Looming Energy Crisis

Pakistan has been facing chronic electricity shortages since the 1990s, and almost ever since has been grappling with introducing ‘reforms’ in the sector. Helped by the World Bank (WB) and Asian Development Bank (ADB), and under the aegis of several International Monetary Fund (IMF) programs, multiple plans have been made to privatise DISCOs, bring in professional outside management into the sector’s government-run entities, improve governance etc. From the late 1990s till around 2003, even the army was co-opted into the sector to stem the losses.

However, none of these reform spasms were successful or produced long lasting results. The net result has been that the power sector has sunk into practical insolvency, with the burden of circular debt increasing from 1.6 percent of GDP in 2008 to approximately 5.2 percent of GDP currently.

Why have the ‘reforms’ failed? A complex interplay of factors have played a role, with the principal political economy contributors as follows.

With annual losses due to theft and non-recovery averaging around an estimated 0.3 percent of GDP (approx. US$ 1 billion per year), the vested interest is not only substantial but entrenched as well. It extends from the line bureaucracy to senior levels, and into the political domain. The presence of ‘insiders’ who are beneficiaries of the status quo is the key hindrance to introducing reforms that will reduce losses such as smart metering etc.

Beyond the financial aspect, there are ties that bind. Politicians – especially those from rural constituencies – rely heavily on five key elements of the government machinery to remain powerful, relevant and electable. These are: the police, revenue officials, the irrigation department, teachers and the WAPDA (Water and Power Development Authority) staff. Hence, far reaching reforms in any of these areas under the current political structure is likely to be extremely difficult, with progress, deliberately, glacial at best.

Politicians and elements of the bureaucracy have had a strong motivation to encourage new power generation projects, well beyond the country’s requirements – for reasons that are well documented in economic and corruption literature (see, for example, Vito Tanzi et al. Corruption, Public Investment, and Growth [IMF, 1997].

Bureaucracies and politicians have an implicit bias the world over towards “build and replace” versus maintaining existing assets. The over-investment in generation capacity under Take-or-Pay contracts has contributed to the ballooning of the circular debt issue.

According to a recent report by Macro Economic Insights (MEI), regulatory capture by IPPs from not following the economic merit despatch order, to non-enforcement of efficiency standards (fuel + heat rate), egregious regulatory forbearance is on display at the very least. At its worst, it could indicate collusion of the power bureaucracy with IPPs. In either case, it has cost the nation via lower sector efficiency, higher tariffs, circular as well as public debt accumulation, and pre-emption of critical public spending.

According to acclaimed economist Sakib Sherani, who is also the former member of the Prime Minister Imran Khan’s Economic Advisory Council (EAC) WB/IMF – the late realisation of a failed strategy for years, the IFIs strategy of reforms in the sector rested on increasing consumer tariffs, without sufficient regard to improvements in governance. In the presence of widespread ‘cheating’, this proved to be both wrong sequencing as well as emphasis, as it incentivised more theft and line losses.

The peculiar incentives of decision making within IFIs that ‘rewarded’ short term tick-the-box measures has also been a contributing factor to the electricity sector’s protracted woes. It is heartening to note a change in strategy of recent to more structural conditionality for the sector in World Bank/IMF lending.

The circular debt issue has destabilised Pakistan’s fiscal management and imposed prohibitive opportunity costs in terms of pre-empting government spending on infrastructure and social expenditure. It has also pre-empted a significant portion of bank credit to other sectors of the economy. Finally, the circular debt issue has potentially adverse consequences for the banking system as well, given its high exposure to the energy sector. In short, the circular debt issue is Pakistan’s top-most macroeconomic and economic security issue.

The snowballing of circular debt in the energy sector is Pakistan’s top-most macroeconomic issue, given its spill-over into myriad areas of the economy. It is without exaggeration that the long run viability of the country’s energy supply chain is at stake.

For Sherani, given its complex nature, and in the context of institutional setting and political economic realities, a resolution of the issue is unlikely in the medium term, despite efforts by the current government.

“We project the electricity circular debt stock to continue rising significantly for the next several years, unless more concerted and robust measures are taken across the entire power sector,” the acclaimed economist concluded.

The writer is a political correspondent, BOL News.