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A N I N T E RV I EW W I T H M IC H A E L K UGE L M A N

Pakistans Energy Insecurity

Anatomy of a Crisis and How to Move Forward

B y W E N DY C U L P
P u bl i s he d : Ju l y 2 2 , 2 015

According to the World Bank, one in three people in Pakistan does not have access to electricity. The shortcomings of the countrys energy
system have led to profoundly negative impacts on public health and well-being, as well as to a rise in energy-related civil unrest. With
energy demand expected to quadruple over the next twenty years, numerous specialists have argued that Pakistan must take action
now to effectively strengthen its energy security outlook. However, the country continues to face ongoing questions about how to muster
the political will necessary to move forward.
To better understand these issues, NBR spoke with Michael Kugelman, Senior Associate for South Asia at the Wilson Center and editor
of a newly released study Pakistans Interminable Energy Crisis: Is There Any Way Out? In this interview, he discusses how Pakistans
energy problems have become a full-scale crisis and proposes near- and long-term reform strategies.

What is the nature and origin of Pakistans

energy crisis?
This is a far-reaching crisis that affects millions
of people on multiple levels. Above all, it has major
economic implications: power shortages have cost
Pakistan up to 4% of GDP in recent years, hundreds
of factories have shut down because they lack power,
and some Western companies have pulled out of
Pakistan because of this electricity scarcity. Many
Pakistanis have lost their jobs because of power
outages. The crisis also aggravates a volatile security
situation because separatist insurgents in Baluchistan,
along with the Taliban, regularly attack electricity
infrastructure and plunge large areas of the country
into darkness.
Society on the whole is affected as well: Gas
shortages have left many people unable to cook, while
some hospitals have had to cut back on services for

the sick due to insufficient power. In June 2015, we

saw all too tragically the direct and deleterious impact
that the crisis has on the masses. Over just a few days,
more than 1,200 people died in a heatwave. Many
became sick after suffering inside homes that didnt
have electricity and therefore couldnt operate fans
or air conditioning. Given this sad state of affairs,
it is not surprising at all that people regularly stage
protests against Pakistans government and its
electricity utilities. Some of these demonstrations are
quite violent, with attacks on the homes and offices
of politicians.
What makes this all so troubling is that its
not shortages of energy alone that define the
crisisshortages of governance of energy are really
MICHAEL KUGELMAN is the Senior Associate for South Asia

at the Woodrow Wilson International Center for Scholars

in Washington, D.C. He is the editor of the new Wilson
Center study Pakistans Interminable Energy Crisis: Is There
Any Way Out?

THE NATIONAL BUREAU OF ASIAN RESEARCH July 22, 2015

what has gotten Pakistan into this mess. Authorities
simply dont manage existing resources well. They
have failed to address transmission and distribution
(T&D) losseswhich often approach 20%and to
repair dilapidated infrastructure. Islamabad has also
failed to deal with the financial debt encumbering
the energy sector, which is compounded by an
unsustainable energy mix that emphasizes expensive
hydrocarbon imports.

As part of a strategy to address the energy crisis,

the Pakistan Muslim League-Nawaz, Islamabads
current ruling party, has begun to implement
measures such as smart meters that capture the
performance of grid station feeders. How can these
measures help alleviate the energy crisis in the short
term, and are they sufficient for the long term?

It may seem that Pakistans energy crisis has been

endless, but actually the country enjoyed a relatively
high level of energy security for its first few decades
of existence. Demand was relatively low because
Pakistan was a very rural country at the time. Most
people were not on the grid and instead depended on
biomass and other traditional, noncommercial energy
sources. Most baseload energy was sourced from
hydroelectric dams, particularly Tarbela Damthe
largest earth-filled dam in the worldwhich was
launched in the 1970s.

The biggest advantage of these measures is that

they empower policymakers with constant data in
real time. There has long been a constant refrain that
Pakistan lacks sufficient data to deal with its energy
crisis. In effect, without access to data, it is difficult
to institute effective policies, or even know where to
start. If you know there are a lot of power outages in
a certain part of the countryor even a certain grid
or feederbut you dont know exactly why or how
often these outages are happening, coming up with
the right type of corrective policy is difficult.

However, rapid population growth and

urbanization sent demand soaring in the 1980s and
especially the 1990s. This was all compounded by
the fact that energy was used wastefully. Tarbela and
other energy infrastructure started to show their
age, and repairs were not made successfully. Poor
maintenance led to leaks and other losses. Pakistan
averted a disaster in the 1990s by aggressively
courting private energy investors, which resulted in
about 4,500 megawatts (MW) of generation being
added to the grid.

