Daily Times

Is Pakistan’s power and energy sector on the verge of collapse? I was asked.

“The fact that we have electricity and gas; if not in most then parts of the country is nothing less than a miracle,” I responded. I could feel a subtle quietness in the room, “Well everything is in god’s hand in Pakistan, energy and power sectors are no different,” -sarcasm broke the silence.

I wish breaking the vicious circular debt cycle was also that easy, but wishful thinking has not taken anyone to success, action has. The energy sector liabilities stand at Rs. 4,177 billion and according to sources, it is increasing by Rs. 129 billion every year. The electricity sector’s circular debt has reached Rs. 2,277 billion and the gas sector recorded its circular debt at Rs. 1400 billion. The present unpaid payment on account of circular debt for Chinese Independent Power Producers (IPPs) has reached Rs350 billion, and there are mounting requests to erase the backlog. IMF’s relentless demand to reduce these demands and for Pakistan to come out of the debt trap seems to have the financial pundits by the throat. With no way out, the government is now forced to take extreme measures.

Many studies on the power sector show that the country suffers from a deficiency in power generation, transmission losses, a lack of planning, and incorrect policies.

Pakistan’s circular debt rose from PKR 227 billion in June 2013 to PKR 1.2 trillion in June 2018 and then to Rs. 2.3 trillion in 2021, according to a State Bank of Pakistan report. Many studies on the power sector show that the country suffers from a deficiency in power generation, transmission losses, a lack of planning, and incorrect policies, all of which have contributed to an intensifying energy crisis. This energy crisis in Pakistan is the direct result of huge institutional and governance failures over the past many decades, manifested in reckless energy policies. Electricity generation and distribution corporations, such as WAPDA, DISCOs, and GENCOs, are the principal contributors to circular debt.

According to research by the National Electric Power Regulatory Authority (NEPRA), the largest contributors to circular debt in the year 2020 were:

IPPs (Independent Power Producers) – 29.5 per cent

DISCOs (Distribution Companies) – 25.6 per cent

GENCOs (Generation Companies) – 21.7 per cent

Other entities – 23.2 per cent

With the mention of IPPs, it is pertinent to highlight the findings of an investigation report in 2020 into alleged contract violations by independent power producers, which discloses that IPPs have earned between 50 and 70 per cent yearly profits, as opposed to the NEPRA-mandated maximum of 15 per cent. Most IPPs had a payback period of two to four years, profits generated were as high as 18.26 times the investment, and dividends were 22 times the investment. Furthermore, under the 1994 Power Policy, 16 out of 17 IPPs invested a total of Rs. 51.80 billion and earned profits in excess of Rs. 415 billion. In the previous thirteen years, the failure of the government to control the circular debt has cost the country about PRs 4,082 billion, with an annual loss of PRs370 billion.

In the fiscal year 2021-22, distribution companies lost a total of 22,298 gigawatt-hours (GWh) of electricity during transmission. For the same fiscal year, the financial impact of transmission and distribution losses caused by the National Electric Power Regulatory Authority’s (NEPRA) inability to meet its targets was estimated to be Rs 520.3 billion – making line losses one of the major reasons for increased prices to consumers. The IMF has also instructed Pakistan to finance unbudgeted power subsidies totalling Rs 675 billion through a combination of energy rate increases and other revenue-enhancing measures.

In the background of this circular debt, the recoveries continue to show a declining trend. In FY22, Discos’ recovery (excluding KE) decreased from 97 per cent to 90.5 per cent. According to news accounts, the fall in the recovery rate for the first quarter of fiscal year 23 was 83 per cent. While Karachi Electric’s report indicates that its recovery rate decreased from 94.9 per cent to 91.8 per cent in the first half of fiscal year 23. Not all discos are equal, some experience greater losses than others. Some contribute more than others to the cyclic debt.

There is some indication that Pakistan’s authorities recognize the need for a shift in policy, but to date, little progress has been made. The top policy priority is the implementation of a comprehensive, well-conceived energy plan. This should not be underestimated in terms of its difficulty for Pakistan. Yet, such a plan is important for the nation’s short- and long-term energy security.

There is talk of diversifying the energy mix of the nation, with the government focusing on gas, renewables, and coal to a lesser extent. This is also supported by the “Variable Renewable Energy Integration and Planning Study” funded by the World Bank, which suggests that solar and wind power should constitute at least 30 per cent of Pakistan’s total energy-producing capacity by 2030.

With the budgetary burden of energy imports and declining domestic energy supplies, change is inevitable, but it will not occur quickly and there are other considerations to be made to control the vicious circular debt.

The writer is the Foreign Secretary—General for BRI College, China.
He tweets @DrHasnain_javed