About the Repor

Pakistan’s energy shortages have a disruptive effect on 

daily life, and protests and demonstrations against such 

shortages often turn violent. There is a risk that energy shortages 

could erode peace and stability in the country. Following an 

invitation from USIP, the authors have worked jointly to achieve 

a balanced analysis, reflecting official viewpoints and donor 

perspectives on the nature of Pakistan’s energy crisis 

and what can be done to address it. 

About the Author

Rashid Aziz worked for twenty-five years as senior energy 

specialist in the World Bank’s Islamabad Office. He contributed 

to the Bank’s energy sector work program, which covered 

electricity, oil, and gas sectors. He participated in preparing 

sector reports; project appraisal, implementation, and 

evaluation documents; and policy analysis and implementation. 

An economist by training, Aziz joined the Islamabad Office’s 

economic team in 1982 and moved to the South Asia Energy 

Unit in 1989. Munawar Baseer Ahmad has extensive experience 

in Pakistan’s energy sector. He held senior positions in the 

public sector, including managing director of Sui Southern Gas 

Company and of Pakistan Electric Power Company. An engineer 

by background, Ahmad is currently the chief executive of EMRConsult (Pvt) Ltd., a consulting firm that provides 

high-level advisory services to private/public sector 

clients on policy matters and all aspects of project 

preparation, financing, and evaluation. 

2301 Constitution Ave., NW • Washington, DC 20037 • 202.457.1700 • fax 202.429.6063

Special Report 375 June 2

© 2015 by the United States Institute of Peace. 

All rights reserved.

Content

Introduction 2

Scope and Causes of the Crisis 4

Financing Troubles 7

Governance Challenges 8

Reform Efforts and Priorities 10

The 2013 Power Policy 11

Learning from the Experience of Neighbors 14

The Way Forward 15

Rashid Aziz and Munawar Baseer Ahmad

UNITED STATES INSTITUTE OF PEACE www.usip.org

SPECIAL REPORT

Summary

• Pakistan is currently facing a severe and multifaceted energy crisis. Electricity shortages 

exceeded 7,000 megawatts in 2011; the gas shortfall is 2 billion cubic feet per day. The 

energy shortages are estimated to cost around 2 percent of GDP annually. This shortfall is the 

result of the failure, over successive governments’ tenures, to invest enough to expand power 

system capacity. Low and declining investment and savings rates (including in power) reflect 

macroeconomic weaknesses.

• Successive governments have set tariffs on electric utilities below cost recovery levels. The 

difference is paid as subsidy, which is unaffordable and diverts resources from other priorities. 

With utilities unable to cover their costs of production, investment has lagged.

• The efficiency of Pakistan’s utilities—both in producing electricity and collecting dues—varies 

considerably. Some companies compare with the best in South Asia. Others do not achieve 

half those performance levels. Supply costs thus remain higher than warranted.

• The current government plans to address the financial constraint and has raised tariffs. Further 

increases are required but will prove politically challenging. The record on past governments’ 

efforts in the sector is mixed. Utility managers are not held accountable for their companies’ 

performances, and there is continued interference in the utilities’ affairs. Prosecution of power 

theft remains weak. 

• The 2013 power policy includes an ambitious agenda to increase generation, raise tariffs, 

and improve efficiency. Private expertise, finances, and management will be mobilized. Some 

donors support the government’s efforts. Experiences in other countries, especially India, may 

provide lessons for Pakistan.

• The reform agenda faces opposition, but the government must stick to it. Contributions from 

all stakeholders—consumers, investors, financiers and donors, media, and civil society—are 

essential if the challenges are to be overcome.

Pakistan’s Power Crisis

The Way Forward
2 USIP.ORG • SPECIAL REPORT 375

Introduction

Pakistan is experiencing an acute energy crisis. Partly due to chronic losses and underinvestment, electricity supply from utilities is well short of demand. The deficit has exceeded 7,000 

megawatts (MW),1 or about one-third of peak demand, during extreme periods.2 The country 

also faces a growing shortage of natural gas, its largest primary fuel source after biofuels, used 

mainly by the poor, who lack reliable access to electricity or other energy sources. Fluctuations 

in the global price of oil have substantially increased power generation costs and strained budgets. The government’s policy to maintain power tariffs below the cost of supply, as determined 

by the National Electric Power Regulatory Authority (NEPRA), requires large subsidies from 

the budget. Delays in disbursing these subsidies are contributing to persistent intersectoral 

debts that have imperilled the creditworthiness of public and private generation companies, 

including the Water and Power Development Authority (WAPDA), fuel suppliers, refineries, and 

domestic oil and gas producers. 

Collectively, the shortages impose large costs on the economy as a whole—estimated at 

about 2 percent of gross domestic product (GDP) annually3—through lower output, exports, 

and employment. Consumers have started using alternate power sources. Industrial and 

commercial entities install their own generators. Households use back-up generators or 

battery-powered units, often at significantly higher costs. Small and medium-sized industrial and commercial enterprises and poor households often cannot afford these high-cost 

alternatives and go without power. 

The electricity shortage has severe social and political effects. Protests and demonstrations against long hours of scheduled and unscheduled power outages—that is, loadshedding—are regular phenomena and often lead to destruction of public property. In 2013, 

the Pakistan Muslim League-Nawaz party swept into power in nationwide elections partly 

due to pledges to tackle the energy problems that its predecessors had failed to address. 

But its first year in office saw only partial progress in addressing the deep structural issues 

facing the energy system.

Multiple factors, compounded across multiple governments, have contributed to 

Pakistan’s current energy crisis. There is a physical shortage: Supply has not increased with 

demand. There is a financial shortfall, as the utilities’ total resources, including revenues 

from consumers and subsidies from the government, do not cover the cost of supply. Finally, 

there is a governance crisis, as the government has been unable to impose commercial discipline, particularly on government-owned utilities and institutions, and their performance 

continues to be below the levels achieved in other countries. 

The challenges are interrelated. The shortfall in generation stems largely from a cumulative 

failure to achieve the investment levels needed to expand and maintain power generation on 

pace with the growing demand. This lack of investment, along with the lack of consensus on, 

for example, a number of hydropower projects, has prevented the energy sector from developing new, cheaper, domestically available fuel sources, such as coal or hydroelectric power, forcing continued reliance on imported fuel oil and dwindling natural gas reserves. The shortfall in 

investment is partly due to macroeconomic conditions. Pakistan’s domestic savings and investment rates have fallen from a mid-2000s peak, and international donor support for investments 

in Pakistan’s power sector declined in the face of political turmoil, inconsistent adherence to 

investment contracts, and worsening security.4 Reversing the savings and investment declines 

is a high priority for Pakistan, and all stakeholders—the government and policymakers, utilities, project developers and financiers (including donor agencies), and, most important, consumers—need to contribute toward addressing these challenges. Pakistan needs to arrest its 

growth in consumption and invest in the future.

The views expressed in this report do not necessarily 

reflect the views of the United States Institute of Peace, 

which does not advocate specific policy positions.

To request permission to photocopy or reprint materials, 

e-mail: permissions@usip.org

About the Institut

The United States Institute of Peace is an independent, 

nonpartisan institution established and funded by Congress. 

Its goals are to help prevent and resolve violent conflicts, 

promote postconflict peacebuilding, and increase conflict 

management tools, capacity, and intellectual capital 

worldwide. The Institute does this by empowering others 

with knowledge, skills, and resources, as well as by its direct 

involvement in conflict zones around the globe.

