envisaged.
  6. The weaknesses in project appraisal and implementation mechanisms have weakened the impact of development spending. PIDE study shows that development spending has little or no impact n long run growth. A PC study shows that development spending has a short run impact if .07% on growth when development spending increases by 1%; in the long run there is no impact of increased development expenditures on growth. Moreover, it is suggested by data that further investment in roads has no positive impact of growth.
  7. Meanwhile, as argued in the Framework for Economic Growth (FEG) international evidence has shown conclusively that growth and development happens with good planning and development processes focused on developing quality public sector management, vibrant markets, creative cities with an emphasis in youth and community. The FEG laid out a comprehensive reform agenda that directed toward this development and estimated that this would lead to an increase in our annual growth rate to 7-8% from average of 3% for the last 5 years and this increase would be sustainable. Sadly, despite this evidence the push for projects continues and our leadership continues to labor under the impression that projects will lead to growth. While the FEG was approved by the NEC, at no time was it ever presented to the cabinet, the PM or the president while project meetings were frequently held.
  8. Ministry of Finance (MOF), in particular, found the discipline of the medium term too difficult to live with. When the budget was in difficulty it relied on either or both a) Cutting development and/or social sector spending and b) Introducing arbitrary and distortionary tax or tariff measures. In the short term to please various special interests, MOF developed the SRO regime which impeded market competition and openness and hence impacted growth. All three of these MOF initiatives- cutting development expenditures, distortionary taxation, and the SRO regimes--challenge the planning process while also severely impeding growth and development efforts.
  9. Consequently, since 1973, MOF has continuously struggled to take over the PC. PC was envisioned to be a technocratic ministry under the PM. The Chairman of the PC was the PM. Most FMs since 1973 have fought to become Planning Ministers a position that should not exist.
  10. Almost continuous IMF Programs since 1988 have contributed to eroding the planning process further. As is well known IMF programs are not designed for growth. In the case of Pakistan the programs remained focused on increasing revenues and holding the rein on expenditures often either through a cut in development expenditures or through arbitrary cuts on overall expenditures. As the programs went off track when difficult revenue measures were not achieved, further arbitrary cuts were imposed often at the cost of maintenance or efficiency. In all case growth suffered further. With the PC and the planning process weakened there was no challenge to the programming approach of the IMF and the MOF. Growth and development suffered severely in this period.
  11. MOF expanded as part of Fund programs to take over functions of the PC as well as other divisions. While the medium term, reform and development functions were the PCs, MOF through donor support managed to develop projects develop sections for economic reform, poverty management and making the Poverty Reduction Strategy Paper, a substitute for a Plan.
  12. Donor agendas are facilitated in a weakened planning system but lead to a fragmented development effort. Without a planning process to coordinate disparate agendas individual donors find it easier to deal with ministries that are not coordinated to accept studies, programs, policies, capacity building, PMUs and even new agencies. For example, we have several heavily funded projects running for years that no one has reviewed, e.g. PIFRA, TARP, PMDC etc. EAD wants to coordinate donors without the discipline of the Planning process even though the role of EAD is to purely manage donor relations without getting into economic policy. It should be noted EAD has no economic, technical or planning skills.
  13. Without the Planning process, fundamental reform is slowed down. The PSE problems arise because no one is pushing for, facilitating or coordinating reform. Despite many Fund programs,
    1. The tariff structure is riddled with SROs against the open economy that Pakistan has committed to.
    2. Commodity operations continue to choke domestic credit and impose a claim on the budget.
    3. Generalized subsidies continue unabated despite a well conceived social safety net.
    4. The pricing structure still has too many administered prices e.g. gas, electricity, wheat etc.
    5. Overall regulatory structure remains unfriendly to investment and promotes anticompetitive practices.
    6. The gains from productivity increases as outlined in the PC FEG remain unexploited while all the government’s time remains committed to projects that are riddled with inefficiency.
  14. The Architecture of economic policy making must be balanced to include growth and development as an equal player to fiscal and inflation management. In the current architecture MOF places everything under the control of short term fiscal constraints. SBP and the banking system are forced to finance the deficit while long term growth is sacrificed unthinkingly through expenditure cuts and distortions as described above. While the IMF is arguing for SBP independence and there have been laws to that effect. Surprisingly in a poor country like Pakistan, little attention is paid to PC independence so that needs of growth and jobs are not forgotten.
  15. Our failure to make reform happen should alert us to a poor reform process. Yet the way forward for many years is to mainstream and fast track reform. Our outmoded system of governance and public sector management, our regulatory, our public service delivery, our work processes and several other areas are in urgent need of modernization. It should be clear by now that
    1. Few in government understand the reform process
    2. Reform mostly happens at the behest of the donor
    3. There is little domestic research or thinking on reform
    4. Donor reports drive reform and are often full of mistakes eg TARP, Access to Justice, Civil Service reform.
    5. Too often reform is command driven
    6. Reform is left to civil service officials who have limited experience in change management.
    7. Change management which is a major part of reform must be driven, monitored and incentivized externally
    8. There is little reform communication
    9. Cabinet must mainstream change-management and reform through its agent the PC
    10. To achieve growth and productivity, we must fast track reform. Without a reform process, we will continue to muddle along. The PC through its mandate of long term growth and development must be the cabinet’s change agent.
