Apart from Islamist and separatist militancy, the energy deficit is the most significant obstacle for foreign investors in Pakistan and the biggest challenge for the new government. To overcome this, the government is likely to seek foreign investment in hydropower, coal-based power stations, and potentially renewable energy.
IHS Global Insight perspective | |
Significance | The Pakistan government reportedly approved a USD9.5-billion nuclear power plant in the port city of Karachi last week. The push in the development of nuclear energy is part of the Pakistan Muslim League-Nawaz (PML-N) government's wider strategy to tackle the country's crippling energy crisis. |
Implications | Given the importance of overcoming the energy deficit and the political difficulty of reducing subsidies, the government is also likely to prioritise the development of hydropower, coal-based power stations, and renewable energy in the medium term. Although a bias towards Chinese investors is probable, the government is unlikely to ward off overtly any investors that would significantly help in overcoming Pakistan's need for energy. |
Outlook | It is unlikely that the government will be able to achieve its target of completely overcoming the deficit during its five-year tenure. Rather, a more feasible target would be for a demonstrable easing of energy shortages – enough for the PML-N to make a case for another five-year term. |
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People on a street darkened by power cuts on the outskirts of Islamabad, Pakistan, 4 June 2013. |
Pakistani media on 24 October reported that the government had approved a USD9.5-billion nuclear power plant in the port city of Karachi. The project will be undertaken with Chinese assistance and will generate 1,100MW of power once it is completed. The push in the development of nuclear energy is part of the Pakistan Muslim League-Nawaz (PML-N) government's wider strategy to tackle Pakistan's crippling energy deficit. Nuclear power contributes less than 800MW to the current energy mix, but the Pakistan Atomic Energy Commission estimates this will increase by 8,000MW by 2030.
Apart from militancy, the energy deficit is the most significant obstacle for foreign investors in Pakistan and the biggest challenge for the PML-N government. According to government estimates, the energy shortfall reduces the annual GDP growth rate by 2%. Moreover, the energy deficit is heavily politicised. Despite warnings from key allies, the United States and Saudi Arabia, the government is unable to abandon the Iran-Pakistan gas pipeline project for fear of public backlash (see Pakistan - Iran: 13 October 2013: Islamabad asks Iran to build Pakistani side of IP gas pipeline).
Prime Minister Nawaz Sharif realises that substantial improvement will have to be demonstrated over the next five years for his party to stand any chance of re-election. With this in mind, the PML-N government undertook to eliminate the country's "circular debt" issue shortly after coming to power in May 2013. Circular debt is caused by distribution companies being unable to pay generating firms, which in turn are unable to pay fuel suppliers leaving many power stations closed. However, the new government under Sharif has paid off the USD5-billion circular debt with money raised through treasury bills. This reduced power cuts in the past few months and assuaged to a certain degree the concerns of the public. Pakistan's circular debt pile has begun building up again however with national media estimates suggesting the USD1-billion mark has been reached. Moreover, IHS sources in the country have reported that power cuts have begun to increase to a level similar to before the PML-N government came into power. Without structural changes, this trend is likely to continue, which in turn is likely to detrimentally affect the government's popularity.
Many of the structural changes were addressed by the government in its five-year energy plan, in which it outlines its strategy to overcome the deficit during its tenure (see Pakistan: 26 July 2013: Pakistani government presents five-year plan to tackle energy crisis). The strategy aims to end electricity load-shedding and power losses by 2018 – an ambitious target – as well as to reduce the role of furnace oil in the energy mix. In theory the plan makes sense, but its implementation will be a difficult task.
Subsidies
A key change will be the reduction of fuel and power subsidies – which is a driving factor in the accumulation of circular debt. This is also one of the key conditions of the USD6.7-billion International Monetary Fund (IMF) loan granted to the government in September 2013 (see Pakistan: 5 September 2013: IMF approves new USD6.7-bil. loan for Pakistan, averting another balance-of-payments crisis). However, this is likely to face resistance from the general public and opposition parties. In the same month, the government announced an increase in power tariffs by 40–120% for residential consumers, triggering criticism from the Pakistan Peoples Party and Pakistan Tehreek-e-Insaf (see Pakistan: 30 September 2013: IMF conditions will raise civil unrest risks in Pakistan over next year). An interventionist judiciary is also likely to oppose increases in power tariffs, which it interprets as adding to the public's hardship.
Yet, the PML-N's majority, which it gained through alliances with independent parliamentarians following the May election, means that it is in a better position than its predecessors to successfully implement the increases. The latest IMF loan is structured in a way that the government will have to demonstrate the implementation of IMF conditions at regular intervals over the next 36 months to be eligible for further tranches. With the government in dire need of foreign-exchange reserves (USD4.7 billion in September, enough to cover barely a month of imports), this increases the likelihood of longer-lasting tariff increases. However, it will mean that bouts of civil unrest will become cyclical as the government seeks to gradually increase tariffs over its tenure, with attacks on power company property in urban centres likely, particular during Pakistan's hot summer months.
The energy mix
The current energy mix is dominated by expensive furnace-oil generated power and hydropower (37% and 31%, respectively, in 2012). To reduce the reliance on furnace oil-generated power, the government is likely to develop hydropower capacity as well as coal-based power plants. The government hopes that the combination of new energy policy measures will attract and direct local and foreign investments to expand the country's power generation capacity rapidly. Notably, Pakistan seeks local and international private investment for small and medium-sized hydropower projects and is inviting multilateral agencies to partner on large infrastructure hydropower projects (see United States - Pakistan: 13 September 2013: US to Help Fund Pakistani Dam). The government also seeks to develop LNG terminals in "close collaboration with friendly countries such as China". However, Pakistan also wants to explore further coastal energy corridors based on imported coal, which is mixed later with domestic coal (see Pakistan: 14 February 2013: Pakistan backs down on coal imports to secure ADB funding). The rapid exploration and development of coal mining across the country – especially at the Thar coalfield, which is expected to hold the sixth-largest coal reserves in the world – and conversion of expensive residual fuel oil (RFO)-based plants to coal are the central tenets of coal policy.
Outlook and implications
Given the importance of overcoming the energy deficit and the political difficulty of reducing subsidies, the government is likely to prioritise the development of hydropower, coal-based power stations, and possibly renewable energy. This is likely to result in tax and other incentives for foreign investors. Although a bias towards Chinese investors is probable, given the countries' close relationship in infrastructure development, the government is unlikely to overtly ward off any investors that would significantly help in overcoming the energy deficit. During a four-day trip to the US on 20 October, Sharif invited US investors to help alleviate Pakistan's energy crisis. Nevertheless, it is unlikely that the government will be able to achieve its target of completely overcoming the deficit during its five-year tenure (to 2018), given the long lead times associated with major energy construction projects. Rather, a more feasible target would be for a demonstrable reduction in the energy shortage – enough for the PML-N to make a case for another five-year term.
Another factor that will determine the success of the government's efforts to attract foreign investment and in turn drive energy development will be how effective it is in reducing the threat of militancy. The PML-N has opted to pursue dialogue with the militants but has as yet been unable to initiate any negations (see Pakistan: 24 September 2013: Peace negotiations with Pakistan Taliban unlikely after church attack). This is likely to be a lengthy process, but as it stands, any peace talks with the militants are unlikely to reduce terrorism risks in the country given the fractious nature of the militant network. However, if the militant threat – or the international perception of the threat – is reduced, the likelihood of the five-year plan's success would increase substantially.