Pakistan's Energy Insecurity
Anatomy of a Crisis and How to Move Forward

Interview with Michael Kugelman
July 24, 2015

According to the World Bank, one in three people in Pakistan does not have access to electricity. The shortcomings of the country’s energy system have led to profoundly negative impacts on public health and well-being, as well as to a rise in energy-related civil unrest. With energy demand expected to quadruple over the next twenty years, numerous specialists have argued that Pakistan must take action now to effectively strengthen its energy security outlook. However, the country continues to face ongoing questions about how to muster the political will necessary to move forward.

To better understand these issues, NBR spoke with Michael Kugelman, Senior Associate for South Asia at the Wilson Center and editor of a newly released study Pakistan’s Interminable Energy Crisis: Is There Any Way Out? In this interview, he discusses how Pakistan’s energy problems have become a full-scale crisis and proposes near- and long-term reform strategies.

What is the nature and origin of Pakistan’s energy crisis?

This is a far-reaching crisis that affects millions of people on multiple levels. Above all, it has major economic implications: power shortages have cost Pakistan up to 4% of GDP in recent years, hundreds of factories have shut down because they lack power, and some Western companies have pulled out of Pakistan because of this electricity scarcity. Many Pakistanis have lost their jobs because of power outages. The crisis also aggravates a volatile security situation because separatist insurgents in Baluchistan, along with the Taliban, regularly attack electricity infrastructure and plunge large areas of the country into darkness.

Society on the whole is affected as well: Gas shortages have left many people unable to cook, while some hospitals have had to cut back on services for the sick due to insufficient power. In June 2015, we saw all too tragically the direct and deleterious impact that the crisis has on the masses. Over just a few days, more than 1,200 people died in a heatwave. Many became sick after suffering inside homes that didn’t have electricity and therefore couldn’t operate fans or air conditioning. Given this sad state of affairs, it is not surprising at all that people regularly stage protests against Pakistan’s government and its electricity utilities. Some of these demonstrations are quite violent, with attacks on the homes and offices of politicians.

What makes this all so troubling is that it’s not shortages of energy alone that define the crisis—shortages of governance of energy are really what has gotten Pakistan into this mess. Authorities simply don’t manage existing resources well. They have failed to address transmission and distribution (T&D) losses—which often approach 20%—and to repair dilapidated infrastructure. Islamabad has also failed to deal with the financial debt encumbering the energy sector, which is compounded by an unsustainable energy mix that emphasizes expensive hydrocarbon imports.

It may seem that Pakistan’s energy crisis has been endless, but actually the country enjoyed a relatively high level of energy security for its first few decades of existence. Demand was relatively low because Pakistan was a very rural country at the time. Most people were not on the grid and instead depended on biomass and other traditional, noncommercial energy sources. Most baseload energy was sourced from hydroelectric dams, particularly Tarbela Dam—the largest earth-filled dam in the world—which was launched in the 1970s.

However, rapid population growth and urbanization sent demand soaring in the 1980s and especially the 1990s. This was all compounded by the fact that energy was used wastefully. Tarbela and other energy infrastructure started to show their age, and repairs were not made successfully. Poor maintenance led to leaks and other losses. Pakistan averted a disaster in the 1990s by aggressively courting private energy investors, which resulted in about 4,500 megawatts (MW) of generation being added to the grid.

These investments, however, were built on flawed pricing models, and this is where the origins of the current crisis can be traced. Pakistan, in its zeal to attract investors, guaranteed financiers a fixed return on investments regardless of project performance. The result was shoddily constructed facilities that used expensive and inefficient technology. Energy costs eventually rose, and, as a result, the stopgap measure of rapidly developing private power projects failed. Yet demand continued to rise as Pakistan’s economy and population grew, as urbanization intensified, and as existing supplies continued to be managed poorly. This series of events has brought us to where we are today.

As part of a strategy to address the energy crisis, the Pakistan Muslim League-Nawaz, Islamabad’s current ruling party, has begun to implement measures such as smart meters that capture the performance of grid station feeders. How can these measures help alleviate the energy crisis in the short term, and are they sufficient for the long term?

