Shehbaz Sharif made some honest appraisal of the current governance and economic challenges faced by his government at the World Economic Forum meeting held at Riyadh. This forum primarily provides opportunities to world leaders to build relationships in the world of politics and businesses and to showcase the perception and potential of the nation to form business alliances and mobilise foreign investments.
Sharif pointed out: Pakistan’s prime dilemma is its debt trap. He went on to elucidate that the power sector is utter shambles and there is an elite capture of the economy, obstructing adequate revenue generation coupled with leakages in the system. Apparently, that is why the country is off and on compelled to sign on the dotted lines with the international lenders, which leads to stagnation and supra inflation. All of this is indeed the truth.
While laying bare the key issues facing the nation would, in the first instance, most likely draw the sympathy of the country’s well-wishers to come forward and help the nation overcome myriad crises while putting at bay the investment in the country pending resolution of the country risk factors posed to their investments.
If one looks at the horrified key figures of the power sector, the Prime Minister is spot on: ’ the power sector is utter shambles’.
The circular debt stands at Rs 5.4 trillion. Of the total electricity generation cost of Rs 3.2 trillion, around Rs 2 trillion is the amount of capacity payments to Independent Power Producers (IPP).
The total installed power generation capacity, as of 31 January 2024, is 46,000 MW of which Thermal is 28,811 MW, Hydro 10,635 MW, Renewable 2,930 MW, and Nuclear 3,620 MW.
The demand is on a decline due to slowdown in economy and is at an average of somewhat over 15,000 MW with a peak of around 29,000 MW. The electricity evacuation and distribution capacity is 22,000 MW.
Pakistan’s average power generation costs rose by 33 percentage month-on-month (MoM) in January 2024 to Rs 15.50 per KWh from Rs 11.70 per KWh in December 2023 mainly due to the hefty increases in generation from higher-costing thermal plants.
This lay bare a few disturbing facts that much of the installed capacity shall remain idle in times to come, adding cost while capacity payments to IPPs shall continue to burden the system, whereas, the circular debt shall continue to rise, threatening the fiscal sustainability of the country. As a consequence, an incremental increase in electricity tariffs shall remain inevitable for an undefined period of time, suppressing growth and revenue generation capacity and limiting payback of debt.
Ironically, this dire situation is home-grown and self-inflicted which multiplies and gets worse each year.
The conduct of IPPs is one factor, which is significantly responsible for this dire situation and there is much of historical facts attached to it which could not be challenged nor corrected in all these years due to the water-tight power purchase agreements made with IPPs.
All of it is in the favour of the IPPs, inclusive of capacity payments to IPPs even when idle, indexation of payment against US dollar, fuel as pass-through, sovereign guarantee by the government of Pakistan and arbitration in case of dispute in the UK, Singapore or any other overseas destination.
Nearing the end of the 1980s, when the country’s annual energy demand was growing at a rate of 12 percentage, the supply of energy was a mere 7 percentage. The impediment caused by the lack of energy demanded by the industrial and agricultural sectors’ growing needs, led to the nation’s GDP suffering a loss of around dollar 1 billion.
To help foster the growth of the economy, the Government of Pakistan invited private sector companies to help increase the combined power capacity of the country. In 1991, the Hub Power Company (Hubco) Limited was established as the first independent power producer in Pakistan and continues to remain the largest energy producer of its kind in the country with a combined installed power generation capacity of 3,581 MW. The project was sponsored by World Bank/IFC.
Thereafter, 42 IPPs were established, mostly during the tenure of the multiple governments of Pakistan Muslim League-Nawaz (PML-N) and Pakistan People’s Party (PPP). The liberal terms offered to Hubco were set as a standard and offered to the subsequent thermal IPPs as well.
What was ignored in all these years was a match between supply and demand and the match between the generation capacity and its evacuation capacity. The fact that hydro power is a primary source of power generation blended with thermal power generation as a secondary source was also ignored.
Today’s adverse situation is an accumulation of the wrongs in all these years with no meaningful policy and strategy to correct them. The debt trap and the power sector, which are both interrelated, are the two foremost challenges for the incumbent government.
Copyright Business Recorder, 2024