However, these smart meters and other new

technologies essentially put data in the hands of
policymakers in a way that could theoretically
allow them to make strong progress in reducing
those 20% T&D losses. Thanks to this new data,
useful discoveries have already been made: Feeder
lengths are directly associated with T&D losses
(longer feeders have higher losses), and there is no
relationship between losses and power cuts (feeders
with low losses often experience more power cuts
than those with higher losses).

These investments, however, were built on flawed

pricing models, and this is where the origins of the
current crisis can be traced. Pakistan, in its zeal to
attract investors, guaranteed financiers a fixed return
on investments regardless of project performance.
The result was shoddily constructed facilities that
used expensive and inefficient technology. Energy
costs eventually rose, and, as a result, the stopgap
measure of rapidly developing private power projects
failed. Yet demand continued to rise as Pakistans
economy and population grew, as urbanization
intensified, and as existing supplies continued to be
managed poorly. This series of events has brought us
to where we are today.

To be sure, the deployment of this new technology

is by no means a nationwide phenomenon. There
certainly are not smart meters all over Pakistan.
For this reason, it would be a stretch to say that this
will be a long-term boon for energy security. These
devices need to be deployed over a much larger
area before we can start having conversations about
lasting solutions.

THE NATIONAL BUREAU OF ASIAN RESEARCH July 22, 2015

As you note, this crisis has been an ongoing challenge.

You authored an NBR commentary in March 2013
in which you identified a number of near-term
steps that could be taken to address the challenges
confronting industry leaders and policymakers in
Pakistan. Have there been any major developments
in the interim?

As Pakistan looks at its longer-term strategies,

the country is projected to see significant energy
demand growth, which may further exacerbate the
crisis if not addressed. Where do coal and natural gas
fall within Pakistans current energy mix, and how
do opinions differ as to what sort of energy mix will
best help Pakistan address its energy needs?

The sad thing is, that commentary was written

more than two years ago, and I would argue that
unfortunately not much has really changed. You
have a political class that simply lacks the will to take
the critical yet politically risky steps necessary to deal
with the crisissteps that include phasing out energy
subsidies, introducing pricing reforms that require
people to pay more for electricity, and implementing
institutional reforms that streamline and bring
more order to a very chaotic and dysfunctional
energy sector.

Pakistan is not scarce in energy right now. It has

supplies but lacks the level of resources needed to
meet long-term demand projections. This means
that the composition of Pakistans energy mix will
go a long way toward determining the nature of its
energy future.
Pakistans official policy today is to push for
coal. Such a policy demonstrates a big break from
recent policy, which has emphasized imported oil
and gas. Coal constitutes a negligible percentage of
Pakistans current overall mix. The governments
view is that Pakistan should finally take advantage
of its vast quantity of untouched indigenous coal
reservesincluding nearly 200 billion tons alone
in the Thar Desert region of Sindh Province. Prime
Minister Sharif spoke of this policy repeatedly on
the campaign trail, and his government continues to
champion Thar today. The problem is that Pakistan
lacks the technological capacity and funding to access
these reserves. It also lacks infrastructure, especially
rail lines, to transport any extracted coal. One rarely if
ever hears politicians acknowledging these challenges.

Im actually somewhat surprised that so little has

changed over the last two-plus years. Elections in
May 2013 brought to power Prime Minister Nawaz
Sharif, who had campaigned heavily on the need to
deal with the energy crisis. His political party has
close ties to the business community, particularly
within the agricultural and sugar industries (Sharifs
family is in the sugar business), which are powerful
constituencies that would seem to be big proponents
of fixing the energy problem. And yet there has
been relatively little to show for these ties, other
than a few one-off achievements such as launching
Pakistans first solar power plant. This is not for lack
of trying, however; the slow progress may be more
the consequence of a government that has had to
deal with multiple immediate challenges ranging
from terrorism to threats to its political survival.

Natural gas, by contrast, is already a core

component of Pakistans energy policy and constitutes
about half the overall energy mix. Yet although gas
may appear to be the preferable option over coal, it
faces its own challenges. The problem is that domestic
supply is being rapidly depleted, and investor interest
has dropped off in recent years thanks to factors
such as low gas prices, prohibitively small gas fields,
overregulation, and a lack of security, technology, and
infrastructure in gas-rich regions. That said, there are

THE NATIONAL BUREAU OF ASIAN RESEARCH July 22, 2015

Another important consideration for how best to

resolve Pakistans energy crisis is the extent to which
the country should privatize its energy sector. What
are the benefits of partially or fully privatizing?

opportunities. Pakistan, like so many other countries,

could be a big beneficiary of the U.S.-Iran nuclear deal,
because this accord could pave the way for Pakistan
to complete a natural gas pipeline with Iran. Such a
pipeline could bring Pakistan up to a billion cubic feet
of additional gas per day.

