AROOJ ASGHAR (arooj.asghar@crosby.com)
Jan 21 - 27, 2008

Pakistan's economy has made a remarkable turnaround in recent years after suffering from a session of recession, stagnation, nineties political turbulences and a series of economic sanctions that left the country on the verge of defaulting on its external debt obligations till 2001. Economy has grown at an average rate of almost 7.0% per annum during the last five years and despite all political turmoil, high oil prices, energy, cotton and wheat crisis, it is expected that Pakistan will have growth rate of around 6% this fiscal year. This brisk pace of expansion on sustained basis has enabled it to position itself as one of the fastest growing economies of Asian region. Because of strong economic growth of past few years has brought it to the attention of investors and leading companies of the world. Resultantly, both foreign and local investment is on its peak in these years. The first Para of "Forward" written by Mirza Hamid Hassan, Secretary Ministry of Water and Power, of 2002 power policy started with; quote "Electricity is the engine for the growth of the economy. Although the surplus power scenario of the late nineteen-nineties was harmful for the economy, but more damaging were the effects of the long load-shedding hours of the nineteen-eighties. The dark and frightening shadows of load-shedding have again started to loom large." Unquote.. Having said this, country needs energy in order to keep the momentum of economic growth which is insufficient since first half of 2005.

According to the Hydrocarbon Development Institute of Pakistan, Ministry of Petroleum and Natural Resources, Pakistan's installed capacity of electricity generation is 19,450 Megawatts (MW) where WAPDA's Hydel, WAPDA's Thermal, KESC Thermal, IPP Thermal and Nuclear is contributing 6,499 MW, 4,900MW, 1,756MW, 5,833, 462 MW respectively. Further, Hydel, Gas, Oil, Nuclear and Coal have a share of 33%, 44.1%, 20.2%, 2.7% and 0.1% of total installed capacity respectively. Due to inherent problem i.e. non-availability of water, WAPDA can't get electricity from hydro all the year therefore it has to rely on thermal power plants both its own and privately owned i.e. IPP. Interestingly country doesn't have any power plant based on wind and coal though coal's share in total generation is 0.1% which is mainly redundant Lakhra Coal Power Plant.

According to the 2002 famous PPIB Demand Vs Firm Supply graph, Demand curve crosses Firm Supply curve in mid 2005. After the miserable failure of 1998 power policy, GOP started working on next power policy in 2000 which eventually declared in 2002. Since then there were clear indications of the impending power crisis. The government was fully aware of the looming power shortage at the time of framing 2002 power policy. But it seems that there was no will to investigate and adopt a reasonable, cost-effective and lasting remedy.

Luckily Pakistan has Pakistan has two cheapest indigenous resources for power generation i.e. water and coal. But it is sheer bad luck that both of these resources have not been utilized effectively. It has a tremendous hydel potential of more than 40,000 MW. However, only 15% of the hydroelectric potential has been harnessed so far. The remaining untapped potential, if properly exploited, can effectively meet country's ever-increasing demand for electricity in a cost effective way. The estimated coal reserves are around 185,175 million tons (source: PPIB) which is one of the largest coal reserves of the world whereas their utilization for electricity generation is barely 1%. Sindh accounts for 99.7% of country's 185,175 million tons of coal deposits, of which 175,506 million tons are only located in Thar District.

Since first issuance in 1994 Ministry of Water and Power has re-issued policies in 1995, 1998 and 2002. 2002 power policy is the most successful power policy after 1994 whereas other two polices were total failures. Three out of four power policy announced by GOP are based on imported furnace oil and don't address the issues related to power generation from indigenous coal and hydropower. There is no doubt that this policy has attracted numerous investors but all in thermal power plants based on imported oil. The only Hydro related policy came in 1995 which couldn't attract investors. It wouldn't be wrong to say that 2002 power policy along with its first and second amendments is one of the most lucrative power policies of the world.

