2.
The Crisis in Brief
• Pakistan’s growing electricity power is marred by a long-standing policy,
planning, management and governance crisis.
• The country slips into power outages routinely disrupting economic and social
life as electricity supply-demand gap hovers between 5000 – 6000MW partly
responsible for prolonging economic stagnation as well as fanning energy
riots.
• Pakistan’s total installed power generating capacity is 21,409 MW in April
2010 having peak demand of around 15,000MW with supply limited to
10,200MW creating a shortfall of 4,800MW.
• Electricity tariffs have been increased by around 100 in the last three years
and especially as a result of Stand-by Agreement with the IMF. Yet the sector
is plagued by a recurrent circular debt standing around Rs.664.527 billion.
• Cash-flow problems in the entire electricity supply chain involvπing oil
marketing, power generation and distribution companies have forced many
private generating plants run well below capacity.
• Most publically – owned power stations are not working in line with the
generation capacity mainly due to up-gradation and maintenance problems.
The fuel miss used to electricity generation in increasingly lacking economic
viability. Over 30% of electricity generated is lost due to crumbling distribution
infrastructure and theft.
• Between 10 -16 hours of electricity blackouts are common during peak
seasons and periods. Resultantly, industrial profit margins have fallen by
about 50% with losses of over Rs.240 billion eroding competitiveness.
• Around half a million industrial workers have lost jobs as over half a million
power looms shut down in the textile sector.
• The economy is losing US$6 billion per annum due to power supply crisis
3.
Backdrop
Pakistan is inherently an energy-rich country holding vast albeit largely an untapped
potential to produce cheap hydropower and coal-based electricity as well as multiple
sources of producing alternative energy such as from biomass, wind and solar
power. But the sector was accorded little policy priority for decades. Public
investment in building power sector infrastructure in line with growing demand has
not been forthcoming. Restructuring efforts in the last two decades lacked suitable
governance and institutional framework. Inter-provincial mistrust and cross-border
water dispute exacerbated the situation. The outcome is a complex and growing
energy crisis especially involving cheap and reliable supplies of electricity and gas.
Water reservoirs are insufficient. One of the largest reserves of coal in the world are
resting idle. Alternative energy remains unharnessed. Lack of investment,
inefficiency, poor governance and pilferage has led to the recurrence of a large
circular debt suppressing capacity generation in the electricity power sector. This is
undermining economic growth, jobs and living standards in the country. The
following section will elaborate on the emergence of electricity power sector crisis
and the recurrence of circular debt in Pakistan.
Evidence and Analysis
1. Pakistan is confronted with a growing electricity power crisis which is
undermining health of the economy. The sector is unable to support economic
and social activities. Production lines are interrupted and businesses routinely
shut down causing large-scale unemployment. Energy riots sporadically erupt
especially during summer. Electricity shortage hovers around 5000 – 6000MW,
the shortfall is expected to increase by more than threefold by 2015. Yet 40% of
the household are supplied any electricity.1
This situation has resulted from
years of policy, planning and investment neglect. The result is a crumbling
electricity power sector infrastructure undermining economic growth for the past
several years declining from 9% in FY2004-05 to 2% in FY2008-09. The
economy expanded by mere 2.4% as against the 4.2% target for FY2010-11.
The International Monetary Fund (IMF) believes the economic growth for the
current fiscal year will be around 2.6% as against the 4.2% target.
2. The electricity power sector is faced with myriad of challenges mainly related to
infrastructure, administration and governance. In its current shape, the crisis is
one of management rather than lack of generation capacity.2
As a result of
1
See “Macroeconomic Stability and Sustained Growth.” A Pakistan Business Council Position Paper
by the Macroeconomic Panel. Pakistan Business Council (2010).
2
Charles K. Ebinger & Kashif Hasnie noted a number of reasons behind power sector crisis including:
1) mostly 1,500MW is hydropower is generated against installed capacity of 6,500MW due to dry
2
Charles K. Ebinger & Kashif Hasnie noted a number of reasons behind power sector crisis including:
1) mostly 1,500MW is hydropower is generated against installed capacity of 6,500MW due to dry
seasons and poor handling of cross-border water issues; 2) IPPs are generating below capacity; 3)
publically-owned generation plants are suffering from maintenance problems and remain under-
utilized; 4) crumbling power infrastructure is incurring huge transmission and distribution losses; and
5) power theft remains very high at around 32%. For details see “Powerless Pakistan.” Dawn. May
17, 2010. http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/the-
newspaper/editorial/powerless-pakistan-750 ADB argued that Pakistan’s power sector problems
4.
