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The rising cost of electricity for industrial, commercial, and residential consumers is putting increasing pressure on the Pakistani government to take action. A prominent suggestion emerging from public debates is the nationalization of Independent Power Producers (IPPs), a move echoing past socialist policies.
Understanding the Current Power Sector
Currently, the installed power generation capacity in Pakistan is split equally between government-run generation companies (Gencos) and IPPs. In 2023, government-run Gencos produced 55% of the electricity. While the transmission and distribution system is largely nationalized, with the exception of K-Electric, the demand for nationalizing IPPs suggests a misunderstanding of the sector’s dynamics.
The focus on IPPs is misplaced. The power sector’s problems are not solely due to IPPs but also involve outdated distribution systems and incomplete reforms from the past 25 years. The “take-or-pay” contracts associated with IPPs, which require consumers to cover fixed costs even if electricity isn’t produced, are standard global practices. These contracts safeguard both producers and consumers but are currently responsible for about 25% of monthly bills.
Historical Context and Current Issues
The public outcry over IPPs is reminiscent of the 1970s’ wholesale nationalization, which had detrimental effects on Pakistan’s economy and society. Although nationalizing IPPs might seem like a quick fix, it overlooks the sector’s complex challenges.
Key issues contributing to rising costs include:
- Currency Devaluation: The Pakistani rupee has depreciated significantly, affecting the cost structure of IPPs. Although previous negotiations improved the exchange rate for contracts, recent revisions have increased costs.
- Increased Borrowing Costs: The cost of capital for IPPs has soared due to rising interest rates. Domestic borrowing costs have surged from 9.5% in 2014 to 20.5% in 2024, while global rates have increased dramatically.
Potential Solutions
Rather than pursuing nationalization, which could lead to legal complications and deter future investments, a more effective approach involves:
- Governance Improvement: Strengthen regulatory frameworks and enhance transparency.
- Reforming Distribution Systems: Privatize and modernize the distribution sector to improve efficiency.
- Reducing Taxes: Lower the substantial taxes and surcharges that currently make up about 33% of electricity bills.
Long-Term Strategy
To address the power crisis sustainably, Pakistan needs to focus on improving governance, cutting down line losses, and creating a competitive market. In the long term, economic growth will help absorb excess electricity and balance demand and supply.
Conclusion
Nationalizing IPPs is a flawed solution with significant drawbacks. Instead, Pakistan should address the root causes of rising electricity costs through systemic reforms and improved management. By doing so, the country can achieve a more reliable and cost-effective power sector without resorting to damaging policies from the past.
