How can Pakistan resolve its power sector woes?

There is a dire need that those at the helm of affairs devise and implement policies to counter this crisis

Amongst the plethora of challenges inherited at the time of assuming power, one of the pressing challenges that the incumbent government had to deal with was a burgeoning circular debt in the power sector. Fast forward two and half-years, the issue has further aggravated to an extent that the national exchequer is at risk of losing billions of dollars in case of default of capacity payments to IPP’s.

The recently announced hike in electricity tariffs by Rs. 1.95 per unit poses a significant threat to Pakistan’s economy at a time when the textile exports were gradually picking up after a hiatus owing to the global Covid-19 lockdown. The inflated electricity costs will scale up input costs making the exports non-competitive in international markets. It is perturbing to observe that in the last eighteen months alone, NEPRA has revised power tariffs twenty times citing monthly fuel and quarterly adjustments. Though in its official statements, the incumbent government blames “landmines” left by the previous administration for the power sector’s perennial issues yet the origins of this crisis are deeply embedded in the reckless and uncoordinated energy policies followed for the last twenty-six years.

Pakistan’s first energy policy was formulated in 1994 (almost 47 years after independence) which is a clear testament that energy conservation was under no circumstances a priority of its policymakers. Owing to poor governance and a short-sighted approach, Pakistan’s energy resources have been squandered for decades due to which the nation is confronted with a serious power crisis that has crippled the growth of the manufacturing and services sector and disrupted power supplies in communities and households across the nation. From an economic perspective, it is completely unnerving to witness that the circular debt that stood at Rs.1.2 trillion in 2018 presently stand at a giant Rs.2.3 trillion (as of December 2020), primarily due to the massive subsidies doled out by the government equating to Rs.477 billion during FY-20 alone and an ever-increasing capacity payments that continue to haunt the cause of cost-effective energy production.

As per a study conducted last year by an Australia-based Institute for Energy Economics and Financial Analysis, the capacity payments to power generators could touch Rs.1.5 billion ($9 billion) by June 2022 due to massive investments in Thar Coal Power Project and CPEC projects. As per the report submitted by the Committee for Power Sector Audit, Circular Debt Reservation, and Future Roadmap in March 2020 over the state of the power sector in Pakistan, the IPP’s have been earning 50% to 70% of the annual profits in contravention to the 15% limit set by NEPRA. The IPP’s established under the 1994 power policy comprising a pay-back period of two to four years reaped profits averaging 18.26 times the initial investment. The energy policy of 2002 that guaranteed capacity payments and unlimited dollar indexation to induce investors, ultimately created grounds for the massive increase in electricity tariffs and circular debt due to currency exchange rate fluctuations. The Energy Policy of 2009 was again short-sighted in acquiring rental power plants which still evaporate billions of rupees from the national exchequer without producing a single unit of electricity. As per the State Bank of Pakistan’s (SBP) report published in July 2019, the capacity payments to IPP’s were 60% higher than FY 2018 which kept the electricity tariffs on a higher side for end consumers, despite the substantial decline in fuel costs.

In the same way, at a time when the economists are urging to improve Pakistan’s ranking in the Ease of Doing Business index, a study by the World Bank reveals, 66.7% of the businesses in Pakistan consider electricity shortages as a more significant impediment to sustainability than corruption (11.7%) and crime/terrorism (5.5 %). As per estimates, the country loses 2% of its GDP due to the existing energy crisis. The Pakistan Economic Survey 2019-20 reveals a 64% increase in electricity generation capacity which spiked from 22,812 MW in June 2013 to 37,402 MW in June 2020. Despite this increase, the country is confronted with an average shortfall of 4000-5000MW which is an offshoot of poor governance as the IPP’s are unable to generate electricity as per their generation capacity. The electricity demand did not scale up as it was expected to do even before the Covid-19 lockdown. Keeping in view these pertinent factors, there is a dire need to induce reforms into the energy sector to scour the country of this looming energy crisis. 

Holistically, to subside the issue to circular debt the policymakers need to take pertinent steps to minimise transmission and distribution losses. In this regard a key solution is to upgrade the fragile transmission and distribution networks through public-private partnerships as adopted by China. Though the government needs a complete privatisation of DISCO’s, yet it will not remain a feasible option in Pakistan as the private investors will seek a neo-liberal profit maximisation model to garner more profits and will be least interested in minimising the electricity tariffs. Inducing private investors to reduce the pilferage and losses in transmission and distribution networks through gradual up-gradation of infrastructure and more rigorous enforcement for bill collection may help reduce the burden of spiraling circular debt. The corporatisation of WAPDA remains another solution to these woes, but it will take some time for the restructuring of WAPDA as a corporate entity and the question remains whether the government will risk their votes by taking over this hard decision expected to invite public resentment.

To counter the upcoming debt trap in the power sector the policymakers need to renegotiate the loan terms for the $35 billion CPEC energy projects which currently stand at LIBOR +4.5% to LIBOR +2%, and also restructure the maturity of loans from the existing tenure of 10 years to 20 years. The question remains whether the Chinese investors will give this interest rate concession to Pakistan at a time when hate-mongering is on the rise against Chinese products causing a significant dent in its economy. It is plausible to induce the latest technology into the sector to enhance the energy produced to generate maximum energy output at minimum input costs. Paradoxically, energy efficiency can be used as a tool to minimize both the consumption and generation of energy needed to fuel the economy. There is a dire need that those at the helm of affairs devise and implement policies and mechanisms to counter this power crisis, and regularly monitor the repercussions of these policies to control any unsolicited diversion.