Why power sector reform can pay big time

The energy sector of any economy drives its progress and growth. Unfortunately in Pakistan, this sector has become among the biggest hurdles on the path to prosperity and a drain on precious state resources.
Besides the dark reality of power outages and its impact on human and business productivity, there are other reasons why power sector reforms should top the governments reform agenda: it is the best bet for bringing down the fiscal deficit, cutting the need for borrowing and boosting investments in the economy.
The governments fiscal constraints have been trumpeted as a major limitation on its ability to spend on development that could kick-start economic growth. A recent report titled "State of the economy" by the Social Policy Development Centre has highlighted that among components of current expenditure, subsidies are the only expense that have grown as a percentage of GDP, unabated since FY09.
The biggest culprit behind the growing appetite for subsidies is the energy sector. The share of energy sector among the total subsidies doled out by the government has surged from less than half in FY09 to a dominant 83.2 percent in FY12.
The government needs to clear its obligations through a solution that does not rely on printing more money. One option is to issue sovereign bonds to IPPs and let these companies raise money from banking system based on those bonds to run their operations. This process may bring adequate liquidity in the energy system to let efficient plants run at optimal levels.
According to official estimates, the energy crisis is impeding 2.5-3.0 percent of the GDP. Cutting down the drag on power sector can help bridge the current power deficit, hence generating more economic activity, while plugging the drain on the national exchequer.
The PML-N government has also envisioned raising the investment-to-GDP ratio to 20 percent within the next four years. The countrys energy sector is among the most lucrative areas where international investors are vying for stakes, if only they are offered commensurate returns.
Again reform of the sectors pricing policies is the missing ingredient. The Petroleum Policy 2012 was a step in the right direction, but more is needed. By offering internationally competitive returns to investors in the sector, the country can dramatically improve the investment climate and rake in big-ticket projects.
Fixing the problems in the energy sector is not all about bitter pills. The returns to be reaped are also not only long-term; the government can start cashing in on the reforms, if only they implement a comprehensive reforms agenda, instead of piece-meal changes.