  16. I would like to propose that for improving our governance, the planning process should be restored and along the same lines as the SBP. This would mean the following:
    1. Independence of the Planning Commission to be restored through the following steps
      1. There should be no minister of Planning; the FM should only be in charge of the MOF.
      2. DCPC should be a tenured technocrat with a rank equivalent to a federal minister. DCPC must be a part of all high level decision-making bodies to present the considerations of long term growth and development.
      3. The PC should report directly to the PM
      4. Subjects of the PC that are replicated in the MOF such as Poverty, reform and PSRP should be either dissolved or merged in the PC.
      5. Members to be professionals and handpicked by the members collectively with no review from establishment division.
      6. PC HRM and salary scales should be decided on a market basis in line with the SBP.
      7. Like the SBP there should be no secretary of the PC or right of establishment division to disrupt through unexpected transfers.
    2. The FEG should be clearly studied owned and amended by the cabinet and all the line ministries though another consultation
    3. All projects, policies and programs, domestic and donor-delivered should be aligned with the FEG and subsequent planning documents. The onus should be placed on all stakeholders to align themselves with the FEG or any other planning document that is developed.
    4. Any new FEG that has to be made should be a long and open consultation process in which agencies must wholeheartedly participate. This will happen if the government backs this discipline fully.
    5. All policies and reforms must be aligned with the FEG and should pass through the Planning process before submission to a higher forum.
    6. Planning processes and coordination mechanisms—policy, plan and program consultations-- must be respected by all agencies at all levels. Cabinet and ECC should not allow these to be bypassed.
    7. Cabinet must empower the PC to initiate work on the results based management system that is the centerpiece of the FEG through periodic meetings to facilitate the process.
    8. The PC must be empowered again through a cabinet process to lead the work on economic reform on behalf of cabinet. This will involve
      1. In consultation with concerned agencies, identification of reform initiatives through the results framework.
      2. In consultation with concerned agencies, developing benchmarks and measures of reform with time lines for achieving them.
      3. In consultation with the concerned ministries and the MOF working out the financing requirements of the reform and the linkage between reform and disbursements.
      4. Reports on these reforms, timelines and financing requirements in collaboration with MOF and other agencies to cabinets for approval of reform process.
      5. Monitoring the reform for cabinet and periodically reporting to cabinet on the reform.
      6. In this manner PC will play the role of a “reform buddy” for the agency in need of reform and a ‘reform monitor’ for cabinet.
    9. For better donor coordination EAD must be merged with the PC. The current fragmented approach has impeded the emergence of domestic longer term development agenda. We must have a coherent and unified approach and for that EAD must be a part of the planning process.
    10. Eventually budgetary processes should be changed to allow maintenance and smaller projects to move into regular budgets. Only very few large projects will be reviewed and monitored by special procedures that will be developed for handling and implementing them.
  17. The dichotomy of division and commission which is seriously impeding the work of managing growth must be removed. Currently all professional staff is in a division which is managed by a Secretary, Additional Secretary and a Joint Secretary, none of which are appointed by the DCPC or with input of any member. This leads to several problems making PC very inefficient.
      1. The turnover in these controlling positions—Secretary, Additional Secretary and a Joint Secretary—is very high. At each change, the work of the PC is thrown off balance as these appointees are from service groups that have little background in economic policy and reform thinking.
      2. In addition, there is always a tension between the members and the Admin staff of the division—Secretary, Additional Secretary and a Joint Secretary.
      3. The technical staff too is deeply frustrated because they are beholden to non-specialists and cannot even be considered on merit to occupy serious decision-making positions in the PC.
      4. Because the secretary controls resources and because the work of economic policy and reform is slowed down.
      5. Through the control of the administration—Secretary, Additional Secretary and a Joint Secretary—and the centralization of resources, the PSDP and the PC are subject to undue political influence. This seriously affects the way the PSDP is used. Public investment in the country is rendered seriously ineffective through this political influence.
  18. PC must be run as a commission by its Deputy Chairman and its members. The Deputy Chairman must be a professional appointed on tenure the same as the SBP governor. He in collaboration with his members through a search process must find the best people on the country for members and they must all have tenured appointments. No agency should be allowed to appoint members over the heads of the PC. The portfolios of members must change with each new “Framework of Economic Growth”. Currently, I suggest we must have members for the following areas:
    1. Public Service delivery
    2. Regulation
    3. Reform
    4. Energy
    5. Water
    6. Production
    7. Social development
    8. Education, technology and research
    9. Chief Economist on Economic Policy
    10. Inter Provincial Coordination
    11. All provincial planning chiefs
    12. 4 prominent academics or from NGOs as associate non-resident members
    13. 2 prominent members of society
  19. The erroneous distinction between PC and Planning division which makes all resoures including all professional staff hostage to non-specialist DMGs should be discontinued.