Arshad Mahmood Awan
Pakistan’s power sector has become emblematic of urgent, yet failed reforms—initiatives that, while promising much, consistently deliver little in practical terms. Despite numerous policy interventions over decades aimed at improving energy generation, curtailing losses, and enhancing cost recovery, the country remains ensnared in a severe and pressing energy crisis. This persistent dilemma adversely affects economic growth and places a heavy burden on the populace. Key issues such as inadequate power capacity, increasing tariffs, and accumulating circular debt continue to afflict the sector, leaving little hope for relief under the current framework.
To comprehend why the myriad reforms in Pakistan’s power sector have largely failed, it is pivotal to look beyond mere technical solutions and explore the deeper structural and institutional factors that shape the sector. Insights drawn from the work of Nobel Laureates Daron Acemoglu and James Robinson, particularly their book “Why Nations Fail” and Chapter Two, “Theories That Fail,” provide a framework to understand the persistent shortcomings in Pakistan’s power sector reforms.
One prevalent theory attributes Pakistan’s energy challenges to geographic constraints. Advocates of this geographic hypothesis claim that the nation’s distribution of natural resources, reliance on imported fuels, and challenges in transmission infrastructure obstruct the development of an efficient energy sector. Alternatively, many explanations focus on socio-economic and governance issues, highlighting inefficiencies in public sector management, rampant theft of electricity, and a noted lack of accountability in managing energy consumption.
While these explanations may offer convenient narratives, they fail to adequately address the core problems plaguing Pakistan’s energy sector. As Acemoglu and Robinson assert, geography and culture alone do not account for a nation’s failures. In fact, countries with far more challenging geographical conditions, such as China, Chile, and Brazil, have successfully developed robust and sustainable energy systems. This success in other nations should inspire hope that the crux of Pakistan’s energy crisis can be overcome, not in its physical location or socio-economic fabric, but fundamentally within the institutions that govern its energy sector.
Another proposition raised by Acemoglu and Robinson, termed the ignorance hypothesis, posits that the failures of the power sector are primarily due to a lack of expertise among policymakers. This notion has fostered a reliance on external consultants, extensive studies, and the procurement of foreign technical expertise, often at the behest of international financial institutions such as the IMF, ADB, or the World Bank.
Efforts have been focused on capacity building and proposing technical solutions, with the expectation that an infusion of knowledge will yield better outcomes. However, despite the influx of expertise, the power sector remains in a dire state. The solutions regarding improving transmission efficiency, adding generation capacity, and optimizing fuel mix are well understood; however, the key issue is not ignorance but the entrenchment of vested interests and the absence of coherent, long-term, strategic planning that embraces an integrated approach to energy production and economic development.
At the heart of the power sector’s issues are extractive institutions, as defined by Acemoglu and Robinson. These institutions are characterized by systems that consolidate power and wealth among a small elite, often to the detriment of the broader population. In Pakistan’s energy sector, these extractive institutions manifest in several ways. A small number of independent power producers (IPPs) dominate the market through long-term power purchase agreements (PPAs) that are indexed to the dollar, thereby ensuring inflated returns regardless of the prevailing economic landscape. The need for transparency and accountability in these agreements is crucial for a fair and sustainable energy sector.
Such contracts, established during previous administrations, have become a financial burden for the government, resulting in excessive capacity payments even during periods when power plants lie dormant. Efforts to renegotiate these contracts or introduce competitive pricing models have faced formidable opposition from influential energy governance agents supported by substantial political and corporate interests. Although recent renegotiations have yielded some success, the overarching institutional framework remains inadequate, locking the government into unsustainable energy costs while consumers grapple with escalating tariffs.
The governance architecture within the energy sector is often described as dysfunctional. It comprises numerous overlapping agencies such as the National Electric Power Regulatory Authority (Nepra), the Central Power Purchasing Agency (CPPA), and various distribution companies (DISCOs), which operate with diminishing synergy. The recent creation of the Independent System and Market Operator (ISMO) represents a promising step forward. Still, the extent of its ‘independence’ from political influences will be critical to enacting serious reforms, given that the staffing of essential positions frequently favors political patronage over competency.
Compounding these issues is the pervasive rent-seeking behavior characteristic of the entire energy sector. Rent-seeking behavior refers to the practice of seeking to increase one’s share of existing wealth without creating new wealth. In the context of the energy sector, this can manifest in various ways, such as through inflated contracts, kickbacks associated with infrastructure projects, or overcharging consumers. These practices enrich a select few while foisting economic burdens onto the general public. Moreover, electricity theft remains rampant, particularly in regions served by PESCO, TESCO, HESCO, and QESCO, often facilitated internally by personnel within these distribution companies. While the burden of high tariffs weighs heavily on ordinary consumers, elites evade payment through theft or non-compliance without facing repercussions, further distorting the incentive structures and complicating reform agendas aimed at enhancing transparency and accountability.
Financially, the crisis in Pakistan’s power sector is exacerbated by the issue of circular debt—a recurring cycle of unpaid obligations among government entities, power producers, and distributors. This precarious situation arises from inefficiencies, rampant theft, and inadequate bill collection, thus perpetuating the cycle of debt. Despite temporary government interventions injecting funds to clear liabilities, the lack of fundamental reform, such as restructuring the energy sector or implementing stricter regulations, results in re-emerging debts that often worsen, yielding a continuous loop of fiscal distress.
Additionally, Pakistan’s attempts to integrate renewable energy within its grid highlight how entrenched institutional failures can stymie reform efforts. Despite the country’s significant potential for wind and solar energy, efforts to bring renewable projects to fruition have been derailed by pervasive governance issues, delays in project approvals, and a lack of transparency throughout the bidding processes. Corruption and political meddling in contract awards have led to subpar outcomes, while established interests within the fossil fuel sector actively lobby against a necessary transition to renewable energy. As a result, the promise of clean energy development remains mostly untapped while Pakistan continues to grapple with its pollution challenges and dependence on imported fuels.
The persistent failure of reforms within Pakistan’s power sector elucidates a crucial lesson articulated in “Why Nations Fail”: genuine progress hinges not on superficial technical fixes but rather on substantial institutional reform. Acemoglu and Robinson argue that inclusive institutions, characterized by broadly distributed power and robust political accountability, are essential for sustained development. In Pakistan, achieving this entails diminishing the influence of entrenched interests, promoting transparency in energy contract dealings, and fortifying regulatory bodies to function independently from political interference. Without these transformative changes, even the most meticulously crafted reform strategies will invariably succumb to the historical forces that have precipitated the ongoing crises within the sector.
Accountability emerges as a pivotal element in initiating any reform endeavor. Measures aimed at enhancing transparency, such as the public disclosure of IPP contracts and rigorous audits of public sector energy projects, could mitigate rent-seeking behaviors. Furthermore, restructuring state-owned enterprises, particularly DISCOs, to operate under qualified management rather than politically appointed officials would boost efficiency and alleviate the financial burden on the state. Until these institutional impediments are addressed, Pakistan’s energy sector is likely to remain ensnared in an unending cycle of crisis and reform failures, ultimately exacting a heavy toll on the country’s populace.
The inadequacy of power reforms within Pakistan does not stem from a dearth of knowledge or technical proficiency—indeed, the solutions are widely recognized and have often been pursued. Rather, the fundamental obstacle lies in institutional configurations that prioritize the interests of a few over the welfare of the many. As suggested by Acemoglu and Robinson, reforms that disregard these extractive institutions will be bound to fail. Absent a decisive confrontation with the underlying institutional dysfunction, Pakistan’s power sector will persist as a costly burden on its economy, leaving citizens to pay the steep price.