Board of Dir

Stephen J. Hadley, (Chair), Principal, RiceHadleyGates, LLC, 

Washington, DC • George E. Moose (Vice Chair), Adjunct 

Professor of Practice, The George Washington University, Washington, DC • Judy Ansley, Former Assistant to the President and 

Deputy National Security Advisor under George W. Bush, Washington, DC • Eric Edelman, Hertog Distinguished Practitioner 

in Residence, Johns Hopkins School of Advanced International 

Studies, Washington, DC • Joseph Eldridge, University Chaplain 

and Senior Adjunct Professorial Lecturer, School of International 

Service, American University, Washington, DC • Kerry Kennedy, 

President, Robert F. Kennedy Center for Justice and Human 

Rights, Washington, DC • Ikram U. Khan, President, Quality Care 

Consultants, LLC., Las Vegas, NV • Stephen D. Krasner, Graham 

H. Stuart Professor of International Relations at Stanford 

University, Palo Alto, CA • John A. Lancaster, Former Executive 

Director, International Council on Independent Living, Potsdam, 

NY • Jeremy A. Rabkin, Professor of Law, George Mason 

University, Fairfax, VA • J. Robinson West, Chairman, PFC 

Energy, Washington, DC • Nancy Zirkin, Executive Vice 

President, Leadership Conference on Civil and 

Human Rights, Washington, DC 

Members Ex Offi

John Kerry, Secretary of State • Ashton Carter, Secretary of 

Defense • Gregg F. Martin, Major General, U.S. Army; President, 

National Defense University • Nancy Lindborg, President, 

United States Institute of Peace (nonvoting)
USIP.ORG • SPECIAL REPORT 375 3

But the power sector also faces problems inherent in its financing and governance structure. By setting electricity tariffs below the costs of supply, the government must provide 

large subsidies from its budget to power producers, distribution companies, and consumers. 

The government nominally justifies the subsidies as a means of protecting the lowest-income 

segments of society, but high-income consumers receive the greatest benefit. Despite government efforts to gradually realign consumer prices with actual costs, the subsidy burden 

was the fourth-biggest federal expense in the most recent fiscal year budget, after debt 

repayments, defense, and the federal Public Sector Development Program.5 Efforts to raise 

tariffs to cover costs are politically contentious and run into opposition across several sectors of society. Industrial and commercial users highlight the need for cheap electricity, 

ostensibly to remain competitive. The media propagates the view that Pakistani consumers 

pay more for electricity than they would in neighboring countries, without verifying this 

fact. Private consumers routinely protest curtailments in supply but do not recognize that 

supply can only increase with additional financial resources—and that by not paying the 

full cost of supply from the grid, they pay much higher prices for electricity when they use 

generators or battery-powered units, or go without power.

Finally, the utilities have not been able to improve their performance consistently, and 

some distribution companies show poor rates of billing recovery from consumers, including 

government agencies. As a result, the cost of power is high and vulnerable to movements 

in international oil prices, the system experiences substantial technical and financial inefficiencies, and the government appears unable to impose any accountability on the utilities.

Power companies regularly complain of late or partial dues and subsidies payments from 

the government, but distribution companies’ poor rates of bill collection exacerbate the 

financial shortfalls facing the sector. Weaknesses in management and in the regulatory 

framework, and the implicit guarantee of government bailout for the largely state-controlled 

distribution companies, have meant that transmission and collection losses have not been 

reduced as quickly as in some other developing countries or utilities. Attempts to enforce 

commercial discipline and accountability on public sector utilities and to require management to improve their companies’ performance—through standards imposed by the regulator or contractual obligations—have also not been very successful. Policy actions that 

were expected to complement reforms first introduced in the 1990s, such as moving from 

a negotiated and guaranteed price of power to competitive bidding for private generation 

projects, were not carried out. As a result, improvements in operational efficiency and costs 

that could have been achieved through greater reliance on market forces and competition 

have not materialized.

While the main aim of the 2013 policy to enhance generation capacity is being achieved, 

it will likely take as much as a decade to create the new capacity needed to overcome the 

shortfall in supply. Continued external support to finance these investments will be needed, 

requiring regular dialogue with donors and partners. Beyond creating new power plants, 

however, government policy must tackle deeper structural reforms. It should introduce competition in power supply and support improved performance and commercial management 

of utilities. Maximizing the benefits from private participation, or power company privatization, will require the government to reorient its approach to privatization, from pure sales 

of assets toward partnerships aimed at improving technical and operational performance, 

investing in expanding the utilities’ capacity and drawing upon private sector managerial 

and commercial strengths to achieve these goals.

Despite government efforts to 

gradually realign consumer prices 

with actual costs, the subsidy 

burden was the fourth-biggest 

federal expense in the most 

recent fiscal year budget.
4 USIP.ORG • SPECIAL REPORT 375

There has to be more widespread acceptance of the true cost of electricity, and all consumers must pay this cost. If Pakistan is to make good on its development potential and offer 

opportunities and economic growth to its millions of young and underemployed citizens, 

Pakistani policymakers, consumers, investors, academia, media, civil society, and utilities—

despite competing security and political priorities—must place the energy crisis at the top 

of their agendas. 

Scope and Causes of the Crisis

Physical Supply Shortfalls

Pakistan’s primary energy resources include traditional fuels, such as firewood, crop residues, 

and animal waste, and commercial fuels, such as coal, oil, natural gas, and hydropower. 

As of 2012, traditional fuels accounted for 34.9 percent of Pakistan’s total energy supply, 

while natural gas comprised 31.7 percent and oil 24.8 percent. Coal, nuclear power, and 

hydropower accounted for the remainder.6 Pakistan’s power sector generates electricity from 

primary fuels and serves as a secondary energy source for household consumers, industry, 

commerce, and other sectors of the economy. Fuel oil accounted for 35.9 percent of Pakistan’s electricity in 2013; hydropower, 31.1 percent; natural gas plants, 28.2 percent; and 

nuclear plants, 4.7 percent.7

Oil’s share of electricity generation has grown since the 1990s, while the share of 

hydroelectric sources has largely remained stagnant. Hydroelectric power plants generate 

electricity at around 20 to 25 percent of the cost of generation from other fuels8 but entail 

significant upfront capital costs compared to oil or coal. Consequently, while hydropower 

is the cheapest source of electricity for Pakistan, mobilizing the funds required for such 

projects constitutes a major challenge. Successive Pakistani governments have sought donor 

support for the Diamer Basha dam and other facilities for more than a decade, with little success. The cost involved, between US$14 billion and US$15 billion, is large, and undertaking 

two large hydropower projects at the same time—Pakistan has already begun building the 

Dasu Hydropower Project with World Bank support—will entail a sharp increase in investments. This may not be compatible with the government’s efforts to ensure macroeconomic 

stability. A key objective of these efforts, also supported by International Monetary Fund 

(IMF) programs9 since 2008, has been to maintain a prudent monetary policy and curtail 

inflation, in part by aligning the rate of growth of aggregate demand with projected increases in output and GDP. The investment requirements of two large hydropower projects will 

exceed US$2 billion annually, especially in peak construction years. This level of additional 

investment may imply a sharper and larger increase in aggregate demand than warranted, 

given the projected GDP growth rate, and could exacerbate inflationary pressures. 

Box 1: The Power Sector Stucture in Brief

Organizationally, Pakistan’s power sector acquires fuels from a variety of domestic or imported sources and 

comprises a mix of state-owned generation companies (gencos) and privately-owned independent power 

producers, a transmission company (the National Transmission and Despatch Company [NTDC]) that manages 

the national-wide transmission network, and regional distribution companies, referred to as discos. All of 

these are state-owned except for Karachi’s K-Electric, which also owns and maintains some generation and 

transmission capacity. The Pakistan Electric Power Company (PEPCO) was established in 1998 with the 

mandate to manage government-owned gencos, NTDC, and discos. WAPDA, from which PEPCO was spun off, 

is authorized to construct and operate hydroelectric generation projects. The discos purchase power primarily 

from NTDC, which in turn purchases electricity from all power generators, including WAPDA. 
USIP.ORG • SPECIAL REPORT 375 5

The current shortage of electricity arose in the first place, however, because essentially 

Pakistan did not invest adequate resources to expand the system’s capacity and meet the 

growth in demand for power for more than a decade. Pakistan’s overall investment rate is 

well below that of its peers. The decline in the national savings rate means that the country 

cannot overcome declines in foreign investment by building up an asset base through its own 

resources.10 At the same time, Pakistan’s reputation as a destination for foreign investment 

has eroded over time, partly due to security concerns and partly because the power sector 

cannot cover all its costs from tariff revenues. Since power production and supply require large 

capital outlays, the sector is disproportionately affected by a slowdown in investments. This 

is Pakistan’s key dilemma. While its needs for capital are large and growing, the declines in 

savings and investments in the power sector reflect broader, worrying macroeconomic trends. 

