THE acute power crisis gripping Pakistan’s cities, towns and villages is a colossal failure of governance. Given that it is estimated to cost three to four per cent of GDP a year in direct costs alone (such as output loss), larger than the estimated losses from terrorism, the power crisis is by far the biggest constraint facing the economy — and has been for three years, if not more.

However, its pernicious effects have spread far beyond the economy, as it tears into the social fabric and the daily routine of 20 million Pakistani households each and every unrelenting day (and night).

Despite delivering such massive suffering and exacting such a huge cost over a prolonged period, the inertia and criminal negligence displayed by the ‘awam dost’ government (the PPP and its allies) on an existential issue for millions of households beggars belief.

ScaleDifferent estimates of the economic loss caused by the energy crisis are fairly similar in magnitude — around three per cent of GDP per annum. Having being involved in the first of these (for the Economic Survey 2009-10), it was clear that we were operating with a conservative estimate since it was based on reported economic activity. Adjusting for the estimated size of the undocumented economy, the total economic loss is closer to four per cent of GDP a year — or, roughly a staggering Rs800bn every year. Following from this, the cumulative loss to the economy in terms of foregone value addition since 2008 amounts to a colossal Rs3tr.

The impact on jobs has been severe. Using the employment elasticity calculated by the Planning Commission, the ‘foregone’ GDP (the value of goods and services the economy would have otherwise generated) of almost 15 percentage points since 2008 translates into ‘lost jobs and employment opportunity equal to 4.1 million — equivalent to roughly 7.5 per cent of the labour force.

In addition to these direct and visible costs, the lingering and unaddressed energy crisis has introduced systemic risks for the budget, for the banking system — and for foreign investors. Having been associated with the board of one of the largest foreign investments in the country in the energy sector, I have seen first-hand the level of angst and frustration the circular debt has caused to leading foreign companies — and how it has not just put off new investment, but jeopardised existing investment.

CausesWhile a number of factors have conspired to trip up the power sector in the past few days — the water situation, shutdown of Chashma, higher mean temperature, an intensification of circular debt — its basic and recurring cause is structural in nature.

A progressively heavier reliance on thermal generation, at a time of declining gas and water availability, has exposed power-generation companies to a huge shock to their cost structure — the price of imported fuel oil has rocketed from around Rs21,000 in 2008 to over Rs72,000 per metric ton currently. With electricity tariffs not keeping pace, and line losses rising, Pepco’s ability to pay fuel suppliers has been severely compromised. This shock has been transmitted along the line (PepcoÕIPPs, SSGC, SNGPLÕrefineries, OGDCL, PPL).

Power-sector experts had begun warning the previous government since 2003 of a looming energy crisis by around 2007 — to no avail. Not only was new generation capacity not added to the system — despite pursuing a professed ‘growth model’ of promoting consumerism in the country — new investment in upgrading the transmission and distribution network was also not accorded priority.

In fact, the economic team of the Musharraf government (Messrs Shaukat Aziz, Salman Shah and Ashfaque Hassan Khan) were so sold on consumerism as Pakistan’s deliverance that they diverted a precious and declining resource — natural gas — from the power sector to fuel private cars as CNG. In addition, to win popularity, the government froze power tariffs between 2003 and 2007, sounding the death knell for the financial viability of the sector.

RemediesHowsoever intractable it may seem, the energy crisis has remedies, including solutions that will mitigate the suffering of electricity consumers in the very short run. Broadly, these fall under four categories:

1)    Making power generation cheaper — in the short run, making additional gas available by diversion from CNG, fertiliser and the domestic sector will be required;2) Implementing a credible ‘energy conservation’ strategy (already prepared);3) Improving governance:

a. Ensuring system losses on account of outright theft are reduced from current 15-17 per cent (Karachi’s MQM strongholds are reportedly top of the pile in non-payment, matching Fata);

b. Ensuring recovery of past dues (with the revival of the federal adjustor’s office that was set up in the Ministry of Finance to net off budget releases to non-paying government entities);

c. Expediting the corporate restructuring of the power sector (with the PM being the biggest stumbling block to bringing ‘clean boards’ since March 2010);

4) Moving towards a cost-recovery tariff

Such an approach was tabled by the prime minister’s Economic Advisory Council (EAC) in 2008, and again by experts in the ‘energy summit’ in April 2010. In both cases, the government has not followed up on recommendations of its own committees for over two years, compounding the severity of the problem. One reason is that implementing these recommendations have painful trade-offs, some of which could be politically difficult.

In conclusion, over two months ago, when I wrote in this newspaper that “the energy chain is close to collapse” due to the unresolved circular debt, a leading apologist of the government wrote in response that a sense of crisis was deliberately being manufactured. Hopefully, this idiotic and blinkered attitude will now be put to rest, and a sense of realism and urgency introduced in providing a modicum of electricity — if not governance.

The writer heads a macroeconomic consultancy based in Islamabad.