The rise in demand for electricity in Pakistan was "prosperity-driven", according to government sources. Besides average GDP growth rate of 7%, some 750,000 air conditioners had been installed in the last few years, apart from other electrical appliances, driving energy demand up. Some 13,000 villages had been electrified in one year, over 11,000 villages are electrifying under the Village Electrification Program and some 30,000 tube well connections have also been given in last year. Massive and rapid economic growth is the sole reason for this shortfall, according to government sources. In simple words, one fine day Pakistanis wake up in the morning and find economic turnaround resultantly no one got the opportunity to think, plan and execute any power project to match the economic growth. Yes, it's true that people accept lot of their explanations but please don't go to this extent. Now there is a huge mismatch between growth of economy and induction of new megawatts in the system. There was a time in 2002 to 2004 when it was planning to sell excess power to India but now it is looking at others to purchase. On this one can agree with government sources where they say "has made a difference".

Another reason for the present electricity crisis is that since long wrong numbers have been used for analysis and planning by WAPDA, PPIB, Ministries, Planning Commission and various analysts. Installed capacity of electricity generation is 19,450 MW but it doesn't mean that country is generating the same number of megawatts. There is hell of a difference between "installed" and "available" capacity. For example, Lakhra Coal is of around 100 MW whereas WAPDA can only get less than 10 MW from that. Therefore "installed" and "available" capacity for this plant would be 100 MW and 10 MW respectively. Because of this innocent human error, planning failed consequently people have to live without light for hours.

There are 16 IPPs' in the country including HUBCO and KEPCO with the installed capacity of electricity generation of 5,833 MW, according to PPIB. It is frustrating to note that all these MW have been injected under notorious 1994 power policy. The last injection to the national grid was 210 MW by Liberty Power in September 2001 after having financial closure in July 1996. Since then we have been meeting, drafting policies, cursing past regimes for their corruptions, painting our out of the world economic turn around (though recent events have washed that paint and ugly mask of economic mismanagement is hanging outside utility stores) and issuing public statements. Previous regime run the government on the name of good governance and responsibility and accountability is placed under good governance. Who is responsible for this energy crisis, any volunteer obviously no one, according to some leader, it will take centuries for Pakistan to reach that level where US and Europe have reached in term of human rights; off-course realization of human rights is the sense of responsibility and accountability.

Due to weak grid infrastructure and substantial theft of electricity, an average of 23.49% has been lost to the transmission and distribution network over the last 10 years. In order to reduce these losses, WAPDA through NTDC and DISCO have taken various steps including improving efficiency and infrastructure but a lot needs to be done. Nothing material has been done in introduction private sector in transmission and distribution system.

Ministry has under performed and is now under tremendous pressure from Government, people and investors which is forcing them to take defensive position while playing in the hands of prospective investors. Under the existing pricing mechanism, GOP protects the investor's returns from the changes in dollar value against rupee through indexation. The purpose of indexation is to adjust the price so that investor doesn't get hit of exchange rate fluctuation. Thus what ever be the dollar value, IPP will get that from WAPDA on monthly basis. Recently Economic Coordination Committee (ECC) made an amendment in 2002 power policy where US dollar indexation is allowed to the investor who has invested rupees in addition to allowing guaranteed 15% return on equity. Allowing dollar indexation on rupee investment is not only illogical but also unjustifiable. Such indexation was also allowed in 1994 power policy but one forgets that equity then injected were in US Dollars or in any other foreign currency. It would have been comparatively batter idea if rate of return be revised from 15% to 18% rather than multiplying their equity return at the cost of tax payers money.

There is another reason for load shading or less availability of electricity is the theft of electricity. According to an estimate, the annual loss of electricity amounts to at least Rs120 billion. In Karachi most of the distribution transformers are of above 200 KVA which technically support the theft commonly known as Kunda (Huck) system as compared to Lahore where most of the distribution transformers are of less than 100 KVA size. KESC is in the process of changing their transformer system in order to protect it from thieves. These corrective measures should have been taken much earlier.

