ABSTRACT
Pakistan is embarking on an era of enhanced investment in the energy sector, galvanized by its collaboration with the People’s Republic of China. This investment and the policies governing it must be carefully thought out and implemented in a framework of reform which, unlike the past, eliminates the immense cost penalties of suboptimal decisions in the capital-intensive energy sector.
The World Bank’s most recent energy strategy accords top priority to an integrated approach in energy reform for the entire developing world, signalling a significant, long-awaited shift in emphasis. During the 1980s the development community, led by the Bank, introduced Integrated Energy Planning and Policy Formulation (IEP) in many countries (including Pakistan) as a vital policy tool to make informed decisions. However, following the break-up of the Soviet Union in the 1990s, the Bank de-emphasized the concept lest it be construed as supporting a central planning ideology, on the erroneous presumption that emerging free market forces would galvanize the right policy choices. Ironically, former Soviet Union states retained IEP while other countries, including Pakistan, began to reject it, resulting in a gradual fragmentation of policy-level institutions. Energy policy decisions were increasingly driven by vested interests, impeded by bureaucratic inertia. In cash-strapped economies, suboptimal choices led to immense economic cost penalties in a sector where interventions are typically highly capital-intensive. Over the past 10 years, developing countries began to clamour for the return of IEP citing its absence as a primary constraint to development; hence the change in the Bank’s strategy, signalling the triumph of economic common sense over ideology. This historical perspective is necessary to identify shortcomings and build a foundation for the future.
The revival of IEP is a great opportunity for Pakistan, especially at a time when the country is initiating major investments in the sector to reduce its acute energy deficit. Energy shortages are considered to be the most serious impediment to its development. Policy initiatives in the energy sector as well as the overall economy have been repeatedly thwarted by special interests, lack of a long-term vision, missed opportunities, and weak implementation performance. This has been compounded by a fragmented institutional structure, governance issues and security concerns, real or perceived. As bleak as it may seem, the situation is far from futile. Islands of excellence exist in Pakistan and, if policies are changed, the current ‘perfect storm’ of issues can be addressed much faster than pessimists would have us believe. Rather than offer patchwork prescriptions, this chapter argues for an approach which strengthens Pakistan’s capacity to generate its own policies to revitalize its energy sector. Fortunately, much of the human capacity to achieve this exists in Pakistan. Pakistan’s policymakers have been remarkably adept in articulating the overall objectives for energy policy within a national development context. The problem is not what the objectives are but how they can be achieved. Overwhelming evidence from energy analysts points to the absence of integrated policy formulation as a fundamental issue. Without this, decision making in the sector remains inherently flawed, with policy initiatives reduced to random speculation. What is now in place is a largely ad hoc process which responds to crisis situations instead of averting them through a long-term vision. In a high-deficit situation with significant energy reserves and vast areas deprived of commercial energy access, there is a temptation to develop all forms of available energy – a prohibitive approach in the face of severe financial constraints. IEP facilitates balanced, inclusive development through optimal resource allocation. A key element of IEP, perhaps the most difficult and therefore requiring strong political will, is to reverse the unchecked fragmentation of policy institutions and consolidate these into a single Ministry of Energy. The chapter will outline the concept of IEP and its two principal components: analysis to feed the decision-making process; and an integrated structure at the policy level to ensure sound decisions. It will trace the somewhat turbulent history of IEP engagement, which has been buffeted by political interference. It will go on to demonstrate how IEP, once revitalized, can be an effective starting point for energy reform and how it can address Pakistan’s most critical issues and streamline vital decisions for future policies and investments. Comparison with India which (dimensions aside) has similar issues, would further demonstrate the case for IEP, and serve to emphasize the immense potential benefits of regional energy trade – an important by-product of IEP analysis. The chapter thus illustrates how IEP, now a policy imperative for Pakistan, can pave the way for the recovery of the energy sector and thereby foster rapid inclusive growth.