The biggest advantage of these measures is that they empower policymakers with constant data in real time. There has long been a constant refrain that Pakistan lacks sufficient data to deal with its energy crisis. In effect, without access to data, it is difficult to institute effective policies, or even know where to start. If you know there are a lot of power outages in a certain part of the country—or even a certain grid or feeder—but you don’t know exactly why or how often these outages are happening, coming up with the right type of corrective policy is difficult.

However, these smart meters and other new technologies essentially put data in the hands of policymakers in a way that could theoretically allow them to make strong progress in reducing those 20% T&D losses. Thanks to this new data, useful discoveries have already been made: Feeder lengths are directly associated with T&D losses (longer feeders have higher losses), and there is no relationship between losses and power cuts (feeders with low losses often experience more power cuts than those with higher losses).

To be sure, the deployment of this new technology is by no means a nationwide phenomenon. There certainly are not smart meters all over Pakistan. For this reason, it would be a stretch to say that this will be a long-term boon for energy security. These devices need to be deployed over a much larger area before we can start having conversations about lasting solutions.

As you note, this crisis has been an ongoing challenge. You authored an NBR commentary in March 2013 in which you identified a number of near-term steps that could be taken to address the challenges confronting industry leaders and policymakers in Pakistan. Have there been any major developments in the interim?

The sad thing is, that commentary was written more than two years ago, and I would argue that unfortunately not much has really changed. You have a political class that simply lacks the will to take the critical yet politically risky steps necessary to deal with the crisis—steps that include phasing out energy subsidies, introducing pricing reforms that require people to pay more for electricity, and implementing institutional reforms that streamline and bring more order to a very chaotic and dysfunctional energy sector.

I’m actually somewhat surprised that so little has changed over the last two-plus years. Elections in May 2013 brought to power Prime Minister Nawaz Sharif, who had campaigned heavily on the need to deal with the energy crisis. His political party has close ties to the business community, particularly within the agricultural and sugar industries (Sharif’s family is in the sugar business), which are powerful constituencies that would seem to be big proponents of fixing the energy problem. And yet there has been relatively little to show for these ties, other than a few one-off achievements such as launching Pakistan’s first solar power plant. This is not for lack of trying, however; the slow progress may be more the consequence of a government that has had to deal with multiple immediate challenges ranging from terrorism to threats to its political survival.

As Pakistan looks at its longer-term strategies, the country is projected to see significant energy demand growth, which may further exacerbate the crisis if not addressed. Where do coal and natural gas fall within Pakistan’s current energy mix, and how do opinions differ as to what sort of energy mix will best help Pakistan address its energy needs?

Pakistan is not scarce in energy right now. It has supplies but lacks the level of resources needed to meet long-term demand projections. This means that the composition of Pakistan’s energy mix will go a long way toward determining the nature of its energy future.

Pakistan’s official policy today is to push for coal. Such a policy demonstrates a big break from recent policy, which has emphasized imported oil and gas. Coal constitutes a negligible percentage of Pakistan’s current overall mix. The government’s view is that Pakistan should finally take advantage of its vast quantity of untouched indigenous coal reserves—including nearly 200 billion tons alone in the Thar Desert region of Sindh Province. Prime Minister Sharif spoke of this policy repeatedly on the campaign trail, and his government continues to champion Thar today. The problem is that Pakistan lacks the technological capacity and funding to access these reserves. It also lacks infrastructure, especially rail lines, to transport any extracted coal. One rarely if ever hears politicians acknowledging these challenges.

Natural gas, by contrast, is already a core component of Pakistan’s energy policy and constitutes about half the overall energy mix. Yet although gas may appear to be the preferable option over coal, it faces its own challenges. The problem is that domestic supply is being rapidly depleted, and investor interest has dropped off in recent years thanks to factors such as low gas prices, prohibitively small gas fields, overregulation, and a lack of security, technology, and infrastructure in gas-rich regions. That said, there are opportunities. Pakistan, like so many other countries, could be a big beneficiary of the U.S.-Iran nuclear deal, because this accord could pave the way for Pakistan to complete a natural gas pipeline with Iran. Such a pipeline could bring Pakistan up to a billion cubic feet of additional gas per day.

How do you envision Pakistan’s energy mix evolving?

