POWER SECTOR AND THE ROLE OF IPP'S

IPP's can play a much wider role and can contribute much for Pakistan's future

Apr 30 - May 06, 2001

The past decade and a half has seen an unprecedented growth of population, per capita income and rapid urbanization, leading to an intensive demand for utilities. The availability of adequate power, in particular, which keeps a nation fired up, has merged as the most serious bottleneck constraining long-term growth and development.

Pakistan, like most developing countries, faces a shortfall of power because of the excess of industrial and residential demand over the existing power-generating capacities. In fact, in the composition of end use sectors, the share of industry in Pakistan stands as high as 40.47 per cent compared to over 37 per cent by other South Asian countries. Furthermore estimates suggest that the average demand for power in South Asia, as a whole has increased at an annual rate of 9 per cent, doubling its magnitude every eight years.

In such a scenario, Pakistan is fortunate to have IPP's or Independent Power Producers like HUBCO, who since 1997, have added 2581 MW to Pakistan's thermal power generation capacity. Without their presence, Pakistan's thermal power would have been in the doldrums. The country's demand for power increases by an estimated 8% annually. Statistics reveal that electricity is available to only 40% of the population and that the per capita consumption per annum is 300 Kwh/year. Considering the increase in the rate of population, a minimum additional requirement of 5000 MW by the year 2018, is needed in order to prevent load shedding.

However, most citizens are likely to scoff at this prediction. Unfortunately, the citizens of Pakistan are no strangers to this phenomena. The rationing of electricity to metropolitan and industrial areas, or load shedding has been going on as early as the 1980s. This has given rise to social costs (the frustration of house-hold and industrial users) as well as economic costs in terms of lost manufacturing output and the loss to GDP. In 2001, it was estimated that the loss of industrial output due to load shedding alone cost Pakistan Rs 250 billion a year.

Pakistan's power generation and supply has long remained in a state of monopoly. Respective governments have owned, operated and regulated the power entities. This resulted in overlapping, undemarcated responsibilities and a lack of accountability in terms of operational performance, service standards and codes. In addition, they have suffered from high system losses and low collection from the consumers, which have ultimately made these entities both defaulters and sick units. The two main state-owned utilities WAPDA and KESC are plagued by these very problems and ever-mounting financial losses which are seemingly uncontrollable.

The government of Pakistan had long realized that poor performance of state-owned monopolies, combined with the rapid globalization of world economies required desperate measures. However, removing the power shortages required a large amount of capital and strong incentives that were beyond the resources and institutional capabilities of the public sector of Pakistan.

Steps were needed to promote competition, encourage the private sector including foreign investment in infrastructure. Thus, the period between 1994 to 1996 saw Pakistan making a move to rectify power shortages by encouraging domestic and foreign private investors to participate in the generation of electricity. The highlight of this period was the Power Policy introduced in 1994. It was well received by foreign investors, mostly from the US and UK and marked the beginning of the era of the IPP's, in Pakistan.

The effect which the presence of IPP's had on the local energy scene is evident from the figures available.

Installed Capacity (MW) of Electricity as on 30th June, 2000

Type

1995

1996

1997

1998

1999

2000

Thermal (WAPDA)

5399

6268

5102

5082

5131

5131

Thermal (KESC)

1738

1738

1738

1735

1690

1756

Thermal IPP's

. .

3015

3879

3879

5549

Total

7137

8006

9855

10696

10700

12436

Source: Pakistan Energy Yearbook, 2000

By 1997, when the IPP's started functioning, Pakistan's installed capacity had improved by 38% or 2718 MW as compared to 1995. Five years later in 2000, the installed capacity had risen to 12436 MW, or an impressive 74 per cent increase, as compared to 1995, which is an achievement by any standards.

The most notable addition to Pakistan's growing family of IPP's as HUBCO. Today, HUBCO is the largest private sector power project of Pakistan. It is producing 1200 MW of electricity and is situated some 60 km from Karachi.

The presence of IPP's has been a God send for a developing nation like Pakistan. The current year 2001 drives home this point rather forcefully. Pakistan has been hit by a drought this year, whose economic cost was estimated between US$ 1-3 billion. The lack of water, brought on by the drought, severely undermined Pakistan's growth rate and GDP targets. It also reduced Pakistan's hydel generating capacity. Under normal circumstances, Pakistan generates 28% of its total electricity through hydel sources. But this year, the share was drastically cut as water levels in dams fell precariously and rivers ran dry.

In such a scenario, the IPP's have borne the burden of providing the electricity through thermal power generation and have kept the wheels of the economy turning. In the absence of the IPP's, Pakistan's thermal power capacity would still have been stunted at the 1996 level of 8006 MW. Clearly this level would have been grossly insufficient to meet the country's current power needs.

HUBCO's case must be mentioned here again. The national grid WAPDA is currently taking around 1200 MW from HUBCO. Without HUBCO's contribution, it would have been unable to meet the surge in demand brought by the onslaught of the summer season. In the past, the two were involved in a long drawn out feud but December 2000 saw the parties settle their differences. They are now working together with the government for the progress of the nation's energy sector.

Despite the fact that we owe much to the IPP's and their contribution to the country's power capacity, we cannot ignore the fact that the power sector of Pakistan is plagued by a plethora of problems. These include persistent spells of load shedding, poor service of WAPDA and KESC, high T&D losses and their ever mounting financial losses. In addition, to this we are faced with a situation where over 60% of the population is still without access to electricity.

Pakistan needs to clearly take stock and concrete steps are needed to pull the power sector out of its current state of decay. Clearly, the IPP's can play a much wider role in this regard and can contribute much for Pakistan's future. Time has proven that only the private sector can lead the country to light. A report