Irresponsible actions could discourage investment in power sector

Pakistan’s power sector, pivotal for the country’s socioeconomic development, is currently grappling with a dire need for substantial investments, as outlined in the latest Indicative Generation Capacity Expansion Plan 2024-2034 (IGCEP 24-34) and Transmission System Expansion Plan 2024-34 (TSEP 24-34). These plans call for an investment of at least 80.7 billion USD over the next decade to address the growing electricity demand.

Recognizing the importance of attracting foreign direct investment to support its economic sectors, notably the power sector, Pakistan enacted the Foreign Investment (Promotion and Protection) Act 2022 whic

h offers substantial incentives such as exemptions from income tax, advance tax, and withholding tax—measures that many countries would hesitate to adopt. However, recent contradictory actions from government representatives jeopardize this crucial objective by demonstrating a lack of alignment between policy and practice.

For instance, the Minister for Energy, Planning, and Development of Sindh, Syed Nasir Hussain Shah, recently made headlines by demanding that the Karachi-based private power utility, K-Electric, absorb consumer losses for public good.

Similarly, a video of Ali Amin Gandapur, Chief Minister of Khyber Pakhtunkhwa, surfaced a few weeks back showing the politician storming a grid station in Dera Ismail Khan under PESCO’s jurisdiction to restore supply from a high loss feeder. The KPK CM brazenly imposed his own outage plan directing the grid and law enforcement personnel to denounce the technical instructions and follow his instead.

This approach to addressing sectoral challenges through impulsive actions and ad-hoc interventions is severely problematic, particularly considering the federal minister’s announcement that state-owned distribution companies (DISCOs) will be privatized within the next 18 months. As obvious, any investor, whether local or international, would seek stability and predictability in their investments. Thus, erratic actions and statements from government officials could deter potential investors, undermining the broader objective of attracting robust and sustainable investment into the sector.

Furthermore, one must understand that the core issue exacerbating the strain within Pakistan’s power sector is not the provision of electricity itself, rather the escalating tariffs that impose significant burdens on both consumers and utilities. By focusing solely on demanding that distribution companies absorb these increasing costs, policymakers overlook the crucial need for substantive reforms that address tari

ff rationalization and financial sustainability. A reductive example of this is someone living in an area with 6-7 hours of load shedding still facing high bills for the limited power they do receive. If the current situation is unsustainable, increasing supply without addressing tariff affordability and system inefficiencies will only worsen the financial strain on consumers, power utilities and the government.

Currently, Pakistan power sector’s circular debt has reached a staggering Rs2.64 trillion, according to the most rec

ent data. Major factors contributing to its escalation include inadequate recoveries, widespread theft, and substantial system losses, among others. A significant driver of this mounting debt is the continued provision of electricity by power distribution companies in areas with low recovery rates, resulting in considerable financial losses. Consequently, mandating power distribution companies to continue delivering electricity while enduring such losses will only exacerbate the problem, further inflating the debt and undermining the financial stability of the sector.

To retain and attract investment in the power sector, government officials must curb the practice of imposing sudden and arbitrary demands and align actions with a clear and consistent economic strategy. It is also essential to comprehend that investments are crucial for growth and are not acts for charity.

Pakistan must establish a stable and predictable investment environment, prioritize substantive reforms over temporary fixes, and ensure that its policies protect both consumer interests and investor returns. Failure to do so risks will further plunge the power sector deeper into financial turmoil, exacerbating the circular debt crisis and threatening the overall stability of the system.

Copyright Business Recorder, 2024