Pakistan has been undergoing significant changes in macroeconomic development and has achieved 8.4 per cent GDP growth in 2004-05. This growth will generate increased demand in electricity particularly in the manufacturing sector.
The demand of electricity, is supposedly to be increased to 7.4 per cent per annum till 2010. Some sort of balance between supply and demand will continue till 2006, but as the demand grows, the present capacity will fail to meet it.
The imminent gap between the demand and supply particularly after 2006, leaves no choice but to expand the sector— both through indigenous capacity and the foreign direct investment.
Despite the fact that there are many impediments in the development of these sectors, it is vital to get foreign investment and facilitate independent power producers(IPPs).
If the government introduces massive reforms in the energy sector as suggested by the international financial institutions, focuses on availability of electricity through foreign IPPs and import reliance, it may fail to provide inexpensive power to the consumers.
Despite the predicament, following the chronic power shortages, government realized that additional generation of about 9,800 MW by 2020 was required. It focused on the restructuring the sector amid making the utilities more efficient and financially viable under the 1994 Power Policy.
Foreign investment was invited on very attractive packages of a ‘cost plus’ approach and resultantly 19 companies brought 3,500 MW capacity. Wapda and the KESC had to purchase power from these companies at expensive rates as their own plants remained underutilized.
As an aftermath of the policy, there were public protests over the lack of transparency in dealing with IPPs, absence of international competitive bidding procedures, poor planning of the size and the location of power plants. Later the government pressurized the IPPs for lowering tariff..
Additionally, the International Funding Agencies showed concerns and advised the government to settle the issue of lowering the tariff amicably under the market economy strategies. However, the 1994 policy proved successful in lowering the power shortage with constant upward power tariff.
Meanwhile, the government has encouraged foreign investment in this sector and privatization process is on. Evidence suggests that privatization has social impacts, and high prices remain a cause of concern. Theory suggests that purely market-led strategy simply increases corporate profit without intelligent investment strategy.
Privatization needs to be combined with competition for the most socially beneficial outcome. According to Medium Term Development Framework, energy demand over the next five years is expected to grow 7.4 per cent per annum. Government plans to enhance the generation of 7100 MW by 2010 with the participation of private sector extensively and reduction in system losses and strengthening the regulatory framework.
There are two kinds of regulations: generic aspect in which prices are charged by a company ensuring a long-term viability, protection to consumers, and provision of transparent and easily understandable information. The other regulations are operational, to establish the key issues arising from industry structure, and the options for restructuring.
There is a clear interaction between the two types of regulations. Regulation can be concerned either with structure or conduct. In an ideal world, structural solutions would be employed where competition can exist and consequently no conduct regulation is required. However, this is often not possible at this stage in Pakistan. If a structural solution is not possible, conduct regulation is but the best solution.
From social perspective, the most important rationale for private service provision is that it reduces poverty. Private firms increase capital investment in services used by poor people, improving quality and expanding access, particularly where government is not able to make heavy investment and the private capital is the only viable opportunity.