Moreover, one of worst incidence in Pakistan's energy sector is the investigation conducted by Saif-Ur-Rahman on the name of accountability in 1998-99. Time, people and their role change over the time, now the same person is pursuing Chichuki Maliyan power plant with the help of Qatar Investment Authority while having 25% equity stake in the project and is asking for certain favors, concessions and agreements which many in WAPDA and PPIB believe are beyond the scope of power policy. This issue is not that he investigated but the irony is that no one was there to tell Saif Ur Rahman that accountants don't book kick backs and bribes in their books of accounts and fixed assets register. Number of IPPs did reduce their tariff by virtue of his investigations, but that was not due to any evidence of their financial fraud but because of certain commercial and contractual issues. This notorious investigation still haunts IPPs, WAPDA, NEPRA, PPIB and other stakeholders. There are many honest and sincere people in WAPDA, PPIB & NEPRA but now they are literally reluctant in taking any responsibility and prefer to delay instead of taking the lead.

Previous government prepared an energy conservation and load management plan which Caretaker government is also following. Under which shops in big cities are instructed to close by 7pm as businesses are closed by 7pm in many developed countries. The bottom line is to adopt things from developed countries where ever those suit the rulers. It is said that the main focus of the plan is conservation so that industrial users and hence the economy doesn't hurt. Government is also encouraging farmers to operate their tube wells during off peak hours or in the morning, not in the evening. Companies operating neon signs and lighted billboards have been asked to shut them down by 8pm. In addition to this, it has also been requested to the management of wedding halls to avoid excessive lighting in order to save energy. There is also a proposal on tables to declare two official weekly holidays but no decision has yet been taken in this regard. These all are short term solutions.

There are various projects which could be done by WAPDA but Ministry barred it from further investment because of its poor financial condition. One must not forget that one of the reasons for the bad financial position of WAPDA and KESC is the over staffing besides IPPs which are based on expensive imported oil. Various governments in past have given jobs to lot many people in both of these organizations for the sake of their publicity without considering its negative effect. There is a deliberate hype that companies can only run in private sector and running the business is not the job of government. Any company can have losses, even there are examples where IPP came under 1994 power policy are in miserable financial condition. Financial, technical and commercial performance is all about management and governance. If people are not handling affairs of WAPDA properly then it doesn't mean that sell the organization or stop it from further investment, the improvement can be made through change of management.

Country's energy mix is of weird character. On first look it seems to be a portfolio of an oil rich state but later one realizes that it is an agricultural country. Presently, 53% of the total generation is based on water and oil. It's nothing but lack of interest and planning that 33% of the total country's generation is dependent on nature i.e. rains and water whereas 20% is based on very expensive imported oil and 44% is based on rapidly depleting gas reserves. Almost all the hydro projects are essentially generating electricity as secondary means since they are built on water reservoirs and irrigation is their main purpose. Power sector experts believe that most of the country's hydropower is dependent on three factors, first the irrigation demand, second the water level in reservoirs and third the water flowing in rivers.

There are few run-of-river projects in pipeline in private sector which many in PPIB believes that will never come online. WAPDA had developed its plans prudently then may be it would have number of run of the river projects and the situation would have been different. Important thing is that the output of the run of river hydropower projects depends on the water flowing in the river only and small projects can be initiated. Ministry and WAPDA are not hesitant in awarding contracts to foreign consultants for conducting feasibility and technical studies but nothing material has yet come out of these studies.

More than 40,000 MW untapped hydropower can meet it's future demand of electricity but for the stability and the reliability of the power grid the hydropower needs back-up of an inexhaustible Thar coal. The coal is still the most widely used fuel for power generation. It should also make optimum use of its coal and hydropower for achieving the energy security, for overcoming power shortage, for stabilizing the price of electricity and for reducing the current account and trade deficits.

It appears that the government seems unable to meet the deadline for construction of five mega dams, including Diamer-Bhasha, Kalabagh, Akhori, Munda and Skardu Kurram Tungi by 2016. After completion of engineering design of Bhasha Dam, it will require at least eight years for the construction of this crucial water reservoir alone. The designing of Bhasha has not yet been completed and it was envisaged to be completed by March 2008, which is a pre-requisite for the multilateral institutions to provide multi-billion dollar funds for the construction of the dams. Whereas the Kalabagh Dam requires six years for completion but there is lack of consensus and no initiative is on the cards to move towards the desired direction. At least there is consensus on one issue i.e. technical and political constraints will delay rather shelf the construction of these five mega dams.

