Comment By Ali Gibran

For all those who seek light in these dark times, it is time for a little introspection. The source of modern light - electricity - is becoming an increasingly rare commodity. A myriad of explanations for this shortage, ranging from circular debt to policy issues and from terrorism to political conspiracy theories, are doing rounds. Ordinary mortals are indulging in them according to their taste, inclination or imagination. Nonetheless, the once-controversial Independent Power Producers (IPPs) remain pivotal to present energy supplies of the country.

The Hub power project initiated in 1988 set the ground work for establishing the viability of private finance for medium and large power generation projects in Pakistan and other developing countries. This led to formulation of Pakistan Private Power Policy of 1994 which initiated development of several IPP projects. The favorable response at that time by international developers and financiers led the US Secretary of Energy to describe this policy as "the best energy policy in the whole world."

During the initial years, there was a general perception of excessive corruption and unfair tariffs, and the IPPs came under intense scrutiny by the government that followed. Some contracts were terminated and others were renegotiated. These actions damaged the government's credibility in the eyes of international private sector investors.

But eventually, the policy was embraced. As many as 27 IPPs were commissioned with net dependable capacity of approximately 6,000 megawatts, and another 26 will be commissioned in the next seven years with the net dependable capacity of around 7,000 megawatts. All the presently functioning IPPs utilize hydrocarbons for thermal processes to generate electricity. But by 2019, about 13 of the upcoming 26 IPP projects - with the total capacity of a little over 4,000 megawatts - will utilize hydropower for electricity generation.

The development of IPPs resulted in some fundamental changes in our energy sector. As a direct consequence for accommodating IPPs, the Water and Power Development Authority, which had a monopoly of electricity generation and distribution, was unbundled. It resulted in the creation of Pakistan Electric Power Company, National Distribution and Supply Company, three generation companies and eight distribution companies. The ultimate aim of this exercise remains privatization of these companies and liberalization of the market to institute a system of competition.

A discussion paper published in 2005 through The World Bank Group talks about the rise of IPPs in Pakistan and more importantly the lessons learnt from the experiences of Pakistan's private power policy. Although the policy has seen subsequent revisions, some of the issues mentioned in the paper still appear to be relevant.

The report states that the "expected efficiency improvements, including restoring health of WAPDA's successor companies failed to materialize even today," and that "investment in upgrading the transmission and distribution system" was not always appropriate. It points toward the lack of effective sector reforms and maintains that that is the chief impediment in attracting fresh private capital in the power sector.

It also asserts that there was a lack of transparency in the initial selection of the projects. The approval of too many projects simultaneously on the basis of bulk tariff ceiling rather than competitive bidding was also detrimental to the overall development of the power sector.

The discussion highlights the importance of an efficient fuel supply policy and the links the competitiveness of an IPP to its ability to procure fuel from domestic and foreign markets. The paper also warns about the risks of excessive foreign investment especially in relation to contingent liabilities and recommends a central mechanism to be created, possibly at the Central Bank to have a proper monitoring system.

Although the report was published seven years ago, some of its findings still remain unaddressed. Our failure to properly institute the sector reforms, our inability to improve the efficiency of distribution companies, and a lack of a robust fuel supply policy have all contributed to the current electricity crisis.

Although there are a number of new IPPs in the pipeline, the combined output of all these projects may not be enough to cater for the projected demand. The problem is not only of supply and demand, but goes much deeper. If we enable a competitive market for private investment in the power sector, the results may reflect the successes of the telecom sector for the consumers and the corporations alike.

The author is an innovator based in Lahore. He studied Engineering Management with a specialization in Technological Entrepreneurship from North Eastern University, and can be reached at gibran@alumni.neu.edu

Friday Times