Nov 11 - 17, 2002

The Government has announced the long awaited power policy 2002 anticipating a shortfall of over 5500 mega watt (MW) of electricity by 2009-10 which is proposed to be produced through indigenous resources like water, coal and gas.

Earlier the Economic Coordination Committee of the Cabinet (ECC) presided over by the Finance Minister Shaukat Aziz approved the new policy which is essentially a continuation of the previous policy of encouraging private investors to invest in this sector. However the main thrust of the new policy is its emphasis on investment projects which are based on indigenous resources of power generation namely hydro electricity and coal based power plant with almost one third of the cost of production then thermal power on which the previous policy had focused. The exploration of these resources will be encouraged by offering fiscal incentives such as exemption of sales tax on the purchase of plant and machinery imported or locally manufactured, waiver of turnover tax and income tax and exemption of withholding tax on imports and plants of machinery. As detailed policy documents has not yet been made public, it is not clear as to what will the duration of these exemptions. It has however, been made clear that these exemptions will not be available to oil fired projects. The power tariff for purchase of electricity from these new plants will be fixed on the basis of international bidding to keep it at the minimum.

Announcing the power policy, Secretary Water and Power, Mirza Hamid Hasan, said that the government has decided to allow arbitration under the local laws, keeping in view the bitter past experience. In the past we suffered in certain cases because our agreements provided for application of foreign laws in case of disputes, but now we have decided to follow Pakistani laws, however, arbitrator can be a foreigner if both parties agree, Mirza added.

He said that the new power policy has been formulated after evaluation of previous policies and consultations with the provincial governments and Water and Power Development Authority (Wapda). If 6000 MW units were not installed by IPPs the country would have perhaps been facing load shedding these days, he argued. But this time oil fired power plants have been discouraged, he added.

What clearly emerges from the new policy strategy is that fiscal policy instrument has been used to encourage power generation through indigenous resources. This appears most logical and sensible after the bitter experience of 1994 power generation policy which had heavily depended on expensive thermal power generation which ultimately strained heavily the country's foreign exchange reserves and WAPDA facing colossal losses despite exorbitant increase in its tariff to great resentment of the consumers. Trade & Industry also suffered because of the high cost of this vital import. It had, therefore become imperative to find much less costly and affordable sources of power generation which has rightly been identified on the new policy as hydro electricity coal and gas.

The policy aims at promotion of private investment in the power sector with a view to overcoming an estimated shortfall of 400 to 500 megawatt by the year 2005. The policy however, does not preclude investment by the public sector for the establishment of power generation plants which may be divested by the government in later years. The possibility of public private partnership in the establishment of new power plants has also not been ruled out. The strategy is quite understandable. In case, private investment does not respond adequately, the government would have no alternative but to make investment for the expansion of capacity in the power sector. However, since the programme of privatization of Wapda is already under way through establishment of 12 corporate companies for power generation and management of transmission and marketing, ultimately the energy sector, as recommended by the World Bank, is going to be all privately owned. In this context there will be little scope left for the public sector to continue operating in the long run.

While the decision to increase the country's power generation capacity through cheaper means appears most appropriate and timely it is equally important that the faults and flows in the distribution system are also effectively removed without which tariff could not be brought down to an affordable level. Though there has been some improvement since army induction in WAPDA, on line losses of the electricity still continue to be fairly high about 30 per cent according to an estimate. That is why that despite high tariff, the utility organizations are either in red or not making reasonable profit. Their operational efficiency should be improved to a level that they can make some reasonable profit to expand and at the same time provide some relief to the consumers.