Out of a sample of seven similar countries, Pakistan was the only country investing 

less as a percentage of GDP today than it was twenty-five years ago.11 Even at its peak in 

2005–06, Pakistan’s investment rate did not reach 20 percent of GDP. By comparison, all the 

other countries in the group maintained investment levels of more than 20 percent of GDP, 

particularly since 2005. As successive Pakistani governments did not sufficiently prioritize 

investments in power generation, transmission, or distribution, the sector’s share of total 

public investment fell from 51 percent in the mid-1990s to 26 percent by 2010.12 At a time 

when Pakistan needed to build the power sector’s asset base to cater to the needs of a 

growing economy, it did not do so and will face the consequences for many years to come.

The decline in investments is also partly a result of a change in policy. Starting in the mid1980s, Pakistan required that WAPDA—which, prior to the spinoff of the gencos, NTDC, and 

distribution companies into independent companies, was responsible for power generation, 

transmission, and distribution all over the country, except Karachi—finance 40 percent of its 

investment program from internal sources.13 Tariffs were adjusted annually so WAPDA could 

meet this requirement. The policy protected WAPDA’s financial situation and ensured that 

WAPDA allocated adequate resources for investments to continually expand the power system. 

When the government and the World Bank discontinued this policy, the utilities faced less (or 

no) compulsion to earmark funds for investment, with obvious results. Capacity has not grown 

in line with demand. No large hydropower project has been initiated for nearly thirty years, 

and transmission and distribution systems direly need repair, rehabilitation, and augmentation.

In addition to the decline in domestic resources available to support power sector 

growth, Pakistan has seen an exodus of foreign investors. Almost all the companies that 

financed generation projects during previous private sector-led development efforts in the 

1990s have sold off their shareholdings. The only exception is Uch Power, a private generation company whose owners have invested in a second plant. The dozen or so oil and gas 

companies that actively explored for and produced gas in Pakistan have also divested their 

ownerships to locals or other foreign groups. 

Demand Growth

As of June 2013, the Pakistani electricity system had an installed capacity of 22,812 MW, 

generated by a mix of state-owned and private power producers. Under its new 2013 

power policy, the government has announced plans to develop at least 16,545 MW in additional generation capacity by 2018, primarily through the construction of new coal power 

plants intended to take advantage of Pakistan’s sizeable but largely unutilized domestic 

resources—including hydropower and coal.14 A major disconnect remains between existing 

installed capacity and actual generation, however. Fuel and financing shortages, physical 

plant maintenance needs, and other problems with generation meant supply peaked at only 

around 14,000 MW, or roughly 60 percent of installed capacity, in July 2013.15

The current shortage of 

electricity arose because 

essentially Pakistan did not 

invest adequate resources to 

expand the system’s capacity 

and meet the growth in 

demand for power for more 

than a decade.
6 USIP.ORG • SPECIAL REPORT 375

Electricity demand, meanwhile, has continued to grow. By the mid-2000s, Pakistan’s 

economy had started growing rapidly, as GDP and income per capita rose by 8–9 percent 

annually from 2005 to 2008. Between 2004 and 2008, commercial energy consumption 

increased by about 8.4 percent annually, with the largest increase recorded in natural gas 

use, at 11.8 percent annually. The highest annual rates of increase in energy use were in the 

industrial and commercial sectors, at 12.5 percent and 11.3 percent, respectively. Annual 

energy consumption in residential and agriculture sectors expanded by 5.7 percent. The rate 

of annual increase in electricity consumption was about 7 percent. Electricity use expanded 

by 7.4 percent and 5.1 percent annually in the residential and industrial sectors, 11.6 percent 

in commercial activities, and 7.1 percent in agriculture.

By contrast, over the next five years, annual energy consumption expanded by only 0.4 

percent. This slowdown was primarily due to supply constraints. Total annual energy use in 

the industrial and agriculture sectors declined by 3.2 percent and 3.9 percent, respectively. 

Residential sector consumption of energy continued to grow, by nearly 5 percent each year, 

despite the slowdown in supply. The annual increase in electricity use during the past five 

years was also nominal, only 0.9 percent. This slower growth was observed in all sectors. 

Residential and industrial electricity consumption increased by only 1.5 percent annually, 

and the agriculture sector’s use of electricity declined by about 2 percent. By 2013, the 

residential sector accounted for 47 percent of total electricity use (compared to 46 percent 

in 2008), industry for 29.1 percent (28.2 percent in 2008), and the agriculture sector’s share 

dropped to 10 percent (11.5 percent in 2008).

Source: Authors’ computations (peak demand, actual production), Energy Yearbook 2013 (generation by fuel)

Figure 1: Power Generation: Peak Demand and Actual Production (Megawatts by fuel/Source)

Demand for energy, including electricity, expanded in line with the increase in incomes, 

but power utilities, the government, and the private sector failed to invest to meet this 

growing demand. Between 2006 and 2013, installed power generation capacity rose by only 

3,000 MW—less than 2 percent per year—and power supply stagnated at 95–98 terawatthours (TWh).16 The current gap between power demand and supply emerged in 2007. Starting from about 3,000 MW, the gap has grown over time and exceeded 7,000 MW in 2011, as 

demand continues to increase while supply has remained more or less stagnant. 

International Donor Support

Declining investments in the power sector could have been offset by international donors. 

However, for more than a decade donors were generally reluctant to commit to any projects 

in the power sector. The Asian Development Bank (ADB) and the World Bank did not finance 

0

500

1,000

1,500

2,000

2,500

2006 2007 2008 2009 2010 2011 2012 2013

Nuclear

Thermal 

(independent power producers)

Thermal (K-Electric)

Thermal (GENCOS)

Hydroelectric

Peak demand

Actual production
USIP.ORG • SPECIAL REPORT 375 7

any power projects in Pakistan between 1995 and 2006. The first World Bank loan after the 

Ghazi Barotha project (approved in 1995) was approved in 2008. The United States also did 

not support any new power projects due to its own legislative constraints, which barred 

the U.S. government from providing any assistance to Pakistan. The Japanese and German 

governments were the only foreign donors that continued to approve new projects during 

that decade. 

Sometimes donors insisted that the unbundling of WAPDA needed to be completed 

before they could consider any new lending to the power sector. At other times policy 

reforms—to increase tariffs to overcome the sector’s financial shortfall—were made prerequisites for new investment projects. In some cases simple processing steps were repeated 

many times, essentially to avoid submitting new projects for approval.17 Donors of the 

Diamer Basha project have reportedly asked for additional work to bring environmental and 

social assessment (ESA) reports, including resettlement plans (RPs), up to internationally 

accepted and bankable standards.

Donor reluctance to finance large hydropower projects until additional work on ESAs is 

completed is surprising, because Pakistan has prepared and implemented ESAs, RPs, and compensation programs that were well received by donors, contractors, advocacy groups, and those 

affected. In the mid-1990s, the ADB, the World Bank, the Japanese government, and other 

donors found the ESA studies for Pakistan’s Ghazi Barotha hydropower project to be acceptable, 

even as the ADB and the World Bank were actively withdrawing from large hydropower projects 

all over the world. The World Bank cancelled the Narmada hydropower project in India and refused 

to fund the Arun project in Nepal only months before it approved funds for Ghazi Barotha.

