Politics of Energy:

Asif Faiz.
Ultimately, the power and energy crisis in Pakistan is a problem of political economy. And at
the heart of the problem are the scams, frauds, corruption and malfeasance in the energy
sector that no policy maker in Pakistan wishes to confront. The quick fix for the energy crisis
it seems is to keep borrowing to subsidise the rich and the corrupt, pursue bankrupt policies
dictated by international financial institutions (IFIs), and make the country entirely dependent
on foreign sources of energy.
Good policies as articulated by the new government will no doubt help, but resolving this
crisis will require a national consensus on how to address the myriad of vested interests
that profit from the chaos and disorder in the power and energy sectors.
Take for example the circular debt issue; it appears to be a convenient scam for channelling
massive public subsidies to a variety of political, commercial and industrial interests for
producing high cost power (under guaranteed fuel supply and guaranteed power take off to
independent power producers, IPPs); for not producing any power at all (under various power
rental schemes); and for underwriting outright theft and cheating at all levels, small and large
- the kunda artists, the meter readers, public sector institutions, commercial and industrial
enterprises of all sizes, owners of upscale air conditioned residences, to name a few.
In the face of a failing power supply, it has become expedient since 2009 to restore
underutilised generation capacity by shelling out billions of dollars of public monies to IPPs
and a variety of energy suppliers (at last count some $5 billion since the advent of the new
government, and more in the offing) to pay off the circular debt .This payout will buy the
new government time to deflect public wrath, but without a strident reform agenda, it may
simply set the stage for a new round of circular debt.
In the short run, the government does not have much space to manoeuvre. The new energy
policy comprises mostly actions with a medium to long term impact. In the near term, short
of borrowing massively to pay for subsidies and losses, the government has few options but
to raise tariffs and undertake a massive crackdown on theft and corruption.
Tariff increases may help in curbing fiscal imbalances in the short-run, but tariff increases
that simply pass the cost of inefficient and unreliable production and blatant theft to the
general consumer will invite a public backlash and in any case will not yield the anticipated
revenues. Resourceful consumers and conniving operators will find ways to thwart such
tariff increases.
On the other hand, a massive crackdown on corruption and theft at all levels will garner
widespread public support, especially if it is matched with gradual and calibrated
improvements in service delivery.
Reduced losses would allow power utilities to sell more power, hence the possibility of lower
tariffs while generating the same level of revenues. Anti-corruption measures also need to

include transparent public procurement of goods and services by state-owned energy entities,
including oil purchases and delivery.
The National Energy Policy 2013-2018 (NEP)
covers all the bases but policy
implementation requires a realistic and carefully crafted action plan that has time-bound
actions and targets with rigorous monitoring and regular reporting to the public. Without
that, the governments claim that it will overcome power shortages by 2017 will remain a
wishful endeavour. Moreover, NEP focuses mainly on supply side measures to increase
generating capacity. This is understandable demand side measures carry a heavy political
cost, as these would alienate so many powerful constituencies, within and outside the
government.
NEP also foresees a lead role for the private sector in improving the power and energy
futures. In the critical power distribution area, privatisation of the Karachi Electric Supply
Company (KESC) variety will help but this is only a partial solution. Most electricity
distribution companies (Discos) are loss-making public entities, heavily indebted and
unionised, and dens of graft and corruption. The worst performing are Peshawar Electric
Supply Company (Pesco), Tribal Areas Electric Supply Company (Tesco), and the
distribution companies serving Hyderabad, Sukkur and Quetta ( Hesco, Sepco and Qesco,
respectively), accounting for 73% of the Rs197 billion ( about $2 billion) receivables from
private consumers at the end of FY 2012. Who will invest in these companies?
According to NEP, Pakistan has a broken power transmission and distribution system; this is
where the major losses (23-25%), both technical and commercial, occur. With a 50%
reduction in losses, coupled with conservation measures such as energy efficient bulbs and
electric appliances (especially air conditioners), the need for new generating capacity could
be reduced by at least 20-30%. Modern solid state electricity meters with smart cards (not
dissimilar to the SIM cards used in cell phones) can eliminate the need for conventional
electro-mechanical meters and meter readers. In
South Africa, Sudan and
Northern
Ireland prepaid meters are recharged by entering a unique, encoded 20 digit number using a
keypad. This makes the tokens, essentially a slip of paper, very cheap to produce. Smartcards
also allow two way data exchange between meter and the utility. Tinker with the device and
power shuts off automatically and the power utility knows instantly where the tinkering is
taking place. The NEP recommends the use of prepaid meters for consumers who default on
paying their bills. But why cannot this robust smart metering technology is used in Pakistan
to do away with the menace of the meter reader?
The answer perhaps lies in the vested
interests that manufacture and supply conventional meters.
It is interesting that energy security garners little mention in the NEP. Pakistan is becoming
precariously reliant onforeign sources of energy (oil from the Middle East, gas from Gulf
states and Iran, nuclear and solar energy from China, electricity from India and coal from
further afield). This, when Pakistan, according to US Energy Information Administration,
ranks among the top 10 countries in the world with technically recoverable shale oil deposits,
equal to those of Canada an estimated 9.1 billion barrels of oil compared to current annual
production of about 23 million barrels of conventional crude; along with a probable
(unproven) 105 trillion cubic feet of shale gas compared to current annual domestic
production of about 1 trillion cubic feet of natural gas and 24 trillion cubic feet .ft. of proven

