Pakistan’s Energy Sector: Groundhog Day for USA?

This is a joint post with Wren Elhai.As the United States tries to contribute to a solution to Pakistan’s energy crisis, it’s worth looking at what others have done. Not one of the hurdles to a sustainable energy policy is new—and in fact other donors have spent years engaging in this arena. What is new is a sense of urgency within Pakistan, as street protests erupt over rolling blackouts and Prime Minister Gilani calls resolving the energy shortage his top priority.  As Nancy Birdsall wrote in her third open letter to Ambassador Holbrooke, now is an opportune moment to put Pakistan’s energy sector on a solid foundation. As the administration pours in U.S. aid dollars and engages in dialogue with Pakistani policymakers, there is much that the team can learn from the failures of past attempts to reform Pakistan’s energy sector.We looked back through World Bank and ADB project documents, where the gory details of their (often unsuccessful) efforts are laid out in black and white.  Reading through these documents is an exercise in déjà vu.  Time and again, the documents cite the same problems, the donors recommend the same solutions, the government of Pakistan promises to implement the same reform, the government breaks (and donors lament) the same promises.  And the cycle repeats.  (To experience this “groundhog day” dynamic for yourself, see selected quotes in our background note on multilateral donors’ experience in Pakistan).Take for instance the critical issue of pricing reform.  Over and over, donors have stressed the need for rationalization of Pakistan’s energy tariff prices.  The Government of Pakistan’s long-standing policy of heavily subsidizing the price that users pay for electricity has proven financially ruinous to the sector and has thwarted greatly-needed private investment. Very roughly, what happens is this: users pay too little (compared to the actual cost) for their electricity usage.  The distribution companies that supply that power are thus unable to pay their bills, including to the central power authority and to power producers and oil importers and refiners. The total debt overhang makes it impossible to buy sufficient fuel oil to run thermal power plants and to attract investment to build new generating capacity. Today, the Government of Pakistan reports nearly $2 billion in unpaid debts within the power sector. Meanwhile, the same users who pay too little are also getting far too little power as brown-outs persist.To close this yawning gap, donors for years have urged the Government of Pakistan to finally reduce the price subsidies on electricity.  Time and again, donor documents cite Government of Pakistan pledges to do just that.  The problem, though, is that the while the solution is well known to Pakistani policymakers, implementing it is politically very difficult. So despite all of the lip service to reform, the government of Pakistan has simply not been able to muster the political will to follow through and raise the tariff rates to a sufficient level—especially when consumers feel they aren’t getting service that warrants paying more (another vicious cycle).Over the years, the ADB and the World Bank have made progress in (slowly and painfully) beginning to privatize Pakistan’s major state owned power sector companies and in creating an independent regulatory body (unfortunately often ignored) responsible for setting tariff levels. However, for every victory, there are a handful of defeats to point to.  Read our background note for several specific examples—here is just one short excerpt:

In the early 1990s, the World Bank tried an innovative approach to attract private investment in Pakistan’s power sector. (See here for the full case study). WAPDA (Pakistan’s water and power authority) agreed to be unbundled and eventually privatized, and massive (greater than $1 billion) private power projects were established. The first of these projects – a $1.62 billion power project – won an award for “Deal of the Decade.” The privatization strategy was deemed the “best energy policy in the whole world” by the then US Secretary of Energy. The success was clear: Pakistan was able to attract significant amounts of private capital quickly and efficiently. (This was due in part to incentives: a bulk tariff ceiling was established, a “one stop shop” for investors, fiscal incentives, etc). By 1998, just four years later, the Government of Pakistan was threatening to terminate nearly a dozen independent private power projects and the program was in shambles.…Lessons identified by the World Bank from its privatization program in the 1990s:(a) The failure of the Government of Pakistan to pursue needed policy reforms and structural changes undermined the program.(b) The World Bank concluded in 2005 that: “there is a strong consensus that private investment is not a substitute for reform, and that significant private investment in generation should not take place in front of reforms which at a minimum address efficiency and tariff policies.”

In 2006, the ADB reached a similar conclusion when examining lessons from its experience encouraging reforms in Pakistan’s energy sector over the past 15 years:

“The reforms, while complex, do not require such long periods to complete.  The means to reduce technical losses and improve financial performances are well understood.  Hence, the outcomes must be viewed more as a failure of implementation of government policy than of ADB strategy….It is clear that the commitment to reform and performance improvement of those working in the power sector has been neither complete nor consistent.”

Is the United States destined to repeat the cycle of dashed hopes and broken promises? We hope this time will be different—that mounting internal pressure from frustrated Pakistani citizens might finally create the political will for the government of Pakistan to act.For more ideas for how the United States might support a lasting fix to Pakistan’s energy woes, please see Nancy’s third letter to Ambassador Holbrooke.