Planning for the energy sector
Over the last 60 years, the sector has not developed according to a well thought out strategy. Such a strategy — had one been formulated —would have given careful consideration to at least the following aspects. Given the country’s resource endowments, what was the appropriate mix of fuels for the various users of energy? In this context what should be the main sources for generating electricity? How should the prices of various sources of energy be determined; should they be left to the market or should the government have a role to play?
If the government were to get involved, should it subsidise some groups of consumers so that they can gain access to different sources of energy supply? Such subsidies can be justified on social as well as economic grounds but their use as a part of public policy has to be carefully weighed against the government’s budgetary situation. The traditional approach is to use the price mechanism for providing subsidies. This creates serious distortions in the market place and usually helps those who are not the main target groups.
Should the government undertake careful demand analysis based on various elasticities (price, increase in national incomes, increases in the incomes of different categories of consumers etc) to determine how much energy the country will need over some specified period of time? Or should this be left to the private sector if private enterprise was to get deeply involved in various aspects of energy development? If the government assumes the responsibility for the supply of some forms of energy, how should it plan to meet the anticipated demand?
Even if the state is heavily involved in the energy sector, as is the case, should the various functions associated with the efficient performance of the sector be carried out only by the federal government or should other levels of government also get involved?
For federal systems as large as Pakistan, should the production and distribution of various forms of energy be the responsibility of the federal administration, or of the governments at the provincial level, or of the district administrations? It would not be unreasonable or irresponsible to let the provinces into the energy sector and give them some responsibility for generating and distributing it.
In Pakistan, most of these questions were never posed the way I have asked them. In fact, even though the state assumed the responsibility for energy production and supply, it allowed energy policy to be developed as a series of responses to the crises the country has faced over the last six decades. Consequently, the energy sector at this time is a patch–work of the initiatives taken when supply shortages appeared in some form of energy supply.
In 2008, Pakistan is faced with multiple energy crises. There is a serious shortage of electricity which has manifested itself in the form of power outages — we call them “load shedding” — that have already taken a heavy economic toll. The government itself estimates the demand–supply gap in electric power at 4,000 to 5,000 MW or 20 to 25 per cent of the total installed capacity.
This will impact economic growth; it will, probably, shave off two percentage points from the rate of GDP growth this year, possibly also next year. By allowing load–shedding to affect productive activities to such an extent, the government has allowed unemployment to increase. The informal sector has been particularly affected and it is on this that most poor depend for their livelihood. Power shortages will contribute to increase the incidence of poverty. This will be the case in particular in the country’s large cities.
Pakistan has also been hit hard by the sharp increase in the price of oil, a commodity vital for the working of the economy but of which very little is domestically extracted. This has produced a heavy burden on the government’s budget since for many months Islamabad resisted the advice that it should allow the increase in prices to be passed on to the consumers. Resort to various forms of subsidies was the easier, short-term option but with heavy long-term costs. These costs will come in the form of very serious fiscal stresses.
Passing the price increase to the consumers would have no doubt resulted in some inflation but by taking on the burden on itself, the government is setting the stage for even greater and persistent inflation. This will certainly be the case if the budget deficit is financed through bank borrowing. In so far as helping the lower income groups is concerned, it is always economically more efficient to have the likely decline in their incomes resulting from inflation to be redressed by direct income transfers. Mechanisms for direct income support exist for compensating the poor and they should be used.
The third energy crisis concerns the shortages that have appeared in the supply of natural gas. The two publicly owned gas companies can no longer meet the growing demand for this particular fuel.
Most of the gas consumed in the country is produced at home but the large deposits discovered more than half a century ago have yielded a significant proportion of what they hold. No major discoveries have been made in recent years in part because those responsible for the business have not searched hard enough. For the last several years, Islamabad has been attempting to negotiate deals with the gas rich countries in its neighborhood for the construction of gas pipelines.
The project that has advanced the most is the pipeline from Iran that will not only supply Pakistan with large quantifies of this fuel but also India. However, the IPI pipeline is subject to geo-politics with the Americans putting a great deal of pressure, particularly on India, to abandon the project. Washington has considerable leverage on India at this time since New Delhi is in the middle of concluding a deal that will allow it to procure nuclear technology from America and other countries of the industrialised West.
Very careless management of what were once rich forest resources have produced the fourth fuel crisis for Pakistan. The country is losing its forest cover at an alarming rate and this means that the access to fuel is becoming increasingly more difficult for the poor living in the country’s poorer areas. Once again an energy crisis is causing increased suffering for the poor.
This long tale of woe should be enough to draw the government’s attention to finding long-term solutions to the energy problem. This has not happened for years if not for decades. The Planning Commission’s work in this area does not give much hope. One of the several “vision statements” it produced over the last several years concerns energy. It presented a blueprint for increasing the supply of electricity several–fold over the next couple of decades.
Translated into annual rates of growth, the Planning Commission’s suggested plan would have increased electricity supply by more than eight percent a year.
This is in keeping with the seven per cent increase it envisaged in GDP. The accompanying table lays out the plan’s main targets. It is clear from the table that the plan depends on natural gas as the main source of power generation. It does not make clear how this additional supply of gas would be obtained.
The need of the moment, therefore, is to abandon ad hoc responses to the management of the energy crises and to develop a medium-term programme (for the next five to 10 years) that finds operational answers to the several questions raised in the opening paragraphs of this article. Now that a committee has been convened to begin work towards the formulation of a five -year development plan this may be a good time to begin addressing these questions.