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Peter Vanham JUNE 22 20120Print this pageReceive free University of Cambridge updatesWe’ll send you a myFT Daily Digest email rounding up the latest University of Cambridge news every morning.Drone attacks, political tension, a hidden independence war… Pakistan is living through some dark hours.And that is true in a literal sense as well. For more than a year, Pakistani cities have faced up to 20 hours a day without electricity. The blackouts are putting a drag on economic growth, stalling everyday life for many Pakistanis and sparking mass protests across the country.One reason is a near total inability to get the population to pay energy bills. But Kamal Munir of the Judge Business School at the University of Cambridge points to another culprit: privatisation.Munir, born and educated in Lahore, makes his case in the latest issue of the Economic & Political Weekly of India, to be published on Saturday.“The 1994 privatisation of the energy sector offered investors generous returns and created pricey overcapacity,” he told beyondbrics. “This created an expensive legacy which is the real problem of today’s energy crisis.”Unless that problem is dealt with, he sees no light at the end of the energy tunnel.He says Pakistan’s government, helped by the World Bank, “sweetened” its energy privatisation with attractive conditions, fearing it wouldn’t be able to attract investors otherwise. It guaranteed a 12 to 15 per cent annual return (indexed in dollars, not rupees), gave tax breaks and paid interest on private funding – more expensive for the government than providing the funding itself. ”The deal was too good to be true for investors,” Munir says.The government gave those guarantees during an economic boom it assumed would continue. That turned out not to be the case.Munir says the model turned out to be badly constructed in terms of creating value for the government and people of Pakistan. Even in an environment of economic growth and efficient energy generation, it would have been hard for the government to finance the plan. But since both have been absent, it became nearly impossible to pay for privatised energy.What else went wrong?Most private investors chose to build oil-powered plants because of their low construction costs and short lead times. This backfired as the oil price has trebled since the 1990s. Variable costs, and therefore prices to consumers, are at unsustainable levels. “No wonder many consumers can’t afford to pay their bills,” Munir says.To make things worse, the government neglected to step on the brakes when its generous conditions attracked too many investors. Assuming economic growth would continue, it allowed too much capacity to be built and guaranteed the same return on that extra capacity, whether it was used or not.But as growth stalled, the government could no longer meet its commitments. So operators have begun shutting down power plants, killing the lights across Pakistan – which is now enduring daily power outages in spite of having excess generating capacity of almost 35 per cent.Munir says the government should develop new power plants using cheaper fuels, and that this shouldn’t be a problem in a country with an abundance of coal, waterways and sun.But Pakistan must first escape its vicious payment cycle. The Economist magazine reports that Pakistan’s so-called circular debt to energy producers stands at $880m. It is only getting worse because of rising interest costs and dollar-rupee appreciation.“We need to get out of the the current deals,” says Munir. But at what cost, and does this imply default? “Your guess is as good as mine,” the academic admits.Still, he felt it was time to make his point. “I’m not defending people who don’t pay bills and I’m not promoting government subsidies to keep prices low,” Munir says. “But why isn’t anyone talking about the policy that led to this situation to begin with?”Related reading:Energy subsidies dilemma expose failings of Pakistan state, beyondbricsPakistan’s political crisis deepens, FT
Peter Vanham JUNE 22 20120Print this pageReceive free University of Cambridge updatesWe’ll send you a myFT Daily Digest email rounding up the latest University of Cambridge news every morning.Drone attacks, political tension, a hidden independence war… Pakistan is living through some dark hours.And that is true in a literal sense as well. For more than a year, Pakistani cities have faced up to 20 hours a day without electricity. The blackouts are putting a drag on economic growth, stalling everyday life for many Pakistanis and sparking mass protests across the country.One reason is a near total inability to get the population to pay energy bills. But Kamal Munir of the Judge Business School at the University of Cambridge points to another culprit: privatisation.Munir, born and educated in Lahore, makes his case in the latest issue of the Economic & Political Weekly of India, to be published on Saturday.“The 1994 privatisation of the energy sector offered investors generous returns and created pricey overcapacity,” he told beyondbrics. “This created an expensive legacy which is the real problem of today’s energy crisis.”Unless that problem is dealt with, he sees no light at the end of the energy tunnel.He says Pakistan’s government, helped by the World Bank, “sweetened” its energy privatisation with attractive conditions, fearing it wouldn’t be able to attract investors otherwise. It guaranteed a 12 to 15 per cent annual return (indexed in dollars, not rupees), gave tax breaks and paid interest on private funding – more expensive for the government than providing the funding itself. ”The deal was too good to be true for investors,” Munir says.The government gave those guarantees during an economic boom it assumed would continue. That turned out not to be the case.Munir says the model turned out to be badly constructed in terms of creating value for the government and people of Pakistan. Even in an environment of economic growth and efficient energy generation, it would have been hard for the government to finance the plan. But since both have been absent, it became nearly impossible to pay for privatised energy.What else went wrong?Most private investors chose to build oil-powered plants because of their low construction costs and short lead times. This backfired as the oil price has trebled since the 1990s. Variable costs, and therefore prices to consumers, are at unsustainable levels. “No wonder many consumers can’t afford to pay their bills,” Munir says.To make things worse, the government neglected to step on the brakes when its generous conditions attracked too many investors. Assuming economic growth would continue, it allowed too much capacity to be built and guaranteed the same return on that extra capacity, whether it was used or not.But as growth stalled, the government could no longer meet its commitments. So operators have begun shutting down power plants, killing the lights across Pakistan – which is now enduring daily power outages in spite of having excess generating capacity of almost 35 per cent.Munir says the government should develop new power plants using cheaper fuels, and that this shouldn’t be a problem in a country with an abundance of coal, waterways and sun.But Pakistan must first escape its vicious payment cycle. The Economist magazine reports that Pakistan’s so-called circular debt to energy producers stands at $880m. It is only getting worse because of rising interest costs and dollar-rupee appreciation.“We need to get out of the the current deals,” says Munir. But at what cost, and does this imply default? “Your guess is as good as mine,” the academic admits.Still, he felt it was time to make his point. “I’m not defending people who don’t pay bills and I’m not promoting government subsidies to keep prices low,” Munir says. “But why isn’t anyone talking about the policy that led to this situation to begin with?”Related reading:Energy subsidies dilemma expose failings of Pakistan state, beyondbricsPakistan’s political crisis deepens, FT
culture which is creating most of the problems with the system. In addition the kunda people don't pay their electricity bills but will pay the corrupt electricity company workers to allow the kunda system.