Recently Pakistan completed the Mangla Raising Project, which increased the water 

storage capacity at the Mangla facility and enhanced power generation by 200 MW. WAPDA 

prepared the RP and compensation scheme for this project and implemented it after the 

government approved the RP. The World Bank viewed it favorably, as it included extensive 

consultations with and inputs by those affected, and all stakeholders appeared to have 

accepted the compensation package.

It is thus difficult to understand the donors’ stance on ESA and RP studies WAPDA prepared 

for the Diamer Basha project. The current impasse could be because WAPDA’s and the government’s technical and managerial resources are not being adequately utilized. Or donor requirements have become more stringent, and WAPDA is now unable to meet their preconditions.18

Donor programs and priorities should not be used as an excuse for procedural and 

institutional constraints within Pakistan that hinder the power system’s development. The 

country must start financing its investment needs from its own savings and stop relying on 

outside financing for such projects. However, in Pakistan’s case, donor willingness to finance 

a project provides a strong signal to other financiers, contractors, and suppliers about the 

likelihood that the project will be completed. All parties take donor reluctance to fund a 

project as a signal that the project carries higher risk.

Financing Troubles

The lack of investment in electricity generation and distribution was a major factor in the 

current power shortfall. A shortage of operating capital or credit to ensure regular fuel supply has sometimes resulted in failures to make full use of existing capacity, and new generation capacity has failed to come on line. A compounding factor in the investment and supply 

gaps is the sector’s heavy reliance on government subsidies to bridge the gap between 

available financial resources and the cost of supply. Over the past decade, successive governments maintained electricity tariffs at lower levels than NEPRA determined and provided 
8 USIP.ORG • SPECIAL REPORT 375

the difference as tariff differential subsidies. These have burdened government budgets at 

a cost of up to 2 percent of GDP annually over the past five years, and their oft-delayed or 

irregular payment has contributed to chronic circular debts19 among fuel suppliers, power 

producers, and distribution companies. 

Addressing the sector’s financial constraints also requires that WAPDA’s financial position 

be protected. WAPDA provides cheap electricity, which the country desperately needs, and 

enabling WAPDA to invest more in hydropower projects would reduce the average cost of 

generation. However, the opposite outcome is often pursued. Payment to WAPDA is curtailed 

more than payments to independent power producers. Its cash balance is used as a cushion 

when the government decides to inject funds into the sector, and WAPDA has at times been 

asked to write off its receivables. These actions are indefensible.

WAPDA’s financial situation can be protected by pursuing two actions. First, its tariffs need 

to be adequate to ensure a 16 percent rate of return for WAPDA, and second, WAPDA should 

be paid more or less automatically in full and on time for the power it supplies to the grid by 

establishing letters of credit and escrow accounts. Such payments should not be left to the 

discretion of utility managers or the government. The World Bank’s analysis in the project 

appraisal document for the Tarbela IV hydropower project shows that if NEPRA enhances 

WAPDA’s rate of return from the current 14 percent to 16 percent, WAPDA would generate net 

profits of US$500 million in 2020 and US$2.5 billion in 2030. WAPDA’s total investment (in 

construction work in progress) was projected to be slightly less than US$2.5 billion in 2030. The 

current tariff formula, therefore, appears to provide adequate resources to WAPDA to finance its 

investment plan. The only constraint on WAPDA’s finances is cash flow, because it is not paid 

fully or on time or has had to write off some of its receivables in the past. 

WAPDA’s cash balance is not a bonus that the utility does not deserve. That cash is 

required for financing part of the cost of new hydropower projects, and WAPDA should be 

allowed to build healthy cash balances every year.

Governance Challenges

NEPRA’s and the government’s efforts to require performance improvements in the power 

sector have not been very successful. The government as well as political and other interest 

groups continue to interfere in key aspects of the distribution companies’ operations, including hiring and disconnecting defaulting consumers. At the same time, the utilities continue 

to absolve themselves from any responsibility for these failures by pointing out that their 

managements’ authority is curtailed. As a result, burdened with poor operational and technical performance, Pakistan’s power sector has not seen improvements in key performance 

indicators—reduced losses and theft, efficiency in public sector generation plants—as 

quickly as other countries and utilities have.

Mismanagement and Inefficiencies

Pakistan’s utilities, particularly the public sector distribution companies, have not significantly 

improved their operational and commercial performance over time. The power sector’s technical 

and nontechnical losses declined marginally, from about 24 percent in the 1990s to around 22 

percent today. By contrast, utilities in other countries demonstrated much more spectacular 

results. India halved its losses in North Delhi, Andhra Pradesh, and Gujarat between 2006 and 

2011. Many South American utilities that were privatized in the 1980s and 1990s showed 

similar improvements. Some of Pakistan’s distribution companies have managed to reduce 

their losses to below 15 percent and now collect more than 95 percent of the billed amount—

below levels that China or East Asia have achieved but comparable with better-performing 
USIP.ORG • SPECIAL REPORT 375 9

distributors elsewhere in South Asia. However, these improvements mask important variations. While five distribution companies show loss levels below 20 percent, others continue 

to have losses of more than 35 percent. In Hyderabad, Sukkur, Quetta, and Peshawar, collection rates have fallen from about 80 percent a few years back to below 60 percent in some 

cases today. These companies account for about 30 percent of total power sales, but for a 

much larger share—up to 50 percent in some years—of the companies’ power purchases.

Public-sector generation companies also show signs of poor efficiency, generating less 

electricity per unit of fuel than private power plants. Efficient plants use about 8,500 btu 

to generate one kilowatt-hour (kWh) of electricity. Some of Pakistan’s plants require 14,000 

to 15,000 btu per kWh.20 The government and NEPRA recognize the need to address these 

inefficiencies but have been unable to impose commercial discipline and accountability on 

the utilities. As a result, while NEPRA’s tariff determinations include performance improvement targets for all distribution companies, there are no consequences for the companies’ 

management when these targets are not met. Ultimately the government ends up paying for 

these additional losses when it clears off the circular debt. 

As mentioned earlier, K-Electric is the only distribution company21 that has been privatized 

so far. Its experience suggests what possible gains in efficiency and challenges can emerge 

from the privatization experience. In 2005, the private sector acquired a controlling stake 

in K-Electric along with management of the company. Initially, this transaction was widely 

criticised in Pakistan, probably for the wrong reasons. The owners needed time to prepare 

and implement the company’s turnaround, involving substantial new generation capacity, a 

detailed diagnostic, investments to upgrade distribution networks, and an update of managerial and other systems. Meanwhile, the public and other stakeholders attributed the substantial 

power shortages in Karachi during the next few years to the new management. The private 

sector owners needed to take responsibility for some of these failures, partly because their 

technical partner was Siemens from Germany, which had extensive experience in manufacturing power system equipment but not in managing or operating a distribution company. Nevertheless, based on its experience in manufacturing and operating power generation equipment, 

the company started work on expanding its power generation capacity. 

By around 2010, a new party took control of the private sector share of K-Electric. That 

party sought an implementation agreement with the government, under which the government would ensure the payment of electricity bills by all federal and provincial ministries, 

departments, and agencies. In securing this agreement, the new owners were safeguarding the company from circumstances beyond their control. The government approved this 

proposal. In the past five years, the company has made its generating capacity sufficient 

to cover electricity demand, and there is no shortage of power in Karachi, except during 

extreme events, such as breakdowns in supply from the NTDC grid. The company has focused 

its load-shedding on areas with high losses and theft, partly to mobilize law-abiding citizens 

to exert pressure on vested interests who may be complicit in such theft.

However, overall impressions about K-Electric’s privatization remain negative. Public 

opinion holds that performance improvements are company obligations, but lapses in meeting supply requirements are drastic failures. This perception can be corrected if management 

prepares public awareness campaigns that highlight its achievements, recognize remaining 

challenges, and mobilize public support to overcome those challenges.