I think that in the short term, unfortunately, Pakistan’s energy mix will continue in its current form—imported and expensive hydrocarbon resources, namely oil and natural gas. At this point, no alternatives are in position to be developed and brought online in a big way over the next few years. Indigenous coal has too many obstacles, hydroelectricity is limited by Pakistan’s rapidly diminishing water supplies and by influential citizens’ movements against large dams, and renewables like solar and wind lack the scale to serve baseload demand. This isn’t to say that Pakistan shouldn’t do what it can in the immediate term to embrace solar and wind—in fact, there is a moment of opportunity because the costs of both resources have fallen in recent months. Some experts believe that with the right developers and investment plans, Pakistan could conceivably bring a new solar or wind plant online in less than twelve months. I fear, though, that this may be overly ambitious.

If you look a bit further down the road, perhaps five or ten years from now, you should start to see a bit more diversity in the energy mix. I think that the Sharif government is really serious about investing in renewables, particularly solar and wind. Islamabad has launched a new solar plant and reduced some taxes on solar panel imports. Pakistan has a lot of sun and wind, so it’s the right kind of place to be tapping into these resources. Bringing these resources online in a big way should not be too hard, especially because the only infrastructural upgrades requiring additional investment by the government relate to T&D. So there is good reason to be hopeful here.

Another important consideration for how best to resolve Pakistan’s energy crisis is the extent to which the country should privatize its energy sector. What are the benefits of partially or fully privatizing?

Privatization is essential simply because the public sector is so dysfunctional. When it comes to energy, the public sector lacks money, it lacks capacity, and it lacks technological know-how. This is a big deal in a country where the government plays such a large role in the energy sector. I think that if there is consensus about anything in Pakistan, particularly within the political class, it’s that the energy sector needs to experience some levels of privatization. There have been efforts toward this goal already. The main electricity supply company in Karachi was privatized a number of years ago, and we’ve seen this lead to greater levels of energy efficiency and reductions in T&D losses, indicating improvement. Furthermore, it goes without saying that when energy institutions are untethered to the state, they will have greater incentive to strengthen their technical capacities and foster accountability.

The problem is that countries need to be very careful about privatizing. They need to do it slowly. You mentioned “partial” privatization as one option, and that option may be the right way to go. There are a lot of vested interests in Pakistan that would be very uncomfortable with the idea of corporate folks coming in and taking over ownership of both operations and assets. In fact, the political class and even the courts have at different times suggested that governments need to take it slow when it comes to implementing this type of change. Particularly risky would be privatizing Pakistan’s distribution companies, which are large, unwieldy, and employ a lot of people. These would be very difficult to swiftly privatize. If you want to look at short-term privatization opportunities, you should look at the generation companies, which are a bit smaller and easier to manage. The best bet is to privatize the generation companies and reorganize the distribution companies into smaller units that operate under franchising models. In other words, Pakistan’s government should transfer operational ownership of the distribution companies to private hands, while retaining control of the assets. This approach would be much less controversial, much less messy, and ultimately much more effective.

How can Pakistan best encourage foreign investment into its energy sector without compromising the country’s energy security as it has done in the past?

In terms of encouraging overall foreign investment, at the end of the day you’re not going to get private investment in Pakistan’s energy sector unless the security situation calms down. The good news is that terrorist violence has declined dramatically in Pakistan in recent months. This is likely because Pakistani military operations in the North Waziristan tribal area have eliminated many terrorists. The problem is that many terrorists were simply displaced, and once they’ve reorganized in their new sanctuaries, they could launch new campaigns of terrorist violence. For this reason, Pakistan should act now to make new pitches for investors while the security situation is calm.

That said, stability is no silver bullet for sluggish foreign investment. Pakistan needs to do more about its red tape, corruption, and other nonsecurity factors that constrain foreign investment. No new international oil companies have entered Pakistan over the last decade, a reality attributable not just to security fears but also to concerns about overregulation and pricing policies. One more thing Pakistan needs to do is cast a wider net in terms of the types of energy investors it courts. Its aggressive pursuit of Chinese investors has made investors from other countries fear that the playing field is not level. And the last thing Pakistan wants to do is alienate otherwise-interested potential investors.

