Cost of failure

The electricity sector is crucial to the functioning of a modern economy. Electricity is a critical input for virtually all economic activities, from manufacturing and construction to transportation and communication. Economic growth is closely linked to the availability of a reliable and affordable supply of electricity. Without it, businesses struggle to function, and the overall economy bleeds.

Lo and behold, our single-biggest economic failure is the failure of our electricity sector. We produce around 100 billion units of electricity per year, a staggering 27 billion units of which are routinely lost. What's worse, most of these lost units are generated using expensive imported furnace oil or LNG. In fact, the average variable cost of generating these lost units stands at Rs33 per kWh. That translates to an annual loss of Rs900 billion or $3 billion a year, every year.

What a paradox! Our government is willing to go to great lengths to secure a $1 billion loan from the IMF, even if it means sacrificing our own blood. But the government is doing nothing when it comes to addressing the massive $3 billion annual loss in our electricity sector. Isn’t it alarming to see the government being eager to go on an austerity drive, yet it handed out a subsidy of Rs989 billion last year and has allocated an additional Rs455 billion this year.

Lo and behold, on top of all these multi-billion rupee subsidies there’s circular debt. There’s little doubt that our electricity sector will make or break Pakistan’s economy – and circular debt will make or break Pakistan’s electricity sector. In 2013, the accumulated circular debt stood at Rs480 billion. In 2018, when the PTI government took over, circular debt amounted to Rs1100 billion. Red alert: Circular debt just crossed Rs2.6 trillion. That’s the equivalent of $9 billion-and we are dying to secure $1 billion from the IMF.

The mother of all questions is: Why is the government of Pakistan in the electricity sector? Why does the government of Pakistan buy each and every unit of electricity that is generated in this country for a total of a hundred billion units of electricity?

What’s the way out? The government must privatize power generation and distribution companies. The government must allow market forces to determine price and supply. The government must create a competitive market with multiple buyers and sellers of electricity. The government must create an enabling regulatory environment that promotes three things: competition, transparency and fair pricing. And if the government fails to do the above the cost of failure is $3 billion a year, every year.

To be certain, the one thing that will make or break the PML-N government’s economic policy is circular debt. Privatization will do three things: attract investment, increase efficiency and reduce government subsidies. Private companies will operate in a competitive market with multiple buyers and sellers of electricity, leading to better quality and lower-cost services for consumers. Remember, the cost of failure is $3 billion a year, every year.

The writer is a columnist based in

Islamabad. He tweets @saleemfarrukh and can be reached at:

farrukh15@hotmail.com