Regulatory Environment

That successive governments have set tariffs at levels lower than those determined by 

NEPRA constitutes another key governance challenge. When NEPRA was set up through an 

act of parliament in 1998, it was empowered to regulate all aspects of the power sector, 

While five distribution companies 

show loss levels below 20 percent, 

others continue to have losses 

of more than 35 percent. In 

Hyderabad, Sukkur, Quetta, and 

Peshawar, collection rates have 

fallen from about 80 percent a few 

years back to below 60 percent in 

some cases today.
10 USIP.ORG • SPECIAL REPORT 375

including the setting of tariff rates distribution companies charged to consumers. In line 

with other international regulators, NEPRA determines tariff rates based largely on a rate 

of return methodology, guaranteeing utilities a fixed return (normally 14 percent) on their 

assets.22 This rate guarantees utilities a profit but does not necessarily ensure that the utilities will make available or earmark finances for new investment needs. Also, for NEPRA tariff 

rates to be enacted, they must be formally notified by the government through the official 

gazette, which has allowed successive governments discretion as to whether or not to pass 

these tariffs on to consumers in practice or to set them at a different level. Between 2003 

and 2008, the government did not adjust consumer tariffs, even as supply costs rose sharply, 

in line with spikes in international oil prices to $150 per barrel as of June 2008. Tariffs were 

adjusted regularly after then, but those changes only kept pace with increases in the cost 

of supply, and the 2003–08 shortfall remained outstanding. The government subsequently 

raised tariffs from less than Rs 5.50 per kWh in 2009 to Rs 9 per kWh by 2012. 

Since distribution companies are entitled to earn revenues in accordance with NEPRAdetermined tariffs, as mentioned before, the government makes up the shortfall between 

the posted and regulatory rates through subsidies. This burden is huge, amounting to more 

than Rs 1.5 trillion (US$15 billion at current exchange rates) between 2008 and 2013, 

around 2 percent of annual GDP.23 Moreover, the subsidy level is unpredictable, with actual 

payments often three to four times higher24 than the budgeted amounts. This drain on 

the budget constrains the government’s ability to finance other priorities. Government 

fiscal crunches have also prevented the payment of larger-than-expected subsidy bills in a 

timely fashion. Beyond the subsidy burden, the disconnect between NEPRA-mandated and 

government-notified tariffs also prevents effective monitoring of the distribution companies’ financial situation, as they can (and often do) attribute their failure to comply with 

performance standards to their inability to charge the tariffs to consumers.

Market Structure and Competition

Successive governments did not carry out plans to follow up the 1994 private power policy 

with the solicitation of new private thermal generation projects on the basis of competition on the price of power. The privately generated price of power therefore continues to 

be negotiated between the government and sponsors. This results in three anomalies. First, 

it absolves new projects from the responsibility to be competitive with other proposals. 

Second, it means NEPRA’s role in determining all power tariffs is circumvented. Third, the 

negotiations culminate in contracts between the government and the sponsors, the details 

of which are not made public—on the plea that the contracts are confidential and private 

agreements between the parties. Civil society therefore continues to criticize such contracts 

for their lack of transparency and accompanying risk of collusion. The lack of competition in 

selecting new projects prevents the country from reducing power generation costs, which 

utilities across the world have achieved.25

Reform Efforts and Priorities

Successive governments have adopted policies to promote the development of the power sector. The most comprehensive was the Strategic Plan for the Privatization of the Pakistan Power 

Sector, adopted in 1994. It called for reorganizing the power sector into autonomous companies responsible for generation, transmission, and distribution; separating WAPDA’s hydropower 

functions from those companies; setting up an independent regulatory body; and privatizing 

thermal generation and distribution assets in a phased manner. Also in 1994, the government 

announced a policy to attract private investment in power generation. While the government 
USIP.ORG • SPECIAL REPORT 375 11

had initiated discussions as early as 1986 with private sponsors to set up privately owned 

and operated power generation facilities, the policy combined the incentives, consents, and 

processing procedures into one document. 

By mid-1998, the reorganization and unbundling of WAPDA had been completed, and 

three gencos, NTDC, and eight distribution companies were incorporated as independent 

companies. The government set up PEPCO as a management company to oversee the functioning of the systems and to prepare the gencos and distribution companies for privatization. NEPRA was established through an act approved by Parliament in late 1998. In parallel, 

36 percent of the shares of the Kot Addu Power Company—established as a subsidiary of 

WAPDA—were sold to the private sector. A management agreement between WAPDA, which 

retained the remaining shares, and the new owners enabled the private sector to take over 

the management and operation of Kot Addu’s plant. 

Concurrently, the government announced its Private Power Policy, aimed at attracting 

the private sector into power generation.26 It offered attractive up-front tariffs to entice 

private investment, along with a premium for all generation projects that were commissioned by the end of 1997, and expedited the processing of those projects. The resulting 

inflow of private investment enabled generation capacity to grow by about 8 percent 

annually between 1990 and 2005. Installed capacity rose from 7,700 MW to 19,300 MW and 

production from 37.7 TWh to 93.8 TWh.27

Unfortunately, academic papers, articles and editorials in the press, and discussions and 

debates regarding the privatization policy settled on the common theme that the power 

supplied by Independent Power Producers (IPPs) is expensive, the amounts paid to IPPs are 

proportionately much larger than their share of electricity supply—so the IPPs are a burden 

on consumers, the government, and the utilities. The policy was also criticized for focusing 

on fuel oil; of the additional generation capacity installed between 1994 and 2004, more 

than two-thirds required fuel oil to function. As international oil prices were low through 

much of the 1990s, it was seen as a low-cost solution at the time, but the sharp increase in 

oil prices in the 2000s led to skyrocketing costs of power generation. The lack of diversity 

in fuel choices under the 1994 policy left Pakistan’s power generation vulnerable.

The 2013 Power Policy

In July 2013, shortly after taking office, the new Pakistan Muslim League-Nawaz government released its own power policy.28 It was well received among Pakistan’s donor partners, 

including the IMF. Following the IMF’s approval of its $6.6 billion extended fund facility in 

September 2013, the government of Japan, ADB, and the World Bank prepared projects and 

programs to support the implementation of energy sector reforms, including the withdrawal 

of tariff differential subsidies over a three-year period.29

The 2013 power policy aims to achieve several goals by the end of 2017. It seeks to eliminate the supply-demand gap by investing in new power generation capacity; reduce the cost of 

generation from the current US$0.12/kWh to below US$0.10; reducing distribution and transmission losses from 23 to 25 percent today to below 16 percent; and increase the collection of 

bills issued to consumers, from about 85 percent today to 95 percent. Over the past year and 

a half, the government has pursued a mix of supply- and demand-side measures to implement 

the policy. It announced a slate of ambitious projects to add more than 16,000 MW of new 

generation capacity by 2018. To address the sector’s financial constraints, the government 

raised tariffs for commercial and industrial users by about 44 percent in August 2013 and for 

residential consumers by about 32 percent in October 2013. The policy also calls to improve the 

efficiency of the utilities and reduce the cost of power, in part by privatizing the distribution 
12 USIP.ORG • SPECIAL REPORT 375

companies. These efforts, part of a broader package of proposed privatizations of state-owned 

enterprises, have moved slowly in part because the divestiture of public enterprises requires 

substantial preparation. The privatization program also faces opposition in political circles and 

resistance from vested interest groups within the utilities.

Supply Increases

Government implementation of the power policy has been most visible in its projects to add 

new generating capacity. These include the construction of the 6,600 MW coal-fired Gaddani Power Park, undertaken with financing from China and investors from the Middle East 

and due to be completed by 2018; a 1,000 MW solar power complex in southern Punjab; and 

1,410 MW of new generation capacity at Tarbela. The government has also announced plans 

to add up to 8,000 MW of additional nuclear generating capacity by 2030, again with China’s 

support, but it has released few public details of that program. 