decades of state ownership, subsidies and lack of investment most publically-
owned power stations are not working in line with their generation capacity mainly
due to up-gradation and maintenance problems.3
The fuel-mix used for electricity
generation consists of around 32% gas, over 35% oil, 3% hydel, 1.8% nuclear
and less than 1% coal. The world trend is 41% coal, 20% gas, 15% nuclear, 16%
hydro and only 6% oil.4
Over 30% of electricity generated is lost due to crumbling
distribution infrastructure and theft. All these issues have contributed to the
recurrence of a large circular debt. Currently, the cash flow problems in the
entire electricity supply chain involving oil marketing, power generation and
distribution companies have reached a record level of Rs.664.527 billion forcing
generating plants run well below capacity. Around 15 Independent Power
Producers (IPPs) are out of operation and many other operating at only 20% of
their installed generation capacity.5
Pakistan Electric Power Company (PEPCO)
alone owes Rs.367 billion.
3. The root cause of the circular debt is the government’s failure to enforce the “use-
pays” principle.6
Resultantly, the government is selling electricity at Rs.7.15 per
unit which is produced at Rs.9.15 per unit. The tariff differential of Rs.2 per unit is
contributing to a debt overhang which the cash-strapped federal government is
finding itself increasingly unable to fund. It is believed that the inefficient power
sector is costing the economy 2.5% of gross domestic product annually in the
form of Rs.300-350 billion cash injection to cover power tariff differential, subsidy,
mismanagement and bill recovery losses.7
The government is consistently failing
to pay subsidy.8
All previous attempts including the issuance of Term Finance
Certificates (TFCs) to tackle the circular debt have failed. TFC charged the
government Karachi Inter Bank Offered Rate plus 200 basis points, the facility
now being converted into Pakistan Investment Bonds and T-Bill. Financing the
circular debt without ensuring structural reforms may not prove sustainable.
International financial institutions are also stipulating reforms as a key condition
for further loans for power sector development. This made the government take
range from “…weak governance, poor financial management, political interference, and long term
disregard for prudent business practices.” http://www.adb.org/Documents/CAPs/PAK/0302.asp
3
Siddiquie, H.A., “Core Issues in Energy Crisis.” Dawn. May 03, 2010.
http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-
and-business/core-issues-in-energy-crisis-350
4
See PICKETT, N., (2011), “Coal: Least Cost Option for Power Generation in Pakistan.” SRK
Consulting. http://www.sbi.gos.pk/ICC-Presentation/10-Mr.%20Nigel%20Pickett.pdf
5
See Ahmad, S. “Short-term Options to Meet Power Demand.” The Nation, 13 November, 2011.
http://nation.com.pk/pakistan-news-newspaper-daily-english-online/Opinions/Columns/13-Nov-
2011/Shortterm-options-to-meet-power-demand
5
See Private Power Infrastructure Board. http://www.ppib.gov.pk/SupplyDemand.htm.
6
Ali, S.S. and Badar, S. (2010), noted two main reasons behind the circular debt. First, “end-
consumer tariffs were insufficient to recover the rising costs of power generation, and the government,
due to fiscal constraints, was not fully compensating PEPCO against the resulting losses.” Second,
“PEPCO has also been facing problems in recovering dues from its consumers” in “Dynamics of
Circular Debt in Pakistan and Its Resolution.” The Lahore Journal of Economics. 15: 61-74
7
See Mustafa, K., “Failure to Implement Power Sector Reforms.” The News. 15 November, 2011.
http://www.thenews.com.pk/TodaysPrintDetail.aspx?ID=10296&Cat=13
8
See Chaudhry, S., “Circular debt in power sector reaches Rs 664.52 billion.”
http://www.dailytimes.com.pk/default.asp?page=20111118story_18-11-2011_pg5_2
5.
responsibility of Rs.391 billion of bank loans outstanding in the circular debt in an
attempt to secure a US$2 billion power sector development financing, US$1
billion each from the Asian Development Bank and the World Bank.9
4. In the existing operating framework for the power sector, it is the responsibility of
the PEPCO to collect tariff from public and private consumers as well as
government subsidy to pay power generation companies and fuel suppliers.
PEPCO is failing to deliver on that and given the quality and level of
independence of institutions in the country situation is set to change a little.
Restructuring in the power sector has created serious bottlenecks in the system.
