Pakistan's Power Crisis

UNITED STATES INSTITUTE OF PEACE www.usip.org SPECIAL REPORT 2301 Constitution Ave., NW • Washington, DC 20037 • 202.457.1700 • fax 202.429.6063 ABOUT THE REPORT Rashid Aziz and Munawar Baseer Ahmad Pakistan’s energy shortages have a disruptive effect on daily life, and protests and demonstrations against such shortages often turn violent. There is a risk that energy shortages could erode peace and stability in the country. Following an invitation from USIP, the authors have worked jointly to achieve a balanced analysis, reflecting official viewpoints and donor perspectives on the nature of Pakistan’s energy crisis Pakistan’s Power Crisis and what can be done to address it. The Way Forward ABOUT THE AUTHORS Rashid Aziz worked for twenty-five years as senior energy specialist in the World Bank’s Islamabad Office. He contributed to the Bank’s energy sector work program, which covered electricity, oil, and gas sectors. He participated in preparing sector reports; project appraisal, implementation, and Summary evaluation documents; and policy analysis and implementation. • Pakistan is currently facing a severe and multifaceted energy crisis. Electricity shortages An economist by training, Aziz joined the Islamabad Office’s economic team in 1982 and moved to the South Asia Energy exceeded 7,000 megawatts in 2011; the gas shortfall is 2 billion cubic feet per day. The Unit in 1989. Munawar Baseer Ahmad has extensive experience energy shortages are estimated to cost around 2 percent of GDP annually. This shortfall is the in Pakistan’s energy sector. He held senior positions in the result of the failure, over successive governments’ tenures, to invest enough to expand power public sector, including managing director of Sui Southern Gas system capacity. Low and declining investment and savings rates (including in power) reflect Company and of Pakistan Electric Power Company. An engineer macroeconomic weaknesses. by background, Ahmad is currently the chief executive of EMR- Consult (Pvt) Ltd., a consulting firm that provides • Successive governments have set tariffs on electric utilities below cost recovery levels. The high-level advisory services to private/public sector difference is paid as subsidy, which is unaffordable and diverts resources from other priorities. clients on policy matters and all aspects of project With utilities unable to cover their costs of production, investment has lagged. preparation, financing, and evaluation. • The efficiency of Pakistan’s utilities—both in producing electricity and collecting dues—varies considerably. Some companies compare with the best in South Asia. Others do not achieve © 2015 by the United States Institute of Peace. half those performance levels. Supply costs thus remain higher than warranted. All rights reserved. • The current government plans to address the financial constraint and has raised tariffs. Further SPECIAL REPORT 375 JUNE 2015 increases are required but will prove politically challenging. The record on past governments’ efforts in the sector is mixed. Utility managers are not held accountable for their companies’ CONTENTS performances, and there is continued interference in the utilities’ affairs. Prosecution of power Introduction 2 theft remains weak. Scope and Causes of the Crisis 4 • The 2013 power policy includes an ambitious agenda to increase generation, raise tariffs, Financing Troubles 7 and improve efficiency. Private expertise, finances, and management will be mobilized. Some Governance Challenges 8 donors support the government’s efforts. Experiences in other countries, especially India, may Reform Efforts and Priorities 10 provide lessons for Pakistan. The 2013 Power Policy 11 • The reform agenda faces opposition, but the government must stick to it. Contributions from Learning from the Experience of Neighbors 14 all stakeholders—consumers, investors, financiers and donors, media, and civil society—are The Way Forward 15 essential if the challenges are to be overcome. ABOUT THE INSTITUTE Introduction The United States Institute of Peace is an independent, nonpartisan institution established and funded by Congress. Pakistan is experiencing an acute energy crisis. Partly due to chronic losses and underinvest- Its goals are to help prevent and resolve violent conflicts, ment, electricity supply from utilities is well short of demand. The deficit has exceeded 7,000 promote postconflict peacebuilding, and increase conflict megawatts (MW),1 or about one-third of peak demand, during extreme periods.2 The country management tools, capacity, and intellectual capital also faces a growing shortage of natural gas, its largest primary fuel source after biofuels, used worldwide. The Institute does this by empowering others mainly by the poor, who lack reliable access to