If realized in full, the government’s slate of new generation projects will boost Pakistan’s 

total installed capacity by nearly two-thirds above its existing levels. While more than 70 

percent of this new capacity will be in the form of coal-fuelled plants,30 the planned generation additions are based on a mix of fuel sources and technologies. This diversity can reduce 

the sector’s vulnerability to unforeseen events, though the final selection of projects must 

include rigorous analysis to confirm that the projects are cost-effective investments for Pakistan. Ultimately, however, the government’s supply-side measures are unlikely to completely 

eliminate power shortages by 2018. Coal-based generation projects involve preparation and 

implementation periods of five to seven years, and hydropower projects require even more 

time. A more realistic estimate of how long it will take to install the required capacity is 

therefore eight to ten years.

Tariff Adjustments and Regulatory Reforms

In the short term, the government’s power policy calls to eliminate intrasectoral circular 

debts. In pursuit of this goal, the government paid off accumulated dues to generators and 

fuel suppliers from the federal budget during fiscal year 2012–13. The measure was intended 

to bring power generators operating short of full capacity for lack of operating capital back 

on line. The government also raised electricity and natural gas tariffs, except on the poorest 

quintile of consumers, and made efforts to divert gas reserves to power generation. Over the 

medium to long term, the government will promote investments in low-cost and domestic 

sources of power—hydro and coal—to reduce generation costs and, as a consequence, 

eliminate the need for periodic large increases in tariffs.

Improved Operating Performance

For state-owned electricity generation and distribution companies, the policy aims to 

improve performance and reduce losses through a number of measures. It seeks to enhance 

transparency through automation, greater use of optimization plans in generation and 

transmission, and the strengthening of NEPRA’s capacity and regulations. It would introduce 

performance contracts to monitor and reward (or penalize) utilities based on performance 

and upgrade manpower and managements via merit-based recruitments. Finally, it seeks to 

strengthen the legal framework and build up investigative and prosecution capacity to more 

strictly penalize electricity thieves and defaulting consumers.

The proposed actions are fairly standard operating characteristics of power systems, and 

NTDC has the capacity and extensive experience to implement them, though it may need to 

supplement its skills and acquire the latest planning models and software. Smart meters and 

Projects to add new generating 

capacity include the construction 

of the 6,600 MW coal-fired 

Gaddani Power Park; a 1,000 MW 

solar power complex in southern 

Punjab; and 1,410 MW of new 

generation capacity at Tarbela.
USIP.ORG • SPECIAL REPORT 375 13

automation can also help enhance collections and reduce losses. Some distribution companies have implemented smart metering on a pilot scale and achieved good results, and they 

are eager to roll out the programs to a wider set of consumers. The only area of uncertainty 

is in the proposal to use performance contracts for improving the utilities’ performance and 

to strengthen NEPRA’s monitoring systems and capacity. The government executed performance contracts with all distribution companies in 2009–10 but discontinued this exercise 

without a stated reason, and no report on whether the distribution companies achieved the 

goals and targets in the contracts has been published.

Improving the legal framework to penalize theft and crack down on losses is an even 

more serious challenge. Since taking office, the government has repeatedly stated its intent 

to introduce legislation in parliament to enhance penalties for theft and to comprehensively 

upgrade the Electricity Act, but those actions have not been completed. 

Competition and Privatization

While new generation projects can help alleviate the physical shortfall once completed, most 

have been negotiated directly and have not been subject to the competition that could ensure 

that the projects provide electricity at the lowest cost. Two mechanisms are proposed in the 

government’s policy to address this: First, up-front tariffs will be offered as ceiling prices for 

new generation projects—including renewables—and NEPRA will conduct or oversee a competitive bidding process to achieve maximum discounts from the tariffs. Second, a market for 

power will be established. Initially, generators will be allowed to sell electricity directly to large 

customers. Ultimately, the system will evolve into a power exchange on which all customers 

can choose the generator they wish and generators can sell power directly to all consumers. 

The objectives are very welcome, as they will enable Pakistan to lower electricity prices. 

Concurrently, the government will be able to reduce its contingent liabilities. It will not need 

to guarantee that NTDC will purchase the electricity produced by the new projects or by IPPs, 

or the price at which the new projects and IPPs will sell power to NTDC. Initially, the new 

investors and sponsors will agree to seek their own customers without a government guarantee for only part of the electricity they produce, and the government will need to continue to 

guarantee that NTDC or the Central Power Purchasing Agency (CPPA)31 will purchase the rest. 

Over time, the share of production from new plants covered by guarantees can be reduced, and 

sponsors should take over the responsibility for developing a customer base for the power they 

produce. This transition, from the commercial risks of new projects and IPPs being covered by 

government guarantees to those risks being taken directly by project sponsors, is essential if 

the full benefits of establishing a power market are to be achieved. However, these policy aims 

may face resistance from project sponsors, who clearly cannot be averse to the government 

covering some of their commercial risks.

Beyond the efficiency measures proposed for state-owned utilities, the policy calls to 

privatize existing distribution companies and implement new projects, either through full private ownership or through public-private partnerships. Privatization can help overcome many 

of the constraints—limited financial resources, low managerial capacity, poor human resource 

management, and low technical and operational skills—that the publicly-owned utilities face. 

Previous governments have repeatedly proposed privatization measures, but as noted above, 

K-Electric is the only distribution company yet to undergo such a process. Such efforts have 

faced political and legal backlashes, and the current government’s privatization initiatives have 

thus far been limited to divestments from financial institutions.

Two points must be considered while privatizing the utilities: the goals to be achieved 

through privatization and the specific criteria to use when selling those assets. The government wants the new owners to take full responsibility for the assets—that is, operate the 

While new generation projects 

can help alleviate the physical 

shortfall once completed, most 

have been negotiated directly 

and have not been subject to 

the competition that could 

ensure that the projects provide 

electricity at the lowest cost. 
14 USIP.ORG • SPECIAL REPORT 375

company, handle all financial and other obligations, and expand supply in line with rising 

demand. This objective cannot really be achieved if investors are asked to bid for a utility’s 

shares, with the shares going to whoever offers the highest price. The process should instead 

require bidders to submit development plans for the asset, which the Privatization Commission should evaluate for completeness, the sponsors’ capacity to deliver on commitments, 

and the adequacy of financial resources for expansion. If the shares simply go to the highest 

bidder—as has been the norm for all privatizations in the past—the country will end up 

paying more for electricity, and bidders inevitably will build the high share prices into the 

cost of the services they offer. 

Learning from the Experience of Neighbors

Despite the difference in size between India and Pakistan—many Indian states have power 

grids on par with Pakistan’s national system32—India’s power sector offers lessons for Pakistani policymakers to consider.33 The Indian system has expanded rapidly in the past five 

years, with rates of supply and consumption growth now reaching double digits. However, in 

the early years of the last decade and again in 2008–10, power supply shortages constrained 

Indian economic growth. As in Pakistan, most Indian utilities still cannot finance all their 

costs from their own revenues and rely on both federal and state subsidies for 10–12 percent 

of their total financial resources.34 However, Indian domestic savings are sufficiently large—

the savings rate in India has remained above 20 percent for the past two decades35—to 

finance investment and operating costs in other priority sectors, in contrast to Pakistan, 

which cannot easily afford a similar subsidy program because its savings rate has been below 

15 percent and declining over the same period. 

Despite the Indian power sector’s inability to fully finance all expenditures from its own 

resources, it continues to attract substantial private investment. Its 1990s policies offered 

generous incentives, including sovereign guarantees, for private investment in generation. 

These saw limited success, particularly as investors had to obtain multiple approvals and 

clearances for their projects.36 Over time, sovereign guarantees were replaced by competitive bidding and opening of the market for private power. This has allowed investors to dispose of a portion of their output on the merchant power market. 

Two major reform measures from the Indian government have enabled the country to 

attract large investments. The first is the 2003 Electricity Act, which established a power 

market where utilities and power traders can acquire or dispose of electricity. The second 

reform was the introduction of availability-based tariffs and a provision for unscheduled 

interchanges, initially for publicly-owned generating plants. These measures allow generation companies to dispose their surplus power on the exchange at prices that are fairly high 

(and therefore attractive).37 When project developers know that they are not at the mercy of 

distribution company management for their payments, and have other avenues for disposing 

of their output, their aversion to investing in a particular market can be significantly reduced 

and perhaps entirely eliminated. 

