ID: 150573    4/21/2008 10:04    08ISLAMABAD1623    Embassy Islamabad    UNCLASSIFIED//FOR OFFICIAL USE ONLY    08ISLAMABAD1623    "VZCZCXRO3172 RR RUEHLH RUEHPW DE RUEHIL #1623/01 1121004 ZNR UUUUU ZZH R 211004Z APR 08 FM AMEMBASSY ISLAMABAD TO RUEHC/SECSTATE WASHDC 6591 INFO RUEATRS/DEPT OF TREASURY WASHDC RUCPDOC/USDOC WASHDC RHEBAAA/DEPT OF ENERGY WASHDC RUEHRC/USDA FAS WASHDC 4183 RUEHNE/AMEMBASSY NEW DELHI 3146 RUEHLO/AMEMBASSY LONDON 7745 RUEHML/AMEMBASSY MANILA 2969 RUEHKP/AMCONSUL KARACHI 9591 RUEHLH/AMCONSUL LAHORE 5342 RUEHPW/AMCONSUL PESHAWAR 4075 RUMICEA/USCENTCOM INTEL CEN MACDILL AFB FL RHMFISS/CDR USCENTCOM MACDILL AFB FL"    "UNCLAS SECTION 01 OF 05 ISLAMABAD 001623

SIPDIS

SENSITIVE

SIPDIS

E.O.  12958:  N/A TAGS: ENGY, EFIN, ECON, EINV, PREL, PK SUBJECT: NAVIGATING THE MAZE OF PAKISTANI ENERGY POLICY- PART ONE

REFS: A) Islamabad 00655 B) Islamabad 00810 C) Islamabad 00921 D) Islamabad 01420 E) Karachi 199

1. (SBU) SUMMARY: Pakistan's energy crisis has the potential to slow down economic growth and create law and order problems. With massive blackouts affecting every region and every demographic, energy policy and shortages are daily front page news. Not a single mega-watt of electricity has been added to Pakistan's national grid since 2000 despite record breaking economic growth and population expansion. With economic and manufacturing capacity slumping due to power outages, unemployment is increasing while tempers and temperatures are rising. Complicating the situation is the complex maze of GOP policy makers who cannot coordinate Pakistan's energy policy due to overlapping and contradictory authorities. As a reference for USG efforts in providing aid to Pakistan's energy sector, the following serves as a roadmap of GOP energy policy making bodies and entities. END SUMMARY.

2. (SBU) This three part cable reviews the haphazard mix of horizontally and vertically placed institutions which comprise the energy policy making sector of Pakistan. Part one explains the Ministry of Water and Power and its 19 subordinate agencies involved with electricity. Part two, in “Navigating the Energy Maze,” will address the Ministry of Petroleum and National Resources and the 16 subordinate agencies. Part three will address the other 4 Ministries and 7 other agencies involved in and at various levels of the GOP energy policy process. A lack of coordination and absence of any clear line of authority hampers any formulation of policy efforts to address the current energy crisis in Pakistan.

3. (SBU) This is a continuation of cables on Pakistan's energy sector.

--------------------- A SIMPLIFIED OVERVIEW ---------------------

4. (SBU) The lead line agency in government for the electric power sector is the Ministry of Water and Power. However, the Ministry of Petroleum and Natural Resources controls fuel supplies; the Finance Ministry holds the purse strings; the Planning Commission manages the investment approval process; and National Electric Power Regulatory Authority (NEPRA) regulates companies operating in the power sector. These operating companies include the Water and Power Development Authority (WAPDA), owner of the public sector hydro power plants, and the Pakistan Electric Power Company (PEPCO), the holding company for WAPDA.

5. (SBU) PEPCO includes three power generating companies (GENCOS), in the south, center and north; the National Transmission and Dispatch Company (NTDC), a central purchaser, dispatcher and wholesaler of power; the Central Power Purchasing Agency (CPPA) which has been set up as an autonomous body to acquire power from the generation companies (GENCOs), on behalf of the distribution companies (DISCOs), and deliver it via the NTDC network; nine power distribution companies (DISCOS), including one for the Federally Administered Tribal Areas; the Karachi Electric Supply Corporation, a private generation and distribution company covering Karachi; and the independent power producers (IPPs), the privately-owned power generation companies selling to the NTDC.

