The present severe shortage of electricity supply at one level is due to the failure to prioritize public policy within a long term perspective. In my first book (Strategic Issues in Pakistan’s Economic policy) published in 1988, I had argued that “…the energy sector would be a critical constraint to industrial growth in the future.” I had then pointed out that there were 8 sites upstream of Tarbela (including Basha and Dassu) where hydro electric power projects needed to be urgently undertaken and which could together provide 10,000 megawatts of electricity. But governments in Pakistan have failed to address long run problems until they become short run crises. Now power outages are causing acute distress to citizens and creating a major constraint to economic growth. Let us examine the anatomy of this crisis.

The crisis originated in the failure to invest adequately in installed capacity and in cheaper rather than expensive energy sources. Dr. Afia Malik at PIDE in a powerful study estimated that to sustain a 1 percent growth in GDP a 1.25 percent growth in installed electricity capacity is required.  Since GDP growth during the period 2002-07 was 7 percent annually, an 8.8 percent annual growth in installed capacity was required. Yet the Musharraf government increased installed capacity by only 2.2 percent annually during the period. To make matters worse, successive governments have been focusing on the much more expensive oil based thermal power plants rather than the cheaper hydro electric plants. Consequently the percentage of total electricity supply generated by hydro electric power fell from 60 percent in 1962, to only 30 percent in 2009-10. This adverse change in the composition of electricity supply resulted in sharply increasing the average cost of electricity production, which accelerated as oil prices rose sharply.
It is testimony to the myopia of public policy that in the first decade of the 2000s no significant investment was made in the up gradation or even maintenance of public sector power generation plants, resulting in a situation where their actually available capacity fell to only half the installed capacity. Moreover the IPPs also did not invest adequately in maintenance and up gradation of their power plants because of the uncertainty of government policy and pessimistic expectations of future profitability. Consequently the supply-demand gap of electricity widened, making the shortages more acute.

Until recently the government kept the notified price of electricity that power distribution companies could charge to consumers, below the cost at which they were buying it from power producers. This created such huge subsidies owed to the distribution companies that a cash strapped government could not entirely pay. This led to the emergence of the problem of circular debt. As the government failed to pay the full dues to the distribution companies, these in turn failed to pay the dues to the power production companies, who then failed to pay the dues to the oil suppliers. The resultant fuel shortages induced further underutilization of the power production capacity and thereby an intensification of the problem of load shedding. The total circular debt may now be Rs. 870 billion.

The losses of the power distribution companies were not entirely due to the gap between cost and price. Dr. Afia Malik has estimated that two thirds of the financial losses of power distribution companies are due to theft.

It is clear that the power crisis is due primarily to a failure of public policy: Delay in setting up hydro power projects, wrong choice of technology in oil based rather than coal based thermal power plants, delay in rationalizing tariffs and poor fiscal management. What is the economic cost of the power shortage? Earlier studies have estimated that the cost to the industrial sector alone is 10 percent of the value added in that sector, or about 2 percent of GDP. Now in an important new study by the Institute of Public Policy, the costs to the economy as a whole have been estimated. The figure is a multiple of 2 percent. This is grim, but it also suggests that a strategy of overcoming the power shortage can lead to a GDP growth of 8 percent.