The overall effect of the reforms has been significant. Indian power generation capacity 

tripled between 1991 and 2012, reaching 214,000 MW. Over this period, the private sector’s 

share of power sector investments rose from around 3 percent to 29 percent.38 Investments 

involving private sector participation amounted to about US$100 billion between 2005 and 

2011. State utilities also invested heavily; between 2009 and 2012, those utilities’ net fixed 

assets increased from Rs 2.3 trillion to Rs 3.3 trillion, and capital work in progress rose from 

Rs 960 billion to Rs 1.13 trillion.39 The 2003 Electricity Act’s move from negotiated prices 

(with guaranteed returns for investors) to competitive bidding for new generation capacity 40
USIP.ORG • SPECIAL REPORT 375 15

also reduced the cost of generation. Despite perhaps less impressive improvements in distribution, the rate of access to electricity rose from 59 percent of the population in 2000 to 74 

percent by 2010.

Public-private joint ventures in electricity distribution were initiated first in Orissa, but had 

limited effects. Learning from Orissa’s experience, the privatization of distribution in North 

Delhi achieved much greater success. In parallel, the Electricity Act of 2003 established the 

concept of distribution franchises for privatizing distribution. Under this model, the franchisee 

took over certain functions—metering, billing, revenue collection, and capital expenditure—

while the state utility retained the legal responsibility for power supply. The Bhiwandi franchise 

operation, begun in 2006–07 in Maharashtra, realized considerable efficiencies and reduction 

in losses, as seen in the chart below.41 The franchise route is therefore being explored and 

taken forward in Bihar, Madhya Pradesh, Maharashtra, and Uttar Pradesh. 

The Way Forward

The shortage of electric power and other primary fuels has imposed large costs on the 

Pakistani economy. Sufficient finances for the large investments needed to match electricity demand and supply cannot be mobilized without actions on the macroeconomic front to 

increase domestic and national savings and improve the incentives for domestic and foreign 

investment. The experience of other countries that have gone through supply shortages and 

high costs of power can provide lessons for Pakistan—though privatization programs should 

be seen as an opportunity for reform, not just a means of achieving high asset returns.

The multiple challenges confronting the power and energy sector can be addressed only 

with the active participation of all stakeholders. Energy consumers need to be made aware 

of, and accept, the true cost of energy. Industrial and commercial users need to be told 

that relying on cheap electricity and gas is not a realistic option. Civil society needs to 

recognize that protests and destruction of public property can only harm itself. The media 

and academic circles should stop sensationalizing the shortages of electricity and focus 

on discussions, analyses, and solutions. Finally, the so-called rich and powerful must stop 

interfering in the utilities’ efforts to curtail theft and nonpayment.

As Pakistan struggles to address its power crisis, it must keep the following priorities 

and realities in mind:

• Increasing the physical power supply can only be achieved over the long term, and all 

efforts should be made to avoid unrealistic expectations that it can be done within five 

years. Projects to develop new generation capacity cannot turn into high-cost sources 

of supply, as has occurred with past efforts to shift generation to imported fuel oil. This 

risk can be reduced by subjecting those projects to least-cost criteria and competitive 

pressure. Some investment incentives may initially be needed. But achieving cost 

reductions over time requires that these be limited to only the first set of projects. 

Parameters 2006–07 2010–11

Table 1. Bhiwandi Distribution Franchise Performance

Aggregate technical and commercial losses (percent) 58 18.5

Number of transformers 2,254 2,611

Transformer failure rate (percent) 42 3

Metering (percent of customers) 23 98

Collection efficiency (percent) 58 99

Customers 174,000 235,000
16 USIP.ORG • SPECIAL REPORT 375

Investors, project sponsors, and financiers need to play their part as well. They must 

consider investment opportunities based solely on their financial merits, gradually take 

responsibility for seeking their own customers and fuel suppliers, and compete for new 

projects based solely on the prices for the electricity they produce.

• Ensuring the financial sustainability of the sector requires addressing the lack of new 

investments and the arrears utilities face, which limits their ability to use and build 

upon existing investments. As the government agreed under the IMF’s Extended Fund 

Facility loan program, electricity tariffs will need to be raised to account for the full cost 

of supply, with targeted subsidy exceptions to help the lowest income quintile. Tariffs 

must be adjusted promptly to reflect changes in costs. In turn, power consumers need to 

recognize that access to electricity entails an obligation to pay—on time and in full—

for the electricity they consume. Until consumers pay the full cost of power, the power 

shortage cannot be eliminated. 

• Improving operating performance requires upgrading state-owned utilities’ managerial 

capacity and skills, rebuilding their planning and strategic analysis capacity, and achieving 

higher performance standards. Performance contracts, benchmarks, and incentive 

bonuses may all be necessary to achieve such standards. More generally, improved 

performance also requires legal reforms that strengthen utilities’ ability to prosecute 

theft and nonpayment of dues. Distribution companies must build their capacity to trace 

malpractices and pursue claims through the judicial system. However, these efforts will 

not yield much success until all segments of society stand against power theft. The police 

and judicial system have to promptly handle complaints and cases involving power theft 

or other misuse of electricity. Not registering such cases, or allowing them to linger on, 

will defeat government and utility efforts to curtail theft and corruption.

• Private capital, managerial, and technical expertise must be mobilized to develop the 

power system. Past efforts to privatize the utilities have focused only on maximizing the 

government’s take. But performance can only be turned around through comprehensive 

plans to replace and modernize assets, attract the best human and managerial resources, 

implement modern managerial practices, and reduce discretion and misuse of authority. 

The government should try to make the best use of private sector involvement in power 

by ensuring that bidders compete for assets based on their plans for revitalizing them. 

Performance can only be turned 

around through comprehensive 

plans to replace and modernize 

assets, attract the best human 

and managerial resources, 

implement modern managerial 

practices, and reduce discretion 

and misuse of authority. 
USIP.ORG • SPECIAL REPORT 375 17

Notes

1. The shortfall was at its highest level in 2011, at 7,726 MW on October 1. See National Transmission and Despatch 

Company (NTDC), “Daily Operational Energy Data,” Islamabad, available at www.ntdc.com.pk/doed.php (accessed April 

15, 2015). These data are updated regularly; the government also provides it to the IMF and other donor missions. 

2. The shortfall represents the difference between a computed peak demand for power (based on various factors, 

such as weather conditions for the next day) and generating capacity available for meeting consumer demand. 

As the computation is specific to the following day, it should ideally not be used for projections or to compare 

with the estimated shortfall at other time periods. 

3. See Government of Pakistan, “Pakistan Economic Survey 2009-10,” Ministry of Finance, Islamabad, 183, available 

at www.finance.gov.pk/survey_0910.html (accessed April 15, 2015).

4. See Government of Pakistan, “Pakistan Economic Survey 2013-14,” Ministry of Finance, Islamabad, chapter 1, 

available at www.finance.gov.pk/survey_1314.html (accessed April 15, 2015). Table 1.6 and Figure 6 depict the 

decline in investment, from over 19 percent of GDP in 2005–06 to less than 14 percent of GDP in 2013–14; and 

in national savings, from 15.2 percent of GDP in 2005–06 to below 13 percent by 2013–14. 

5. See, for example, Government of Pakistan, “Federal Budget: Budget in Brief, 2013–14,” Finance Division, 

Islamabad, available at www.finance.gov.pk/budget/Budget_in_Brief_2013_14.pdf (accessed April 15, 2015).

6. International Energy Agency (IEA), “Share of Total Primary Energy Supply in 2012: Pakistan,” Paris, available at 

www.iea.org/stats/WebGraphs/PAKISTAN4.pdf (accessed April 15, 2015).

