A response to an article by Sartaj Aziz
Mr Sartaj Aziz, senior vice president of PML-N, in his article in this newspaper on April 23, has rightly argued that generation capacity is not the cause of the present energy crisis and his explanation of the circular debt is eminently reasonable. However, his position on the 1994 energy policy is untenable. In particular, the figures that he has mentioned on hydel-thermal mix in 1994 as part of his critique of the 1994 policy are incorrect.
The 1994 power policy was framed in the backdrop of power shortages which date back to 1982. In 1985, the government of Pakistan announced an initiative to encourage private participation in power generation which led to the development of Hub Power Project in 1987. Construction of the power station began in December 1992, financial close was achieved in January 1995, and the project started operation in 1996. The experience from Hub Power Project cleared the way for attracting more private investment in the power sector.
In 1994, electricity shortage was 2000 MW during peak demand, and electricity was available to only 40 percent of the population. The 1994 power policy projected an eight percent annual increase in energy demand over the next 25 years.
A solution to the power shortage which addressed the problem in 2-3 years had to rely on thermal energy. A solution based on hydel power, which involved greater capital cost but lower operating cost, would have taken 7-10 years, at least.
The fast-track solution entailed higher energy cost but it had to be seen in the context of the loss that the economy was suffering in terms of loss of economic growth because of energy shortage. Although the 1994 energy policy invited investment in the power sector and not specifically in thermal power, the investments that materialised in 3-4 years were thermal-based.
Mr Sartaj Aziz claims that in 1994, out of the total installed capacity of 11000 MW, 60 percent was hydel and 40 percent was thermal, and in the next few years this mix was reversed from 60:40 to 30:70. This is not correct. The share of hydel-power in 1994 was 42 percent and not 60 percent.
The statement that the additional thermal power capacity installed under the 1994 power policy agreements was about 6000 MW is also not correct. If Hub power, which is being claimed as a project of the first PML-N government, is excluded, the actual installed capacity under the 1994 power policy was 3000 MW and not 6000 MW as stated by Julia Fraser in Lessons from the Independent Private Power Experience in Pakistan, Energy and Mining Sector Board Discussion Paper No 14, The World Bank, May 2005.
The share of thermal power in hydel-thermal mix in 1994 was 58 percent. If we add the Hub power capacity (1292 MW) the share of thermal power increases to 62 percent. The Ghazi Barotha hydel power project, whose PC-I was approved in 1994 and became operational in 2003 and 2004, added 1450 MW of generation capacity. The short-term impact of the 1994 policy (before the Ghazi Barotha became operational) was to increase thermal share in the hydel-thermal mix from 62 percent to 70 percent. The long-term impact of the 1994 policy on hydel-thermal mix (taking account of Ghazi Barotha) was a change of thermal share from 62 percent to 64 percent. Therefore, the impact of the 1994 policy, when complementary public sector investment in hydel power is taken into account, is not very dramatic.
The 1994 policy served the purpose of addressing short-term energy shortages but more power was contracted than the economy could absorb in the short term, especially because of anemic growth in that period. The ‘dazzling speed’ that Mr Sartaj Aziz has referred to and the lack of transparency in awarding contracts had added to the perception of corruption. Notwithstanding these perceptions, prices offered under the 1994 policy were comparable with those offered by Indonesia, Philippines and India at that time, as Julia Fraser made it clear in the same paper.
The same paper reports that in July 1998, the PML-N government served Notices of Intent to Terminate to seven IPPs on grounds of corruption and to two on technical grounds. Evidence on corruption charges were not presented in court and Hubco was constrained by courts to seek international arbitration. Eventually a number of IPPs agreed to tariff reductions.
After many years of slow growth, the economy picked up in 2003-04 and for the next four years the growth rate was between 5.8 percent and 9 percent. This growth rate would have been impossible without the availability of electricity that was made possible in large part by the 1994 energy policy, and contributed cumulatively more than $44 billion to the economy during the four-year period (2004-2007) over and above what would have been possible at the 3.4 percent growth rate in the previous four years of the Musharraf government.
The high growth rate during this period had started to create shortages and new thermal projects were approved during this period and started operations during the tenure of the last PPP government. A number of small hydro plants were commissioned and some large hydro power plants are under construction including the Neelum-Jhelum hydro project with 969 MW capacity, first approved in 1989, on which construction started in 2008 and is expected to be completed in 2016.
The hydel-thermal mix in 2012 was 30:70. New thermal power projects during the PML-Q government were approved at the time when the economy was growing strongly and electricity shortages had reappeared. The commissioning of these projects coincided with major escalation of international oil prices. The government policy of not passing the higher cost to the consumers and keeping tariffs low creates excess demand. Meeting the entire excess demand would involve unacceptable fiscal burden. The extent to which the government is willing to bear the subsidy burden determines the extent of load shedding.
The tariff subsidy burden is made worse because of poor recovery of energy bills, power theft and pilferage, relief provided to consumers by courts, and non-payment of dues by provincial governments’ departments and agencies, all of which add to the problem of circular debt and load shedding.
Even though load shedding can be addressed to a considerable extent if consumer tariffs reflect the higher cost of generation, but this would involve rationing through the price mechanism rather than quantity rationing through load shedding as is being done at present. Higher tariffs affect the competitiveness of our industry, not to mention the greater incidence of power theft and other corrupt practices. Therefore, the search for cheaper forms of energy has to be a major priority. Generation of electricity through hydro power is cheaper but project engineering and social, environmental and political dimensions are far more complex than those of thermal power. Other power options based on wind and solar energy are in their infancy in Pakistan. Thermal energy based on Thar coal reserves is also at an exploratory stage. Let’s hope the new governments will focus on indigenous and renewable resources for power generation, which have become economically far more viable because of major escalation in international oil prices since 2008.
Reehana Raza is the CEO of Institute of Development and Economic Alternatives (IDEAS). Anjum Nasim is a senior research fellow at IDEAS.