Power crisis and policy failures

Posted on August 29, 2011. Filed under: Energy crisis, Pakistan |

IN SPITE of the present government’s many promises, power shortages continue to take a heavy toll on the country’s economy. Why has this problem proven so hard to tackle for the policymakers in Islamabad?

The simple answer to the question is that an effort is still to be made to find a solution that addresses all aspects of the problem: supply and demand sides of the equation, the institutional imperatives for taking care of the shortages, and planning the future so that this problem does not reappear again.

It is not that the present government in particular has failed to develop a coherent strategy for this important sector of the economy. This has happened many times in the past. Pakistan has experienced shortages several times before. Each time the government response was different based on whatever was the thinking at that time not only in Pakistan but also among development experts around the world.

Several aid providing agencies have had a profound impact on the development of the power sector in the country. This process of evolving an approach as the country went from crisis to crisis means the absence of coherence in the way the governments at various times have dealt with the subject of electric power.

The Lahore-based Institute of Public Policy (IPP), carried out a survey of 65 industrial firms operating in various sectors of the economy to develop a better understanding of how electric power shortages were affecting the economy and how various firms were dealing with the problem.

The institute found that power outages averaged at four hours and 36 minutes for the firms surveyed. Those that were affected the most did not need continuous operation while those that could not interrupt the production cycle suffered the least amount of outages. This suggests that an effort was made by the distribution companies to ration the supply of power taking into account needs of the end users.

There were several different types of responses to the outages by the firms surveyed. Some 75 per cent of the sampled firms went for self-generation, not confident that power shortage was a short-term phenomenon. This was a costly solution. The average cost of selfgeneration is estimated at two and a half times the cost of power obtained from the distribution companies. The firms not involved in continuous production made adjustments by changing the hours of operation.

On the whole, the IPP concluded that a significant proportion of the potential losses were recovered through self-generation or adjustments in operations. “For the sample as a whole, the extent of recovery of output is approximately 60 per cent.

Highest recovery rates were observed in the industries which have acquired self-generation capabilities at 85 per cent. Units which are unable to acquire generators lose about 73 per cent of the output.” Extrapolating from the results provided by the sample of industrial units surveyed, the IPP estimated that “the total cost to the economy of power loadshedding in the industrial sector…was equivalent to two per cent of the gross domestic product.” The cost to the economy of the shortages of this important input was because of policy lapses. Those responsible for making public policy had not given enough attention to ensure the regular supply of power by making sufficient investments. For instance, Pakistan has not been able to make up its mind as to which source of power it should depend upon.

Hydro electricity would be far the cheapest source and was the focus of attention by the government at one time. Two massive dams were built, one at Mangla (1,000 MW, inceasing to 1,666 MW after the dam’s height is raised) on the Jhelum and the other at Tarbela (3,478 MW), on the Indus almost half a century ago.

The only significant addition since then was with the construction of the Ghazi Baroda power station (1,450 MW). For political reasons various governments have not been able to proceed with some other mega projects such as the dam and power station at Kalabagh and also on the Indus.

When in the 1990s, the government of the day invited private capital into the generation part of the power sector, it allowed those interested to use natural gas as the fuel. The conventional wisdom at that time was that the country had enough gas available to supply the power stations with the amounts needed. That did not turn out to be the case.

The governments have also ignored the impact a rational price regime for electricity would have had on total demand and its distribution among different users. Demand increased significantly in the 2000s. The rate of growth was estimated at seven per cent a year compared to four per cent in the 1990s and 11 per cent in the 1980s. The price regime subsidised household consumption at the expense of industry and the modern service sectors. Accordingly, the share of household demand in the last decade doubled from 23 per cent of the total in 1980-81 to 46 per cent in 2007-08.

The government headed by President Pervez Musharraf miscalculated the demandelasticity for power, assuming that the high rate of growth in the first few years of its tenure would not translate into an even larger rate of increase in the demand for electricity. No significant new investments were made to generate additional power and the supply-demand gap continued to widen. The share of public sector expenditure on the power sector which averaged about 28 per cent of the total in the two decades before the Musharraf period declined to less than three per cent while he was in office.

Then there was confusion on the institutional side. In the late 1990s, the World Bank used its lending programme of several hundred million dollars for the power sector to persuade the government to reorganise the Water and Power and Development Authority. According to the plan drawn up by the Bank and accepted by Pakistan, the authority was to be split up into several smaller units responsible separately for hydro-power, thermal power, transmission and distribution.

This structure reflected the thinking in development circles at that time according to which even natural monopolies such as the entities responsible for power distribution were to be run as for-profit corporate bodies.

A new regulatory agency looking after all these new organisations and also fixing tariffs at various levels – from generation to transmission, from transmission to distribution and from distribution to final consumers – was set up. This restructuring has been done in a halfhearted way. The result is considerable institutional confusion. In the meanwhile some experts at the World Bank have begun to think that integrated systems as Wapda was at one point may not, after all, be a bad way of running the power sector.

The conclusion one should reach from this quick overview is that the power sector development in Pakistan has suffered from government neglect.

This also happened in several other sectors in which shortages critical inputs for the economy have appeared. Islamabad should take a careful look at the current situation and put in place a policy framework that would be consistent with the demands of a growing economy and would also take cognisance of the resources available in the country for power generation.

Dawn.com

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