7. IEA “Pakistan: Electricity and Heat for 2012,” Paris, available at www.iea.org/statistics/statisticssearch/report/?

&country=PAKISTAN&year=2012&product=ElectricityandHeat (accessed April 15, 2015).

8. See, for example, World Bank, Pakistan-Dasu Hydropower Stage I Project (DHP-1) (Washington, DC: World Bank, 2014), 

available at documents.worldbank.org/curated/en/2014/05/19551979/pakistan-dasu-hydropower-stage-projectdhp-1 (accessed April 15, 2015). Annex 6-A provides details of the cost of electricity from ongoing hydropower project 

or those under construction in the public sector (between USc 2.49 and 4.45/kWh) and the corresponding cost of 

generation from the cheapest alternative, a combined cycle gas turbine (around USc 10.5/kWh).

9. Reducing the inflation rate to 6 percent (or lower) per year has generally been an end-of-program target of 

these programs.

10. Ministry of Finance, “Economic Survey 2013-14,” Table 1.6 and Figure 6.

11. The other countries are Bangladesh, Brazil, China, India, Indonesia, and the Philippines. These countries were 

selected based on their success in quickly overcoming power supply shortages (Brazil, China, Indonesia, and the 

Philippines), similarities with Pakistan in their operating environment (Bangladesh and India), and achievement 

of quick gains in efficiency and performance (China and several states in India).

12. Rashid Aziz, “Building an Efficient Energy Sector,” Pakistan Policy Note 1, World Bank, June 2013, 2, available at 

www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2013/07/17/000442464_20130717121

249/Rendered/PDF/795580BRI0SASE0Box0377381B00PUBLIC0.pdf (accessed April 15, 2015).

13. See World Bank, Pakistan - Second Energy Sector Loan (ESL) Project (Washington, DC: World Bank, 1989), 

available at documents.worldbank.org/curated/en/1989/06/737409/pakistan-second-energy-sector-loan-eslproject (accessed April 15, 2015). Paragraph 57 of this report provides details of the agreement reached on 40 

percent internal cash generation by WAPDA.

14. Ministry of Finance, “Economic Survey 2013-14,” 222-23.

15. Ibid., 222.

16. See Hydrocarbon Development Institute of Pakistan, Pakistan Energy Yearbook, various issues, available at hdip.

com.pk/contents/Yearbook-2013-Available/31.html (accessed April 15, 2015.

17. A good example is the World Bank support for NTDC’s investment program. In 2004, the government requested 

that the bank finance some power projects, including a 220 kV grid station at Kassowal for NTDC. ESAs, which 

the bank required for this grid station, needed to be revised and redrafted many times. In parallel, NTDC obtained 

funds from local banks for a 500 kV grid station at Sahiwal. By the end of 2008, the 500 kV Sahiwal grid station 

had been commissioned; by contrast, NTDC had not even initiated tendering for Kassowal project. While one could 

claim that such rigor applies to all World Bank projects, that a much larger project was completed in the time it 

took to complete one donor’s procedures for just the appraisal of a project also points to a need for some realism 

in those procedures.

18. The World Bank recently approved funding for the Dasu hydropower project. Preparatory work for that was carried 

out by WAPDA’s consultants. So WAPDA is demonstrating its ability to prepare hydropower projects up to donor 

requirements and standards. This raises a question as to why those requirements are not being met for Diamer Basha.

19. See Ministry of Finance, “Economic Survey 2009-10,” 186, which provides the first official assessment of the 

circular debt problem. For a more recent analysis, see Planning Commission of Pakistan, The Causes and Impacts 

of Power Sector Circular Debt in Pakistan (Islamabad: Planning Commission of Pakistan and U.S. Agency for 

International Development, 2013).

20. National Electric Power Regulatory Authority (NEPRA), State of Industry Report (Islamabad: NEPRA, 2013).

21. It should be noted that K-Electric (formerly KESC) is not technically a distribution company, as it also owns and 

manages transmission and distribution assets. However, as it provides lessons about the experience of private 

sector management of distribution assets, it is covered here as a case of distribution privatization.

22. See NEPRA, “National Electric Power Regulatory Authority (Tariff Standards and Procedure) Rules, 1998,” Islamabad, 

December 23, 1998, available at www.nepra.org.pk/Legislation/Rules/NEPRA%20(Tariff%20Standards%20and%20

Procedure)%20Rules%201998%20along%20with%20all%20amendments.pdf (accessed April 15, 2015).

23. This amount could have financed 4,500–5,000 MW of hydropower capacity, e.g., the Diamer Basha project.

24. Authors’ computations, based on budget documents.

25. India’s success in reducing costs through competitive bidding is documented in Sheoli Pargal and Sudeshna 

Ghosh Banerjee, More Power to India: The Challenge of Electricity Distribution (Washington, DC: World Bank, 2014).

26. Government of Pakistan, “Policy Framework and Package of Incentives for Private Sector Power Generation 

Projects in Pakistan,” Islamabad, March 1994, available at www.ppib.gov.pk/Power%20Policy%201994.pdf 

(accessed April 15, 2015).
27. See Hydrocarbon Development Institute of Pakistan, Pakistan Energy Yearbook (various issues) for details on 

generation capacity and power generation.

28. See Government of Pakistan, Ministry of Water and Power, available at www.mowp.gov.pk/gop/index.php?q=aHR

0cDovLzE5Mi4xNjguNzAuMTM2L21vd3Av (accessed April 15, 2015).

29. International Monetary Fund, “IMF Executive Board Approves 3-Year, US$6.64 Billion Extended Arrangement for 

Pakistan,” press release no. 13/322, September 4, 2013, available at www.imf.org/external/np/sec/pr/2013/

pr13322.htm (accessed April 15, 2015).

30. Ministry of Finance, “Economic Survey 2013-14,” 223.

31. Presently, CPPA is a department of NTDC and handles the functions of sale and purchase of power from all 

generators. The government is in the process of splitting off this power trade function of NTDC and establishing 

CPPA as an autonomous entity—that is, a company under the 1984 Companies Ordinance—that will conduct 

the power purchase function as an agent of the distribution companies. In future, therefore, contracts for power 

sale by generators and purchase by the distribution companies will be signed between the generator and CPPA.

32. For example, during 2011–12 total sale of power to consumers of the four distribution companies in Andhra Pradesh 

was around 73,000 gigawatt-hours (gWh), about 54,000 gWh for the four distribution companies in Gujarat, about 

38,000 for the five distribution companies in Uttar Pradesh, and around 80,000 for one distribution company in 

Maharashtra. See Power Finance Corporation report on Performance of State Power Utilities for 2009-10 to 2011-12.

33. This section draws upon the analysis, conclusions, and recommendations in Pargal and Banerjee, More Power to India.

34. Government of India, Power Finance Corporation, “The Performance of State Power Utilities for the Years 2009–10 

to 2011–12,” Government of India, New Delhi, 2013.

35. Authors’ computations.

36. See Pargal and Banerjee, More Power to India.

37. For example, the rate of unscheduled interchanges established by the Central Electricity Regulatory Commission 

in 2007 was Rs 7.5 per kWh (US cents 18.75 per kWh).

38. See Pargal and Banerjee, More Power to India.

39. See Power Finance Corporation, “Performance of State Power Utilities.”

40. Complementary actions to reduce the cost of solar and other renewables included “reverse auctions,” as opposed 

to reliance on feed-in tariffs only.

41. See Pargal and Banerjee, More Power to India.

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Of Related Interest

• Maximizing the Impact of Aid to Pakistan by Richard Albright (Peace Brief, July 2014)

• Mapping Conflict Trends in Pakistan by Saira Yamin and Salma Malik (Peaceworks, February 2014)

• Understanding Pakistan’s Water-Security Nexus by Daanish Mustafa, Majed Akhter, and Natalie 

Nasralla (Peaceworks, May 2013)

• Pakistan’s Energy Crisis by Elizabeth Mills (Peaceworks, June 2012)