Why power-sector reforms fail

Pakistan’s power sector has long been a tale of reforms that promise much but deliver little. Despite decades of policy interventions aimed at boosting energy generation, reducing losses, and reforming cost recovery, the country remains mired in an energy crisis that undermines economic growth and burdens its population. The power capacity trap, rising tariffs, and unsustainable circular debt continue to plague the sector.

To understand why these reforms repeatedly fail, it’s essential to look beyond technical solutions and delve into the structural and institutional dynamics shaping the power sector. Drawing on insights from this year’s Nobel Laureates Daron Acemoglu and James Robinson’s ‘Why Nations Fail’, particularly in Chapter Two, ‘Theories That Fail’, offers a perspective on why Pakistan’s power-sector reforms fall short.

A common belief is that Pakistan’s energy woes stem from geographic limitations. Proponents of the geographic hypothesis argue that the country’s natural resource distribution, reliance on imported fuels, and transmission constraints, such as the north-south transmission challenge, hinder energy sector development. Socioeconomic and governance explanations often point to inefficiencies in public sector management, theft, and a perceived lack of accountability in energy consumption.

Yet these explanations, while convenient, do not fully capture the root causes of Pakistan’s power-sector failures. As Acemoglu and Robinson argue, geography and culture alone cannot explain why nations fail. Countries with more challenging geographies, such as China, Chile, or Brazil, have developed diverse and sustainable energy systems. The issue in Pakistan is not its location or socioeconomic attitudes but rather the institutions governing its energy sector.

The ignorance hypothesis, another explanation by Acemoglu and Robinson, suggests that the failures in Pakistan’s power sector are due to a lack of expertise among policymakers. This view has led to repeated hiring of consultants, commissioning of studies, and reliance on external technical expertise, often at the behest of multilateral agencies like the IMF, ADB, or the World Bank.

These interventions focus on capacity building, technical fixes, and introducing new management frameworks in the hope that knowledge will improve outcomes. However, despite this influx of expertise, the sector remains in crisis. Technical solutions – such as improving transmission efficiency, adding generation capacity, or addressing fuel mix issues – are well understood.

The real problem is not a lack of knowledge but entrenched interests and a lack of integrated, forward-looking planning that stymies meaningful change. Pakistan needs a homegrown power-sector agenda that integrates electricity with a productive economy.

The core issue in the power sector lies in its extractive institutions, which Acemoglu and Robinson define as systems that concentrate power and wealth in the hands of a few to the detriment of broader society. In Pakistan’s power sector, these extractive institutions take several forms. The country’s energy market is dominated by independent power producers (IPPs) that operate under long-term power purchase agreements (PPAs), indexed to the dollar, guaranteeing them high returns regardless of economic circumstances.

These contracts, signed during previous administrations, have become a financial burden for the government, leading to exorbitant capacity payments even when plants sit idle. Efforts to renegotiate these contracts or introduce competitive pricing models face stiff resistance from energy governance agents, backed by powerful political and business elites. While recent renegotiations have proven somewhat effective, the institutional framework remains deficient. This creates a scenario where the government is locked into unsustainable energy costs while consumers face higher tariffs and the power sector remains linked to an unproductive economy.

The energy bureaucracy itself is often termed as a source of institutional dysfunction. The governance structure is complex, with overlapping bodies such as the National Electric Power Regulatory Authority (Nepra), the Central Power Purchasing Agency (CPPA), and various distribution companies (DISCOs) operating with limited coordination.

The recent establishment of the Independent System and Market Operator (ISMO) is a step in the right direction. However, the degree of ‘independence’ in ISMO will be crucial for power market reforms, given that political interference in these institutions is rampant, with key positions often filled through patronage rather than merit. This mismanagement and inefficiency, especially within public sector entities, exacerbate the sector’s financial troubles as the state continues to bail out these companies with taxpayer money.

Adding to these problems is the rent-seeking behaviour permeating every level of the energy sector. Rent extraction – whether through inflated contracts, kickbacks on infrastructure projects, or overcharging consumers – enriches a small elite, leaving the population to shoulder the costs. Electricity theft is widespread, particularly in PESCO, TESCO, HESCO, and QESCO, often facilitated internally within distribution companies. While poor consumers suffer under high tariffs, elites either avoid payment or steal electricity without consequence. This rent-seeking behaviour distorts incentives, making reforms aimed at improving transparency or accountability difficult to implement.

Financially, the power-sector crisis is compounded by circular debt, a recurring feature of Pakistan’s energy landscape. Circular debt refers to the chain of unpaid obligations between government entities, power producers, and distributors, arising from inefficiencies, theft, and under-collection of bills. Each time debt reaches unsustainable levels, the government steps in with financial injections, temporarily clearing the backlog without addressing underlying causes.

This cycle has repeated for years, with successive governments borrowing from banks or issuing bonds to pay off circular debt, only for it to re-emerge, often worse than before. Without tackling the inefficiencies in billing, theft, and structural deficits of distribution companies, circular debt will continue to cripple the power sector.

Pakistan’s efforts to introduce renewable energy into its grid offer another example of how institutional failure derails reform. While the country has significant potential for wind and solar energy, implementing renewable projects has been hampered by poor governance, project approval delays, and lack of transparency in bidding processes.

Corruption in contract awarding and political interference in regulatory decisions have led to suboptimal outcomes, while entrenched interests in the fossil fuel industry lobby against the transition to renewables. Consequently, the potential for clean energy development remains largely untapped, even as Pakistan struggles with pollution and dependence on imported fuels.

The failure of reforms in Pakistan’s power sector highlights a critical lesson from ‘Why Nations Fail’: meaningful progress requires institutional change, not just technical fixes. Acemoglu and Robinson argue that inclusive institutions, where power is broadly distributed and political accountability is strong, are key to sustained development. In Pakistan, this would mean reducing the influence of vested interests, introducing transparency in energy contracts, and strengthening regulatory bodies to function independently of political interference. Without such changes, even the best-laid reform plans will continue to be undermined by the forces that have plagued the sector for decades.

Accountability is crucial to any reform effort. Transparency initiatives, such as public disclosure of IPP contracts and audits of public sector energy projects, would help curb rent-seeking behaviour. Additionally, restructuring state-owned enterprises, particularly DISCOs, to operate under professional management rather than political appointees would improve efficiency and reduce the financial burden on the state. Until these institutional barriers are addressed, Pakistan’s energy sector will remain trapped in a cycle of crisis and reform failure, with the population paying the price.

The failure of power reforms in Pakistan is not due to a lack of knowledge or technical expertise – the solutions are well known and many have been tried. Rather, the problem lies in institutional structures prioritising the interests of a few at the expense of many. As Acemoglu and Robinson suggest, reforms that fail to address these extractive institutions will inevitably fall short. Pakistan’s power sector will continue to be a costly drain on its economy unless the underlying institutional dysfunction is tackled directly.

Twitter/X: @Khalidwaleed_

Email: khalidwaleed@sdpi.org

The writer has a doctorate in energy economics and servesas a research fellow in the Sustainable DevelopmentPolicy Institute (SDPI).