Circular debt remains a serious cash flow problem despite an increase in
electricity prices by 100% in the last three years as well as the removal of
subsidies as part of last Stand-by Agreement with the IMF. Tariffs for commercial
and industrial users have increased by 120%.10
5. The irony is that despite having a vast potential to generate cheap energy,
Pakistan is suffering from growing electricity and gas shortages. The country
holds one of the largest coal reserves in the world estimated to be around 185
billion tons. It can help Pakistan generate annually 50000MW of cheap electricity
for 500 years from its 185 billion tons of coal reserves, one the largest in the
world mainly located in the Sindh province.11
The country can potentially
generate up to 46,000MW of very cheap hydropower. Currently, the total
installed power generating capacity in PEPCO system stands around 21,190MW
as of March 2010. Around 6,555MW is hydropower and 14,126MW is thermal
production, or 31.7% and 68.3% respectively. Heavy dependence on thermal
power continues to increase Pakistan’s import bill. This needs to be reversed.
Pakistan’s must increase the share hydropower in the national grid for achieving
greater economic competitiveness. This will be challenging given that per capita
availability of water has decreased from 5000 cubic meter in the 1980s to around
1000 cubic meter. Policy inaction will result in an estimated US$62 billion of
energy import bill by 2025.12
6. Electricity peak demand is usually 15,000MW with supply limited to 10,200MW
creating a shortfall around 5,000MW costing the economy around Rs.250 billion
per annum.13
Thermal power generation in Pakistan heavily relies on oil and gas.
Almost 70% of power generation is oil/gas-based. This is increasing gas supply-
9
See Kiani, K., “Government Takes Over Circular Debt.” Dawn. 5 November, 2011.
http://www.dawn.com/2011/11/05/govt-takes-over-circular-debt.html
10
See Tasleem, N. Power Tariffs Doubled in 3 Years: Outages Continue.” Pakistan Today. 25
th
October, 2010 http://pakistantoday.com.pk/pakistan-news//Regional/25-Oct-2010/Power-tariff-
doubled-in-3-years-outages-continue
11
http://pakobserver.net/detailnews.asp?id=65322
12
See “Macroeconomic Stability and Sustained Growth.” A Pakistan Business Council Position Paper
by the Macroeconomic Panel. Pakistan Business Council (2010).
13
The World Bank has argued that electricity shortfall will reach 6000MW in 2010.
http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/0,,contentMDK:21642
194~pagePK:146736~piPK:146830~theSitePK:223547,00.html In November 2009, the daily demand
of gas in Pakistan was more than 3,800MCF while the supply was 3,000MCF.
http://www.dailytimes.com.pk/default.asp?page=2009%5C11%5C19%5Cstory_19-11-2009_pg7_4
6.
demand gap set to be around 529 MMCF per day in November and expected to
increase to 911MMCF per day in December 911; 1,127 MMCF per day in
January and 1,046 1 MMCF per day in February.
7. Pakistan has no option but to import gas not only for electricity power generation
but also for meeting industrial, domestic and transport needs. Pakistan is
contemplating importing gas from Qatar, Iran, and Turkmenistan but progress
towards materialization is slow. It is believed that the country can save up to
US$100 billion in next 25 years by importing gas through Iran-Pakistan (IP) and
Turkmenistan-Afghanistan-Pakistan-Iran (TAPI) pipeline, the construction for the
latter will cost US$7.6 billion and is expected to be completed by 2016.14
IP can
supply Pakistan 750 MMCF per day while TAPI has 1300 MMCF per day supply
capacity.
8. Growing electricity power outages are disrupting economic and social life.15
In
particular, power shortages are gravely hurting the textile sector which is the
source of more than half of the country's exports and provides around 40% of
manufacturing jobs.16
As a result, profit margins have fallen by about 50%.17
The anecdotal evidence is that industry has incurred losses of over Rs.240 billion
and around half a million industrial workers have lost jobs due to 10 – 16 hour of
electricity blackouts. According to some estimates, the economy is losing US$6
billion per annum due to power supply crisis.18
9. The circular debt involving refineries and oil marketing companies as well as
power generation and distribution companies needs to be resolved on
sustainable basis. The privatization of power utilities can inject new investment
and technology. But lessons must be learnt and applied from the privatization
experience of KESC that has failed to meet its key efficiency objectives and the
entity is in dire financial and operational problems.19
10.Pakistan has great potential to produce cheap hydro, coal-fired, wind-based and
solar power. The country’s future growth depends on the availability of reliable
14
See Bhutta, Z., “Resolving the Energy Crisis: Pakistan to Renegotiate IP Gas Pipeline Deal.” The
Express Tribune. 14 November, 2011.
15
According to the Institute of Public Policy’s survey of 65 industrial units, average annual outages
per unit was 1379 in 2008 with an average duration per day was around 4 hours and 36 minutes
especially affecting industries like textiles, machinery and equipment, food, glass, and allied goods
(2009:P 11).