gas deposits. Moreover, the country has vast reserves of coal. Why is it that the energy sector
policy of the country does not focus on policies and incentives to develop domestic energy
resources? Shale oil is the new frontier that will once again make US the largest producer of
oil in the world. Why cannot Pakistan begin investigating its shale oil resources while
expanding the prospecting and exploration for gas on a war footing?
Likewise, the countrys hydropower potential is huge but poorly exploited; ultimately, an
additional installed hydropower capacity of 22,000MW in the Indus Cascade System is
within the realm of the possible, while realising some 10,000 MW of new generating capacity
within the next 10-15 years. This would shift the power mix in favor of renewable and cheap
hydropower, the way it was before the misguided leap to thermal generation started in the
1990s. By comparison, as of June 2012, the total installed capacity in Pakistan was 23,718
MW, with a 29% contribution from hydropower. Except for a few small hydro investments
over the last two decades, the government has remained mired in a fruitless chase of donors
to fund Daimer Bhasha Dam. It is time that the government charts an independent
hydropower development policy (notwithstanding donor priorities and proclivities) and
begins investing in the planned Indus Cascade schemes, which include a string of
hydropower investments including the Tarbela Tunnels (work has started on Tunnel #4 and
needs to be extended to #5), Dasu (which some donors are willing to fund without much
hesitation as it does not involve significant resettlement), Pattan and Thakot, while initiating
work on Bhasha as a longer-term proposition that might take a decade or more to realize.
And there is need to fundamentally rethink the structure of the power sector. Privatisation of
Discos is a good starting point. But along with privatisation or subsidised concessions for
non-profitable Discos, the time has come to make power distribution a provincial/city
government responsibility. Why should the federal government subsidise waste and
corruption that takes place at provincial/local levels? The federal role should be confined to
generation and transmission as is the case in India, China and most federal countries.
Restructuring the federal and provincial roles in the power sector, however, is not a simple
proposition, especially when provincial governments especially Sindh and KP along with
FATA and AJK) are major beneficiaries of power subsidies as well as contributors to the
circular debt. Resolving the recurring power crises will require a compact with the provincial
governments on power subsidies and decentralisation of power distribution functions.
The power sector reforms pushed by the IFIs (World Bank and ADB, in particular) remain
incomplete. It seems that the government was never serious about these reforms. Instead of
unbundling the sector and creating a level-playing period through fair regulation and
incentivising the private sector, what resulted was a weak regulator and a centralised
bureaucracy centered on Pakistan Electric Power Company (Pepco) and several public sector
entities. The cost of waste, inefficiency and corruption was simply converted into the circular
debt and later ever rising tariffs, while system performance and reliability took a nose dive.
The NEP fortunately has given considerable thought to the institutional arrangements in the
power sector. A future institutional set-up could include provincially regulated distribution
companies that operate at provincial/local levels, a much strengthened and independent
federal regulator, an autonomous public transmission company, and a large range of power
producers both public and private at the national, provincial and local levels, that can produce
and sell
power competitively to Discos and large independent consumers, such as
industrial and agricultural units, housing estates, electricity cooperatives for farmers and rural

consumers, etc. NEP, however, does not explicitly dispense with the current single (central)
power purchaser arrangement in favour of a competitive power market, where competitively
produced electricity could be traded freely and openly, thus passing the benefits of
competition and associated efficiency improvements in generation, transmission and
distribution to the consumer.
There is also a a need to review the contractual terms for IPP contracts to ensure an
equitable distribution of risk between the public and private sectors, including renegotiating
or adjusting poorly designed government guarantees in existing contracts. But it seems that
NEP intends to continue with the erstwhile tax breaks and other incentives for IPPs (in
relation to contract period, exemption from taxes and duties, and the tariff structure with
guaranteed capacity charges and guaranteed off take), that over time have contributed to the
current crisis.
The real irony is that Pakistan has made great strides in making electric power accessible to
its population, by some estimates; about 80% has access to electricity, arguably among the
highest access levels in
South Asia. But there is no electric power to serve the
connected. Load-shedding is at a scale and magnitude only seen in economically collapsed
states.The steady expansion of power connections in rural areas and new housing colonies
shows that incentives work in Pakistan (in this instance the lure of political patronage and
graft) but seldom
are they focused on productive and legitimate endeavors. For NEP to
deliver on its promise, public interest must override political expediency and private gain.