electricity or other energy sources. Fluctuations with knowledge, skills, and resources, as well as by its direct in the global price of oil have substantially increased power generation costs and strained bud- involvement in conflict zones around the globe. gets. The government’s policy to maintain power tariffs below the cost of supply, as determined by the National Electric Power Regulatory Authority (NEPRA), requires large subsidies from BOarD OF DIRECTORS the budget. Delays in disbursing these subsidies are contributing to persistent intersectoral Stephen J. Hadley, (Chair), Principal, RiceHadleyGates, LLC, debts that have imperilled the creditworthiness of public and private generation companies, Washington, DC • George E. Moose (Vice Chair), Adjunct Professor of Practice, The George Washington University, Wash- including the Water and Power Development Authority (WAPDA), fuel suppliers, refineries, and ington, DC • Judy Ansley, Former Assistant to the President and domestic oil and gas producers. Deputy National Security Advisor under George W. Bush, Wash- Collectively, the shortages impose large costs on the economy as a whole—estimated at ington, DC • Eric Edelman, Hertog Distinguished Practitioner about 2 percent of gross domestic product (GDP) annually3—through lower output, exports, in Residence, Johns Hopkins School of Advanced International and employment. Consumers have started using alternate power sources. Industrial and Studies, Washington, DC • Joseph Eldridge, University Chaplain commercial entities install their own generators. Households use back-up generators or and Senior Adjunct Professorial Lecturer, School of International Service, American University, Washington, DC • Kerry Kennedy, battery-powered units, often at significantly higher costs. Small and medium-sized indus- President, Robert F. Kennedy Center for Justice and Human trial and commercial enterprises and poor households often cannot afford these high-cost Rights, Washington, DC • Ikram U. Khan, President, Quality Care alternatives and go without power. Consultants, LLC., Las Vegas, NV • Stephen D. Krasner, Graham The electricity shortage has severe social and political effects. Protests and demon- H. Stuart Professor of International Relations at Stanford strations against long hours of scheduled and unscheduled power outages—that is, load- University, Palo Alto, CA • John A. Lancaster, Former Executive shedding—are regular phenomena and often lead to destruction of public property. In 2013, Director, International Council on Independent Living, Potsdam, NY • Jeremy A. Rabkin, Professor of Law, George Mason the Pakistan Muslim League-Nawaz party swept into power in nationwide elections partly University, Fairfax, VA • J. Robinson West, Chairman, PFC due to pledges to tackle the energy problems that its predecessors had failed to address. Energy, Washington, DC • Nancy Zirkin, Executive Vice But its first year in office saw only partial progress in addressing the deep structural issues President, Leadership Conference on Civil and facing the energy system. Human Rights, Washington, DC Multiple factors, compounded across multiple governments, have contributed to Pakistan’s current energy crisis. There is a physical shortage: Supply has not increased with MEMBERS EX OFFICIO demand. There is a financial shortfall, as the utilities’ total resources, including revenues John Kerry, Secretary of State • Ashton Carter, Secretary of from consumers and subsidies from the government, do not cover the cost of supply. Finally, Defense • Gregg F. Martin, Major General, U.S. Army; President, there is a governance crisis, as the government has been unable to impose commercial dis- National Defense University • Nancy Lindborg, President, cipline, particularly on government-owned utilities and institutions, and their performance United States Institute of Peace (nonvoting) continues to be below the levels achieved in other countries. The challenges are interrelated. The shortfall in generation stems largely from a cumulative failure to achieve the investment levels needed to expand and maintain power generation on pace with the growing demand. This lack of investment, along with the lack of consensus on, for example, a number of hydropower projects, has prevented the energy sector from develop- ing new, cheaper, domestically available fuel sources, such as coal or hydroelectric power, forc- ing continued reliance on imported fuel oil and dwindling natural gas reserves. The shortfall in investment is partly due to macroeconomic conditions. Pakistan’s domestic savings and investment rates have fallen from a mid-2000s peak, and international donor support for investments in Pakistan’s power sector declined in the face of political

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