Privatization is essential simply because the public

sector is so dysfunctional. When it comes to energy, the
public sector lacks money, it lacks capacity, and it lacks
technological know-how. This is a big deal in a country
where the government plays such a large role in the
energy sector. I think that if there is consensus about
anything in Pakistan, particularly within the political
class, its that the energy sector needs to experience
some levels of privatization. There have been efforts
toward this goal already. The main electricity supply
company in Karachi was privatized a number of years
ago, and weve seen this lead to greater levels of energy
efficiency and reductions in T&D losses, indicating
improvement. Furthermore, it goes without saying that
when energy institutions are untethered to the state,
they will have greater incentive to strengthen their
technical capacities and foster accountability.

How do you envision Pakistans energy mix evolving?

I think that in the short term, unfortunately,
Pakistans energy mix will continue in its current
formimported and expensive hydrocarbon resources,
namely oil and natural gas. At this point, no alternatives
are in position to be developed and brought online in
a big way over the next few years. Indigenous coal
has too many obstacles, hydroelectricity is limited by
Pakistans rapidly diminishing water supplies and by
influential citizens movements against large dams,
and renewables like solar and wind lack the scale to
serve baseload demand. This isnt to say that Pakistan
shouldnt do what it can in the immediate term to
embrace solar and windin fact, there is a moment
of opportunity because the costs of both resources
have fallen in recent months. Some experts believe
that with the right developers and investment plans,
Pakistan could conceivably bring a new solar or wind
plant online in less than twelve months. I fear, though,
that this may be overly ambitious.

The problem is that countries need to be very

careful about privatizing. They need to do it slowly.
You mentioned partial privatization as one option,
and that option may be the right way to go. There are
a lot of vested interests in Pakistan that would be very
uncomfortable with the idea of corporate folks coming
in and taking over ownership of both operations and
assets. In fact, the political class and even the courts
have at different times suggested that governments
need to take it slow when it comes to implementing
this type of change. Particularly risky would be
privatizing Pakistans distribution companies, which
are large, unwieldy, and employ a lot of people. These
would be very difficult to swiftly privatize. If you want
to look at short-term privatization opportunities, you
should look at the generation companies, which are
a bit smaller and easier to manage. The best bet is to

If you look a bit further down the road, perhaps

five or ten years from now, you should start to see a
bit more diversity in the energy mix. I think that the
Sharif government is really serious about investing in
renewables, particularly solar and wind. Islamabad has
launched a new solar plant and reduced some taxes
on solar panel imports. Pakistan has a lot of sun and
wind, so its the right kind of place to be tapping into
these resources. Bringing these resources online in
a big way should not be too hard, especially because
the only infrastructural upgrades requiring additional
investment by the government relate to T&D. So there
is good reason to be hopeful here.

THE NATIONAL BUREAU OF ASIAN RESEARCH July 22, 2015

privatize the generation companies and reorganize the
distribution companies into smaller units that operate
under franchising models. In other words, Pakistans
government should transfer operational ownership
of the distribution companies to private hands, while
retaining control of the assets. This approach would
be much less controversial, much less messy, and
ultimately much more effective.

In April 2015, China gifted an unprecedented

investment of $46 billion to Pakistan, $35 billion of
which is meant to be allocated to the energy sector.
How does this monetary gift compare to current
and prior investments from other countries? What
does China hope to accomplish with such a large
monetary gift?

How can Pakistan best encourage foreign investment

into its energy sector without compromising the
countrys energy security as it has done in the past?

Theres no overstating how much money is involved

here. For a comparison, the United States is one of
the most generous donors to Pakistan, and yet that
$46 billion far exceeds what the United States has
provided to Pakistan in development assistance over
a number of years. So its a lot of money; theres no
doubt about that.

In terms of encouraging overall foreign investment,

at the end of the day youre not going to get private
investment in Pakistans energy sector unless the
security situation calms down. The good news is that
terrorist violence has declined dramatically in Pakistan
in recent months. This is likely because Pakistani
military operations in the North Waziristan tribal
area have eliminated many terrorists. The problem is
that many terrorists were simply displaced, and once
theyve reorganized in their new sanctuaries, they could
launch new campaigns of terrorist violence. For this
reason, Pakistan should act now to make new pitches
for investors while the security situation is calm.

