Feisal Naqvi

Archive for January, 2008|Monthly archive page

Costs of economic illiteracy

In Uncategorized on January 15, 2008 at 12:28 pm

The Ministry of Water and Power is now once again trumpeting the 1995 Hydel Policy. But building dams takes time. Getting other people to build dams for you takes even longer. And so, in the meantime, we remain stuck with the consequences of other people’s economic illiteracy

Like most other crises in this country, the current power crisis has deep roots. To understand why we have no electricity today, start by going back to 1986 when a committee of senior bureaucrats was tasked with trying to find out the cost of electricity as produced by Tarbela.

The answer should have been fairly simple: take the cost of building the entire project and divide by the amount of electricity being produced. Unfortunately, what the juniouses did (to use a term coined by my six-year-old son) was to assume that the main purpose of Tarbela was to store water and that the production of electricity was simply an incidental benefit.

So while figuring out the cost of the project, they left out most of the cost of the dam itself and instead only used the cost of the turbines and other generating stuff.

To put it bluntly, this was not a “snart” move (again to use my six-year old’s vocabulary). It was as if I had asked somebody what the cost of buying a new Corolla was, and their response was, “well if somebody gives you a Corolla for free, it costs about one rupee per kilometer to run”.

This initial and wondrous leap of logic has poisoned the well of hydel power policy ever since. The first consequence was that when the federal government was trying to figure out how much it should be paying the NWFP as hydel profits, the figures went haywire. The Frontier government is currently claiming that the federation should pay it 90 paisas/kwh for hydel projects in the province, like Tarbela. On the other hand, if a private party sets up a hydel project in the NWFP, the Frontier government only wants to be paid 15 paisas/kwh. In short, the Frontier government wants to charge the federal government six times what it charges private parties for the privilege of building and operating a hydel project in the NWFP.

The second consequence of this original leap of logic was that people in WAPDA became convinced that hydel electricity should be available for next to nothing. And it is true: if somebody gifts you a large dam, generating electricity costs you next to nothing. All you need is somebody to gift you the dam.

Fast-forward now to 1994 when BB’s second administration came up with a new power policy. The policy itself was well intentioned and effective. The idea was to build credibility by buying the first 1,500 megawatts at relatively high prices, and then buy another 1,500 megawatts at relatively lower prices. The next step was to use the breathing space being provided by the purchase of expensive thermal energy to procure cheaper hydel energy (but which takes a lot longer to build).

The first half of the policy went swimmingly. The only problem was that the rates offered were so attractive that everybody and their mother wanted to get into the action. As a consequence, Pakistan committed itself to buying 4,500 megawatts of expensive (but desperately needed energy) rather than only 1,500 expensive megawatts. Whether this happened for valid reasons or because developers “persuaded” the relevant ministers to change their mind is a moot point.

When Mian Nawaz Sharif took over in 1997, his reaction to the situation was the same as that of a wadera confronted by an uppity peasant. The IPPs were harassed, their executives were threatened and in one notorious incident, the son-in-law of one IPP executive was charged with the allegation most favoured by warring feudals: “gai chori”.

In the middle of all this mess, those poor sods who had responded to Pakistan’s call for hydel energy and sent millions on feasibility studies were thrust out into the cold. Five projects had been granted letters of support under the 1995 Hydel Policy and not one of them was allowed to proceed further. Those who tried to stick it out were reduced to begging WAPDA to come to terms with them. And that is where our story comes full circle.

In 2002 and 2003, there were private hydropower developers who were literally begging WAPDA to buy electricity from them at 4 cents per unit. WAPDA refused even though WAPDA’s refusal meant that it was in turn forced to buy electricity at 6.5 cents from the thermal companies. WAPDA refused because according to its financial juniouses, hydel energy was not supposed to cost more than 3 cents per unit. Of course it does not; but only if somebody builds you a dam for free.

The good news is that somewhere along the line, economic reality seeped through. The Ministry of Water and Power is now once again trumpeting the 1995 Hydel Policy. But building dams takes time. Getting other people to build dams for you takes even longer. And so, in the meantime, we remain stuck with the consequences of other people’s economic illiteracy.