Power Sector Distortions Cost Pakistan Billions

World Bank analysis shows need for reforms to cut costs and increase access to reliable electricity

ISLAMABAD, December 2018 – Pakistan’s power sector suffers from inefficiencies that cost the economy $18 billion or 6.5 percent of GDP in fiscal year 2015, according to a new World Bank report. Costs are far greater than previous estimates based on fiscal costs alone. Reforms could save Pakistan’s economy $8.4 billion in business losses and could increase total household incomes by at least $4.5 billion a year.

In the Dark: How Much Do Power Sector Distortions Cost South Asia states that Pakistan has made great strides in expanding electricity access and capacity. 91 million more people are receiving electricity for the first time from 1990 to 2010. However, up to 50 million people still do not have access to grid electricity and frequent load shedding damages businesses and the health and living standards of consumers.

Pakistan can boost economic growth and job creation by overcoming inefficiencies in its power sector,” says Illango Patchamuthu, World Bank Country Director for Pakistan. “Reforms that address these distortions can make better use of existing facilities. These need to focus on eliminating waste, promoting the shift towards cleaner energy and attracting private investments.”

Almost a fifth of electricity generated is lost through poor infrastructure, faulty metering and theft. Load shedding is caused by high cost, losses and subsidies which compromise investments and the ability to procure fuel. A lack of grid electricity also impacts health, as it leads to greater use of kerosene lamps, causing indoor air pollution linked to respiratory infections and tuberculosis risks.

The report argues that reforms that focus solely on liberalizing energy prices would lead to an excessively high cost of electricity because of inefficiencies in the system, negatively impacting the poor and vulnerable. Reforms must therefore go beyond liberalizing energy prices to address several aspects of the power sector distortions, including prioritizing gas allocation for efficient power generation and adopting tariff mechanisms that encourage performance. For the benefit of consumers, reforms should focus on rationalizing consumer prices for electricity and gas to reflect supply costs; and social assistance to help vulnerable populations cope with increased energy prices. Increased access to reliable power must be made a priority.

“Power sector reform should be a top priority, as few other reforms could yield economic gains of a similar magnitude so quickly, based on findings from this report,” says Fan Zhang, Senior Economist at the World Bank and author of the report. “If well designed, these reforms will directly benefit the poor by increasing access, improving reliability, and reducing cost and pollution.”