---------- MINISTRIES ----------

6. (SBU) Each federal ministry in the Pakistani government is headed by a Minister. A Secretary (a vice Minister equivalent) heads the administrative functions of the Ministry and is assisted by varying numbers of second tier Additional Secretaries and Members. While Additional Secretaries are career civil servants with functional and administrative background in that Ministries' functional area, Members are subject specialists with specific professional qualifications. At the third and fourth tier of each ministry are varying numbers of Joint Secretaries and Deputy Secretaries. In the energy policy making arena, each committee and subordinate agency contains a crisscrossing network of appointments from this cadre to ensure full authority by the federal government over the “privatized” joint ventures and provincial bodies.

--------------------------- Ministry of Water and Power ---------------------------

7. (SBU) The Ministry of Water and Power (MWP) develops all policy relating to water and power as well as the strategic and financial planning for both the public and private sector. A Secretary heads the administrative functions and is assisted by an additional secretary, three joint secretaries, an advisor and a member.

8. (SBU) The Ministry of Water and Power monitors activities in the fields of power generation, transmission and distribution, and performs a supervisory and advisory role for the power sector's overall smooth operation. MWP reviews all public sector power projects submitted by the Water and Power Development Authority (WAPDA) and its 19 “unbundled” corporations with a mandate to scrutinize the technical and financial viability. Similarly all private sector projects in the power sector are approved by the Private Power and Infrastructure Board (PPIB) under the close supervision of the MWP which sets the policy guidelines for approval. The MWP also oversees preparation of the five year plans and the Annual Development Program (ADP) in the water and power sector. Areas of conflict arise due to this delegated oversight review capacity delegated to the MWP which pits government oversight against private sector competitiveness.

9. (SBU) In its water capacity, the MWP also coordinates inter-provincial water sharing issues and activities related to irrigation, drainage, water logging and monitors the operation of Indus Water Treaty of 1960 between Pakistan and India. The Water and Power Wing are the main functionaries of the MWP including office of Chief Engineering Adviser/Chairman, Federal Flood Commission and PPIB.

------------------------------------- SUBORDINATE ORGANIZATIONS OF THE MWP -------------------------------------

10. (SBU) There are 19 subordinate, yet distinctly independent organizations, which report to the Ministry of Water and Power. Descriptions follow below.

------------------------------------- Water and Power Development Authority -------------------------------------

11. (SBU) With a umbrella workforce of 175,000 employees, and 14 subordinate agencies, Pakistan's Water and Power Development Authority (WAPDA) is one of the largest employers in Pakistan. WAPDA, Pakistan's only remaining public sector utility company, was created in 1958 to coordinate and develop the water and power sectors. WAPDA is headed by a Chairman, appointed by the Prime Minister for a three-year renewable term.

12. (SBU) Since October 2007, WAPDA has been separated into two distinct entities: WAPDA and the Pakistan Electric Power Company (PEPCO). Headed by a Chairman and assisted by three Members, for water, power and finance, WAPDA is responsible for water and hydropower development, whereas PEPCO is responsible for overseeing the privatization efforts related to thermal power generation, transmission, distribution and billing. However, privatization efforts have remained stalled for over a decade and WAPDA continues to forestall approval of drastically needed reforms to allow the unbundling to continue.

------------------------------- Pakistan Electric Power Company -------------------------------

13. (SBU) Established in 1992, Pakistan Electric Power Company (PEPCO) was established as a state owned private limited management company to manage and oversee activities related to privatization. PEPCO now has an independent Chairman and Managing Director. While GOP interlocutors tout PEPCO's independence, in practice PEPCO must get approval from WAPDA for decisions who in turn seeks approval from the MWP. “Privatization” has not translated into “independence” in Pakistan's energy sector.