It is regrettable that it is using only 2% of the existing coal reserves. The discovery of sizable coal deposits in the province of Sindh is of significance. Since long an integrated coal based power plant is approved in the area. Needless to say, abundant supply of coal at home will greatly reduce pressure on imported oil. Thar coal project has certain issues which need special attention like availability of water, development of coal mines etc. In recent days a lot is being written and said on the NEPRA's upfront tariff for Thar project which is significantly out of context and people commenting on that know little about the inside out of the power sector and tariff mechanism. NEPRA has declared upfront tariff for oil and wind based projects before this but not a single investor accepted that. It doesn't mean that those tariff were wrong but basically these upfront tariffs are used to gauge the pocket of the Regulator and is considered as minimum price by the investor and EPC contractor where they start negotiating from above this price and EPC contractor adjust his price accordingly on the name of booming industry and shortage of supply of equipment. Its total misconception and propaganda that investor will not come for Thar project at 7 cents. The story goes like this, Investor conducts his own feasibility study and on that basis he works out a tariff which is negotiated with NEPRA. A simple question to Sindh government, can they guarantee that the investor will invest in Thar at 11 cents, provided NEPRA declares upfront tariff of 11 cents? Simple answer to this simple question is, "NO". Giving example of Shenhua of China and AES of USA is quite irrelevant. In the case of Shenhua, President Musharaf himself requested them to come back but they refused. Now kindly think for a second, did one think that it was a matter of half cents only. It is easy to blame WAPDA for not accommodating them on tariff whereas no one ever tried to figure out the exact reasons of investor's back out. Therefore, instead of making upfront tariff an issue, Government of Sindh and Pakistan should focus on the development of Thar coal mines. Moreover, there are so many other issues which will affect the tariff like the price of the coal, who will bear the mining cost, how mining cost will be built in tariff, cost of supplying water or taking coal to other location etc-NEPRA has done absolute correct decision by declaring upfront tariff in the range of 7 cents.

As of today, no coal based power project has started and no hydro based power projects have made financial closure. Only the low risk gas and fuel oil based thermal power projects achieved the financial closure. Although water as an input for hydropower is virtually free and coal is the cheapest fossil fuel, the green field coal and hydropower projects require more investment per MW than the gas and fuel oil-based power projects. The payback period of capital cost of such projects would be 15/20 years but thereafter these will be virtually free whereas imported oil based plants remain expensive even after paying off debt.

Last but not the least, blaming government for this shortage is not entirely correct. Investors are also putting their share in this crisis. Presently Pakistan's power sector is more like a cotton and yarn market. New local players have entered in the market and are exploiting the situation. They first get the tariff determination from NEPRA after few months file a revision petition while threatening to discard the project and a new trend where tariff revision petitions are being filed before Authority even after financial closure. It's unfair to blame NEPRA alone, what they can do in this situation where they are under pressure from all sides and no one trusts them. There was a time when NEPRA delayed the issues but now things have changed completely.

In present age, without sufficient energy the wheel can't run on roads, industry and agriculture can't sustain, hospitals and operation theatres can't function, schools and laboratories can't work and public and private sector businesses can't operate. The situation demands a collective effort on the part of all stakeholders of society, including policy and decision makers, scientists and academia, industrialists and entrepreneurs and ordinary citizens. The worst is yet to come, in winter it has 8 hours load shading and what will happen in summer when due to previous regimes robust economic growth lot many people will use air conditioners and other electric equipment's. Until the new power generation units come in line, the only way to mitigate the problem of power shortages remains conservation. On fresh capacity building side, Pakistan's first choice should be hydro projects even small dams and run of river projects and then indigenous coal for power production. It is clear that current alarming power crisis is set to continue in the coming years. Therefore it will be a sensible move to allow WAPDA to construct its own power plants, develop Thar coal mines, and start constructing small dams without wasting a single day. Otherwise forget the economic prosperity, and foreign investment.