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November 3, 2017

Power problems


November 3, 2017

Pakistan’s troubles in international arbitrations have continued. The burden of unpaid dues and cancelled contracts continues to pile up on top of the country’s already high levels of obligations to debtors. In another international arbitration in London, a judge has asked Pakistan to pay more than Rs14 billion to nine independent power producers (IPPs). Not only is this a reflection of the continuing debt crisis in the power sector, it also shows poor policy and financial management. Instead of paying smaller amounts to clear the piling dues in the power sector, the government has continued to delay major payments to IPPs, leaving them with little choice but go through courts and, eventually, international arbitrations to get their dues paid. If the government had made the payment earlier, the amount would be smaller than what has been ordered now. But this is not the most significant element of this. The bigger tragedy is not the arbitration results themselves, but what it means for the current policies enacted to solve the power crisis in Pakistan.

The choice to focus on increasing power generation, instead of financial management and structural reform, is a questionable one. The risks of such an approach become clearer as the story of financial mismanagement in the power sector is revealed. The policy of increasing power generation remains dependent on IPPs – which remain a key cog in the circuits through which circular debt piles up. The government is insisting that the current award is not binding, which is likely to put it into more financial trouble when it eventually has to pay up. What is also important is to note that the nine power producers that went to international arbitration are all local ones. The IPPs claim that they suffered a liquidity crunch in 2011 due to non-payments, which led to fuel shortages. The government’s position has been rejected, which does not make it bad or good, but does show inefficiency in planning and financial management within the power sector. The system in place remains dysfunctional. This cannot be solved by adding more generational capacity. What would be the point of having surplus supply capacity if we do not have the capacity to pay for it? This is the fundamental contradiction that underpins three decades of failures to solve the power crisis in the country. Adding more IPPs will only increase disputes between the government and power producers – and will not solve the power crisis.

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