Chinas motivation for providing this gift is not

necessarily to improve Pakistans energy security. Or
at least thats not the chief motivation. China does not
provide infrastructure support, no matter how large
or small, out of sheer benevolence. Rather, China has
a strong interest in promoting energy infrastructure
projects in Pakistan because it believes Islamabad can
help serve Beijings broader strategic goal of developing
a new economic trade corridor to Chinas westone
that will link China to the Middle East and Europe.
Essentially, China is looking to create alternative trade
routes to facilitate the transit of its imports from the
Middle East and Europe to sites within China. And
Pakistan, because of its geographic position, plays a very
important role in this grand scheme. Hence, Chinas
stated intentions to build roads, power plants, and
ports in Pakistan. China is doing this not for Pakistan
but for itself. There is nothing charitable about this
$46 billion gift.

That said, stability is no silver bullet for sluggish

foreign investment. Pakistan needs to do more about its
red tape, corruption, and other nonsecurity factors that
constrain foreign investment. No new international oil
companies have entered Pakistan over the last decade,
a reality attributable not just to security fears but also
to concerns about overregulation and pricing policies.
One more thing Pakistan needs to do is cast a wider
net in terms of the types of energy investors it courts.
Its aggressive pursuit of Chinese investors has made
investors from other countries fear that the playing field
is not level. And the last thing Pakistan wants to do is
alienate otherwise-interested potential investors.

I would also contend that despite the rhetoric among

many in Pakistan that this investment will solve the
countrys energy crisis, it will not magically resolve
the problems from which the crisis stems. These
infrastructure projects, if they are developed, will
provide a whole lot of energyup to 17,000 MW of
new generation capacity, according to estimates. Thats
5

THE NATIONAL BUREAU OF ASIAN RESEARCH June 22, 2015

nearly as much as Pakistans total current installed
electricity capacity. However, theres no guarantee
that these projects will all come to fruition. China has
a history of promising more than it actually delivers.
Consider, for example, that in January 2015 China
quietly withdrew its support for the development of
several coal plants in Baluchistan.

power over how energy policy is formulated, developed,

and implemented. This simply doesnt work, because
all of these entities are highly dysfunctional. They dont
get along, and they dont coordinate. Its a classic case
of too many cooks in the kitchen.
If you want to talk about moving forward with new
policies, then thats great. But unless Pakistan has an
effective institutional structure in place to allow policy
to be properly developed, then nothings going to
change. Once a more effective institutional framework
is in place, then the rest can follow. At that point you
can introduce the pricing policy reforms and other
essential measures.

Furthermore, Chinas investments are all about

supply. They are meant to build new capacity. This
is well and good, but the projects will do nothing to
address the governance-related problems that fuel
Pakistans energy crisis. These investments have little to
do with repairing dilapidated equipment, undertaking
pricing reform, or bringing more order to the energy
sector. These investments will not be used to produce
the non-sexy yet essential outcomes needed to deal with
the crisis.

This institutional reform is something that only

Pakistan can undertake. It is not something that China,
the United States, or any other foreign donor can do
anything about. And this raises a broader issue: at the
end of the day, Pakistan, and Pakistan alone, needs
to take ownership over its energy crisis. This issue of
ownership, of taking responsibility without simply
blaming previous governments or other external factors,
is something with relevance for many of the countrys
policy challenges, whether related to economics,
politics, or security. Pakistan needs to acknowledge
energy as a big problem, and then it needs to take hard
and politically risky steps. And the first place to start
is with institutional reforms. This is what I said in the
NBR commentary more than two years ago, and its
what I believe now as well.

Quite frankly, China could do a lot more to ease

Pakistans energy crisis if instead of building new
infrastructure and simply creating more supply, it did
things that were more modest but no less important,
like trying to reduce transmission losses by repairing
equipment and machinery that dont work. Such
investment would be a big boost right there. But these
activities would not fit into Chinas strategic plans and
therefore are not likely to materialize.

What are the most important changes that we

must see in the political will and governance of
Pakistans energy sector to prevent the energy crisis
from worsening?

THE NATIONAL BUREAU OF ASIAN RESEARCH (NBR)

is a nonprofit, nonpartisan research institution

headquartered in Seattle, Washington, with a second
office in Washington, D.C. For information on NBRs
programs, please visit www.nbr.org.

I think the single most important thing that Pakistan

needs to do, yet has refused to do, is to bring more
order to the energy sector. There are over a dozen
different entities that have some sort of say in energy
policy. You have all these fiefdoms within the energy
policy world that want to have some sort of influence or

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