16
According to the All Pakistan Textile Manufacturers Association (APTMA), almost 90 % of
Pakistan's textile industry is either in financial loss or on the verge of shutting down due to power
shortages resulting in more than two months of production loss.
http://southasiainvestor.blogspot.com/2009/02/pakistan-textile-industry-hits-rough.html.
17
http://www.reuters.com/article/idUSSGE6230J1
18
For details see “30,000 Tons of Furnace Oil Used Daily for Power Generation.” The News.
February 10, 2009. http://www.thenews.com.pk/daily_detail.asp?id=161804
19
See Abbas, G., “ADB, IFC to Acquire 1.3 Billion Shares of KESC.” Business Recorder, 22 January,
2010. The ADB and the International Finance Corporation (IFC) will be acquiring 1.3 billion ordinary
shares of KESC worth UD$50 million that is expected the improve its financial and operational
7.
and affordable energy.20
But this will only be possible if increasing reliance on
expensive thermal power produced by IPPs consuming over 30,000 metric tons
of furnace oil is reversed with the help of greater investment in hydro power, coal-
fired and alternative means (see Figure-1).21
The impending inclusion of Rental
Power Projects (RPPs) in the national grid will increase tariffs by 80% is
perceived as a bad news for Pakistan growth and competitiveness prospects.22
RPPs are widely considered as unfair, uncompetitive and unviable facing legal
censure.23
Figures-124
20
The Atlantic Council’s Pakistan Report (2009) noted that “rising demand, water shortages, high oil
prices, and insufficient investment in energy generation have given rise to significant energy
shortages. Protests have occurred throughout the country because of prolonged power blackouts and
rising electricity prices. The energy deficit has reduced production – including in the textile sector –
curtailed economic growth and discouraged foreign investment” (February 24, 2009: 21).
www.acus.org/publication/pakistan-report. SBP argued that “the sources of uncertainty holding back
economic growth and an even more pronounced decline in inflation primarily emanated from
persisting electricity and gas shortages and a very challenging security environment. The upward
revisions in power tariffs, partial settlement of circular debt, and timing of official foreign inflows also
played their part in diluting the optimism vis-à-vis macroeconomic stability” (Monetary Policy
Statement, January-2010: 5).
21
For details see “30,000 Tonnes of Furnace Oil Used Daily for Power Generation.” The News.
February 10, 2009. http://www.thenews.com.pk/daily_detail.asp?id=161804 Ali, K., noted that “of the
10,000MW of electricity produced in the country, about 7,000MW is produced by power plants that
use furnace oil.” “Hike in Furnace Oil Price Pushes Up Cost of Power Generation.” Dawn. May 03,
2010. http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/the-
newspaper/national/hike-in-furnace-oil-price-pushes-up-cost-of-power-generation-350
22
ADB (2010) argued that “the recent energy crisis has greatly subdued the country's economic
growth. For sustainable development, Pakistan needs energy security which requires striking a
balance between (i) affordability, (ii) demand and supply options and (iii) load shedding. The
relationship between the three components is dynamic, affected by both internal and external factors.
Plans cannot be cast in stone and require continuous updating. One of the major issues that require
the government's attention at the highest level is the sourcing and development of the fuels or primary
energy sources that are to be converted to electricity.”
23
Ahmad, S. noted that “in inviting bids for RPPs and finalization of contracts, all caution and
prudence was thrown to the winds. The defective contracts have caused huge financial loss to the
country, which is now under scrutiny by the Supreme Court of Pakistan. “Short-term Options to Meet
Power Demand.” The Nation, 13 November, 2011. http://nation.com.pk/pakistan-news-newspaper-
daily-english-online/Opinions/Columns/13-Nov-2011/Shortterm-options-to-meet-power-demand
24
See Private Power Infrastructure Board. http://www.ppib.gov.pk/SupplyDemand.htm.
8.
11.Developing feasible hydropower projects must be the key priority of any future
energy development plan.25
Pakistan can generate more than 46,000MW of
hydropower compared to the current around 6,500MW or around 33% of the
country’s total power generation capacity.26
Oil, natural gas, and coal contribute
around 66% of Pakistan’s total electricity generation capacity. Pakistan also
needs to consistently increase the share of alternative energy. Speedy
implementation of Integrated Energy Development Program will help the
economy to grow at an average of around 7.5%. This is also expected to
considerably increase the share of hydro and coal-based electricity generation in
the next decade and half.