In April 2015, China gifted an unprecedented investment of $46 billion to Pakistan, $35 billion of which is meant to be allocated to the energy sector. How does this monetary gift compare to current and prior investments from other countries? What does China hope to accomplish with such a large monetary gift?

There’s no overstating how much money is involved here. For a comparison, the United States is one of the most generous donors to Pakistan, and yet that $46 billion far exceeds what the United States has provided to Pakistan in development assistance over a number of years. So it’s a lot of money; there’s no doubt about that.

China’s motivation for providing this gift is not necessarily to improve Pakistan’s energy security. Or at least that’s not the chief motivation. China does not provide infrastructure support, no matter how large or small, out of sheer benevolence. Rather, China has a strong interest in promoting energy infrastructure projects in Pakistan because it believes Islamabad can help serve Beijing’s broader strategic goal of developing a new economic trade corridor to China’s west—one that will link China to the Middle East and Europe. Essentially, China is looking to create alternative trade routes to facilitate the transit of its imports from the Middle East and Europe to sites within China. And Pakistan, because of its geographic position, plays a very important role in this grand scheme. Hence, China’s stated intentions to build roads, power plants, and ports in Pakistan. China is doing this not for Pakistan but for itself. There is nothing charitable about this $46 billion gift.

I would also contend that despite the rhetoric among many in Pakistan that this investment will solve the country’s energy crisis, it will not magically resolve the problems from which the crisis stems. These infrastructure projects, if they are developed, will provide a whole lot of energy—up to 17,000 MW of new generation capacity, according to estimates. That’s nearly as much as Pakistan’s total current installed electricity capacity. However, there’s no guarantee that these projects will all come to fruition. China has a history of promising more than it actually delivers. Consider, for example, that in January 2015 China quietly withdrew its support for the development of several coal plants in Baluchistan.

Furthermore, China’s investments are all about supply. They are meant to build new capacity. This is well and good, but the projects will do nothing to address the governance-related problems that fuel Pakistan’s energy crisis. These investments have little to do with repairing dilapidated equipment, undertaking pricing reform, or bringing more order to the energy sector. These investments will not be used to produce the non-sexy yet essential outcomes needed to deal with the crisis.

Quite frankly, China could do a lot more to ease Pakistan’s energy crisis if instead of building new infrastructure and simply creating more supply, it did things that were more modest but no less important, like trying to reduce transmission losses by repairing equipment and machinery that don’t work. Such investment would be a big boost right there. But these activities would not fit into China’s strategic plans and therefore are not likely to materialize.

What are the most important changes that we must see in the political will and governance of Pakistan’s energy sector to prevent the energy crisis from worsening?

I think the single most important thing that Pakistan needs to do, yet has refused to do, is to bring more order to the energy sector. There are over a dozen different entities that have some sort of say in energy policy. You have all these fiefdoms within the energy policy world that want to have some sort of influence or power over how energy policy is formulated, developed, and implemented. This simply doesn’t work, because all of these entities are highly dysfunctional. They don’t get along, and they don’t coordinate. It’s a classic case of too many cooks in the kitchen.

If you want to talk about moving forward with new policies, then that’s great. But unless Pakistan has an effective institutional structure in place to allow policy to be properly developed, then nothing’s going to change. Once a more effective institutional framework is in place, then the rest can follow. At that point you can introduce the pricing policy reforms and other essential measures.

This institutional reform is something that only Pakistan can undertake. It is not something that China, the United States, or any other foreign donor can do anything about. And this raises a broader issue: at the end of the day, Pakistan, and Pakistan alone, needs to take ownership over its energy crisis. This issue of ownership, of taking responsibility without simply blaming previous governments or other external factors, is something with relevance for many of the country’s policy challenges, whether related to economics, politics, or security. Pakistan needs to acknowledge energy as a big problem, and then it needs to take hard and politically risky steps. And the first place to start is with institutional reforms. This is what I said in the NBR commentary more than two years ago, and it’s what I believe now as well.

Michael Kugelman is the Senior Associate for South Asia at the Woodrow Wilson International Center for Scholars in Washington, D.C.

This interview was conducted by Wendy Culp, an Intern in the Trade, Economic, and Energy Affairs group at NBR.