14. (SBU) The unbundling of the power sector has resulted in the formation of fourteen corporate entities; three power generation companies (GENCOs), one national transmission and power dispatch company (NTDC) and nine distribution companies (DISCOs). These companies are each working under independent Boards of Directors. Yet, WAPDA still controls the finances of all these companies and in turn must get permission from the Ministry of Water and Power to make payments to each entity.

15. (SBU) Despite GOP claims that these companies are administratively autonomous, none of these distribution companies have any autonomy over their finances sixteen years after creation. Privatization efforts have stalled due to the inability of these companies to set their own tariffs based on the marginal cost of their individual production and largely because of the GOP's continued use of fuel subsidies which prohibits any free market price stabilization.

16. (SBU) The three GENCOS are Jamshoro Power Generation Company covering the south, Central Power Generation Company covering the central areas, and Northern Power Generation Company covering the north. The nine DISCOs include Faisalabad Electric Supply Company (FESC); Gujranwala Electric Supply Company (GESC); Hyderabad Electric Supply Company (HESC); Islamabad Electric Supply Company (IESC); Karachi Electric Supply Corporation (KESC); Lahore Electric Supply Company (LESC); Multan Electric Supply Company (MESC); Peshawar Electric Supply Company (PESC); and FATA Electric Supply Company (FATA ESC).

----------------------------------- Karachi Electric Supply Corporation -----------------------------------

17. (SBU) The Karachi Electric Supply Company (KESC) was incorporated in 1913, and the Government of Pakistan took control by acquiring a majority shareholding in 1952. As Pakistan's only “private” sector utility company, KESC's privatization was finalized in November 2005 with the transfer of management control and a 73 percent share from the GOP. KESC is listed on the Karachi, Lahore and Islamabad Stock Exchanges.

18. (SBU) KESC generates, transmits and distributes electricity. KESC provides electricity to some 12 million people through two million connections over a 6000 square kilometer area. Its two million connections reach a customer base that is primarily residential (1.5 million) and industrial (425,000).

19. (SBU) Despite privatization, the MWP meddles in the business affairs of KESC to ensure consistent electricity rates, manage the KESC debt and also gives permission to WAPDA to bridge any demand and supply gaps. KESC is not free to set its own tariff rate and thus operates at a loss. The GOP's use of fuel subsidies forestalls KESC's ability to charge competitive market rates.

20. (SBU) KESC is still purchasing electricity from WAPDA to meet its needs two years after privatization. Infrastructure upgrades cause severe strain on KESC's financial resources. As a result, WAPDA and KESC have continual payment disputes. Most recently, in March 2008, WAPDA literally turned the lights off, plunging Karachi's 12 million people into darkness for up to 8 hours in various parts of the city because KESC owes WAPDA USD 558 million. While WAPDA only cut the electricity for 1 hour and 25 minutes, KESC was unable to restart its systems properly due to its outdated equipment. (Ref E).

-------------------------------------- Private Power and Infrastructure Board --------------------------------------

21. (SBU) The Private Power and Infrastructure Board (PPIB) was created in 1994 to facilitate private sector investment in power generation with a “One-Window” facility for the establishment of power projects and related infrastructure. PPIB is responsible for the negotiation of implementation agreements, establishing investor incentives, and clarifying investor rights and obligations. PPIB also provides a guarantee to the individual power producers (IPPs) for the performance of the power purchaser and fuel supplier. It also assists the regulatory authority (NEPRA) in determining and approving the tariff for new private power projects.

22. (SBU) PPIB also provides support to the power purchaser and fuel supplier while negotiating the Power Purchase Agreement (PPA), Fuel Supply Agreement (FSA)/Gas Supply Agreement (GSA), other related agreements, and serves as a liaison with local and international agencies for facilitating and expediting progress of private sector power projects.

23. (SBU) The Minister for Water and Power serves as the Managing Director of the PPIB. The organization is governed by a Board of Directors which consists of the Minister for Water and Power; the Advisor to the Prime Minister on Energy; the Secretaries from the Ministries of Water and Power, Petroleum and Natural Resources, Finance, and the Board of Investment, plus the Member Planning Commission, the Chairman of WAPDA and the Managing Director of PPIB. The Managing Director is responsible for the administrative control of the organization and is assisted by four directors in the areas of administration, finance, projects and legal.