Strategic Recommendations
• Improve pricing mechanism – appropriate pricing mechanism is very important
for efficiency and future development of the electricity sector. Regulators need to
be fully independent in tariff setting. Pakistan needs to ensure that electricity
tariffs allow full cost recovery and offer an economically acceptable rate of return
on investment in plant and equipment while safeguarding the end-users’ interest.
This would essentially demand that the sector is exposed to fair competition over
time. In principle, Pakistan also has a pricing mechanism to ensure recovery of
all operating and capital costs as well as a fair return on investment. Automatic
Tariff Adjustment mechanism is also in place since 2001 to accommodate
changes in fuel cost every three months. Tariff setting and resolving tariff
disputes is the domain of National Electric Power Regulatory Authority (NEPRA).
But it is widely believed that the body lacks independence and capacity to ensure
a “rational and equitable pricing regime” (Malik, 2007).27
Planning Commission
25
Planning and design work to build five major dams at an estimated cost of US$20-25 billion
including Diamer-Bhasha, Munda, Kurram Tangi and Akhori as well as the much delayed and most
controversial Kalabagh is already completed. See “Government to Seek $17 Billion from Lenders:
Construction of Three Major Dams.” Dawn, 18 December, 2006.
26
Pakistan Economic Survey (2007-08: 257). Bailly (2003: 2) argued that Pakistan can generate up
to 40,000 MW of hydropower.
27
See Malik, A., (2007). “Effectiveness of Regulatory Structure in the Power Sector of Pakistan.”
Pakistan Institute of Development Economics Working Paper, 2007: 25.
9.
also expressed grave concerns over the performance of NEPRA and argued that
it “…has failed to fulfill any of its mandates under the law.”28
• Increase public investment in power infrastructure – Pakistan needs to make
around US$1 billion investment per annum during this decade to improve the
power sector infrastructure that is capable of meeting the growing needs of the
economy and society. Ensure substantial amount of public investment first into
generation, transmission and distribution infrastructure for closing the demand
and supply gap.
• Liberalize fuel procurement – IPPs should be allowed to procure fuel from
suppliers of their own choice, both local and international. Competitive
procurement of fuels will lower cost of electricity to end-users. But the
liberalization of energy markets is complex task and requires considerable
political will. This can be greatly helped by government efforts to mobilize
relevant stakeholders for necessary legal and institutional reforms.
• Tackle circular debt on sustainable basis – ultimately Pakistan has to ensure
that the electricity power sector is efficient and competitive. This would require
consistent structural and institutional reforms. In particular, removing subsidies
and adherence to full cost recovery will have to be ensured. Tariffs should fully
reflect normal profits. The sector’s large debt overhang also needs to be
eliminated on sustainable basis. One way of handling the problem may involve
decentralization of power purchase to provinces. The recent constitutional
development concerning decentralization through 18th
Amendment, Provincial
Power Purchase Authorities should be established. These authorities should be
entrusted with distribution of electricity and collection of payments. Any
outstanding amount should be settled through the award of National Finance
Commission. This will make sure circular debt is tackled on sustainable basis.
• Privatization of power utilities – many countries around the world have
established fully competitive electricity power markets following the experience of
Britain and United States. But this is a huge agenda and Pakistan may not be
ready for this for at least another decade especially in view of fixed-price and
long-term Power Purchase Agreements that have been granted to IPPs.
However, efforts can be made to privatize all power generation because this will
bring new investment and technology. But where private sector is to be engaged
in distribution also then lessons must be learnt from the privatization experience
of Karachi Electricity Supply Corporation (KESC) that has failed to meet its key
efficiency objectives. KESC continues to suffer from dire financial and
operational problems.
• Exploit coal as fuel of the future – coal has gained the status of “fuel of the
future” for electricity generation world over especially in the wake of greener coal
technologies that can effectively tackle carbon emission. Pakistan has
unmatchable potential to produce cheap and reliable electricity through coal. But
28
See Kalbe, A., “Planning Commission Assails Nepra’s Performance.” Dawn. 22 May, 2011.
http://www.dawn.com/2011/05/23/planning-commission-assails-nepras-performance.html
10.
currently the country is using less than 1% coal in its electricity generation as
compared to 55% in India and 74% in China.
• Implement the Integrated Energy Development Program – electricity power
sector development should be based on an integrated approach. This will link
power sector to the country’s efforts to ensure energy security. Integrated energy
development will provide a framework for developing Pakistan water, coal and
nuclear, gas as well as all resources of alternative energy. However, the
inclusion of RPPs in the national grid should be avoided because it will exert
significant pressure on economic competitiveness as well as consumer interests
regarding value-for-money.
