The power sector’s circular debt rose to Rs. 2.646 trillion as of July-May 2023. According to data from the Power Division, payables to power producers rose by Rs420 billion to Rs1.771 trillion, while payables to state-owned generation companies (Gencos) increased by Rs9 billion to Rs110 billion. However, Power Holding Limited’s (PHL) share of the circular debt decreased by Rs35 billion to Rs765 billion.
Independent Power Producers are a worldwide phenomenon that is hard to ignore in the current state of Pakistan. But when we stop and reflect, we can’t help but wonder how we arrived at this point.
The Hub Power Company (HUBCO) was the greatest private sector power generation venture in Asia when it was founded in 1986. All of Pakistan’s independent power producers (IPPs), including HUBCO, are thermal facilities. Since the introduction of IPPs in the country in 1994, electricity rates have steadily increased. The Water and Power Development Authority (WAPDA) is incurring enormous losses as a result of the liberalisation of the power generation sector, which has depleted its resources. According to one estimate, the utility is incurring losses of several billion rupees at present. One could always argue that the IPPs did not act alone in this regard. WAPDA has been in a deplorable state for many years and requires a significant overhaul to improve its fortunes. True, however, the IPPs alone cost WAPDA one billion dollars in capacity payments every year. Theoretically, this implies that WAPDA would still have to pay the IPPs for the availability of their capacity even if none of them produced a single unit of electricity.
Poor infrastructure, the disagreement between the IPPs and the government, and the negligence and fraudulent actions of the masses to steal power have brought Pakistan’s Power Sector to the verge of a meltdown.
The advent of public discussions on IPPs has raised numerous issues, including privatisation, tariff rates, government policies, the restructuring of the power sector, the use of local fuels, the effectiveness of the organisations involved, and the participation of multilateral organisations. Since 1994, the most visible consequence of allowing IPPs to operate in Pakistan has been an increase of 100 per cent in rupee terms in electricity tariffs.
While the HUBCO initiative was still in development, load shedding in the country increased. The government anticipated a huge increase in electricity demands and a power deficit of approximately 2,000 megawatts (GoP, 1994a). Recognising that it would be impossible to finance such large public projects, Pakistan established an energy task force in 1993 with the mandate to investigate Pakistan’s electricity demands through 2020 (Shah, 2002). The Task Force issued a report entitled “Report of the Prime Minister’s Energy Task Force.” The Government’s private power policy from 1994, titled “Policy framework and package of incentives for private sector power generation projects in Pakistan,” is based on its outcomes. The majority of the Task Force report’s recommendations were incorporated into the policy, including the tariff and fiscal incentives.
One must also remember the political backdrop in which all of this was happening. In the early 1990s, the new energy policy was implemented during a period of elevated political instability. In 1992, President Ghulam Ishaq Khan sacked the first Benazir Bhutto administration (elected in 1988). She was succeeded by Nawaz Sharif, who initiated a number of free market reforms and signed Pakistan’s first IPP contract with the Hub Power Company for the largest power sector initiative in 1992. It was the elected PPP government that signed numerous agreements with the IPPs. Since then each succeeding government has criticised the IPP agreements and deals signed by its predecessors, hinting at financial misconduct and mal intent. However, given the state of politics in Pakistan, many have grown accustomed to this behaviour.
Pakistan’s Power Policy of 1994 was intended to attract foreign investment. As this was the first time the government actively sought substantial private investment in the power sector, it promised investors extremely lucrative and generous incentives. Prospective investors were offered a tariff of 6.5 cents per kilowatt-hour under the policy, which determined electricity rates using the cost-plus method.
In addition to a high tariff rate, IPPs were permitted to utilise any technology other than major hydro projects on the Indus. They were also permitted to select any primary fuel. Presently, all IPPs are thermal power plants that utilise furnace oil, high-speed diesel (HSD) oil, or natural gas.
As of today, the capacity payment to Independent Power Producers (IPPs) for the fiscal year 2023 has reached a staggering Rs1.3 trillion. The main reasons quoted behind this mammoth amount are the dollar-to-rupee conversion rate, imported coal prices, RLNG, and KIBOR. Power theft has incurred a cost of Rs 467 billion and transmission and distribution losses were recorded at Rs520.3 billion in the year 2022. These numbers have continued to deteriorate over the years and without any reformative action in the way we conduct business, the losses will only continue to mount.
The poor infrastructure, the disagreement between the IPPs and the government, and the negligence and fraudulent actions of the masses to steal power all have brought Pakistan’s Power Sector to the verge of a meltdown. However, one thing is certain: this journey to the current disaster began in the 1990s.
The writer is Foreign Research Associate, Centre of Excellence, China Pakistan Economic Corridor, Islamabad.