------------------------------------ Alternative Energy Development Board ------------------------------------

24. (SBU) The Alternative Energy Development Board (AEDB) is mandated to act as a “One-Window” facility for establishing, promoting and facilitating renewable energy projects based on wind, solar, small-hydel, fuel cells, tidal, ocean, biogas, and biomass.

25. (SBU) AEDB is governed by a Board of Directors chaired by the Minister of Water and Power. The other members are the MWP Chief Executive Officer, AEDB Secretary, Advisor to the Prime Minister on Energy, and Secretaries from Ministries of Finance, Water and Power, Science and Technology, Petroleum and Natural Resources, Planning Commission and Environment. The board also has three Members from the private sector.

26. (SBU) The GOP has tasked the Board to ensure that five percent of the total national power generation capacity (or approximately 970 MW) will be generated through renewable energy technologies by the year 2030. In addition, under the remote village electrification program, AEDB has been directed to electrify 7874 remote villages in Sindh and Balochistan provinces using renewable energy. The AEDB is responsible for creating development which incorporates private sector participation in plans for solar products, including lights, fans, stoves, and heaters.

27. (SBU) The AEDB has thus far issued 94 letters of intent to potential investors for setting up 50 MW wind power plants; however, none are operational yet because of on-going land title disputes and the absence of a set tariff. The inability of the AEDB to produce tangible projects resulted in internal political shifts. While established in May 2003 as an autonomous Cabinet division, the administrative control of the Board was downgraded to be subservient to the MWP in February 2006, and the subsequently ruffled feathers are still visible in turf wars over control of various projects.

--------------------------------------------- ---- Pakistan Council of Renewable Energy Technologies --------------------------------------------- ----

28. (SBU) Under the administrative control of the Ministry of Science and Technology, the Pakistan Council of Renewable Energy Technologies (PCRET) coordinates renewable energy technology research and development. PCRET is actively involved in research and development activities in photovoltaic, solar thermal applications, micro-hydel power plants, biogas plants and wind energy. AEDB and PCRET have duplicative mandates, yet AEDB falls under the MWP and PCRET under the Ministry of Science and Technology.

-------------------------------------- National Engineering Services Pakistan --------------------------------------

29. (SBU) Established in 1973 as a private company by the GOP, the National Engineering Services Pakistan (NESPAK) is ranked in the world's top 200 consulting firms. With a staff of over 2400 employees including 1900 engineers, architects, planners, geologists, economists and other professionals, NESPAK has undertaken 2816 projects worth USD 151 billion, of which 2419 are domestic and 397 are overseas.

30. (SBU) NESPAK specializes in power and mechanical engineering; water and agriculture; architecture and planning; highways, bridges, airports and seaports; environmental and public health engineering; engineering for industry; heating, ventilation and air-conditioning; information technology and geographical information systems. NESPAK has provided pre-feasibility and feasibility studies to power producers in public and private sectors.

----------------------------------- National Power Construction Company -----------------------------------

31. (SBU) A state owned enterprise under the control of the MWP, the National Power Construction Corporation (NPCC), was established in 1974 to execute power engineering projects including extra high voltage transmission lines, cable networks, distribution network, substations, power generation plants, industrial electrification, and even the external lighting of housing complexes. The Secretary of Water and Power heads the NPCC's five member Board of Directors drawn from the Ministries of Water and Power and Finance. With an enormously expansive mandate, NPCC was created to ensure speedy execution of power projects.

---------------------------- Pakistan Engineering Council ----------------------------

32. (SBU) Created in 1976, the Pakistan Engineering Council (PEC) is a regulatory body responsible for overseeing the transparency of bidding documents, setting evaluation criteria as well as awards and execution of construction and consultancy contracts for public and private sector power projects. PEC works with both federal and provincial governments and must approve project proposals. The PEC also regulates the engineering profession in Pakistan and oversees the accreditation of engineering programs at all educational institutions.

PATTERSON