There is one version of the story of Pakistan’s power sector that reads like a financial tragedy. Billions of dollars borrowed, capacity built, rates indexed, guarantees issued – and the lights still went out.
This version is accurate, but incomplete. The deeper story is one of institutional political economy: a systematic misapplication of development finance theory to a sector whose problems have never been about megawatts, but about institutions, incentives, and risk allocation.
Pakistan has not experienced an energy crisis; he took his path to make one by design. The political economy of big infrastructure debt rewards the act of financing rather than the discipline of planning, while the coalition that benefits from capacity expansion – governments seeking groundbreaking opportunities, lenders deploying capital, and developers securing guaranteed returns – has always been more cohesive and influential than the diffuse public that ultimately had to pay the price.
The economics of debt-financed power capacity have a consistent theoretical foundation: long-term assets, predictable revenue streams, and financing tailored to the life of productive assets. Financing school infrastructure. The problem is that Pakistan’s IPP model violates almost all of the conditions that make this theory work. Take-or-pay contracts transferred demand risk from investors to consumers. Sovereign guarantees transferred default risk from lenders to the state. Indexed tariffs have transferred the exchange rate and inflation risk from developers to electricity buyers.
At each stage, the private sector retained the increase while the public sector absorbed the decline. This is not about infrastructure financing. It is a structured transfer of fiscal responsibility dressed up in the language of private investment, and it persisted for two decades because the parties who designed the contracts were not the ones who paid for them.
Pakistan pays for the right to use the plants at rates that assume near-full utilization, while overall utilization of thermal plants was less than 45 percent. The economic logic would be indefensible in any other sector. A government committing to paying a hotel 80% of room revenue, regardless of occupancy, would immediately face a public audit.
This is precisely what Pakistan’s power sector did in dozens of contracts spanning two decades, and the audit only took place when the budgetary consequences became impossible to absorb. This delay is itself a finding of political economy: the costs have been distributed among millions of consumers and a stock of national circular debt, while the benefits have been concentrated in project companies with direct access to the policy-making process.
Karot Hydropower came into operation with a debt of $1.358 billion at a project cost of $1.698 billion. Suki Kinari carried $1.280 billion compared to $1.707 billion. Punjab Thermal Power has assumed a debt ratio of 75:25 in its tariff structure. Coal-fired power plants followed the same financial philosophy. High leverage works when income is predictable.
In Pakistan’s power sector, revenues were contractually guaranteed but collected through a circular debt mechanism which, by 2025, had metastasized into one of the largest contingent fiscal liabilities in the country’s history. The debt did not finance the capacity. It financed the illusion of capacity while real liabilities accumulated on the public balance sheet with compound interest.
And don’t get me started on Neelam-Jhelum. A 969 MW hydroelectric project financed with about $2.7 billion in sovereign debt that cracked, flooded and shut down production by 2022 due to geological failures that would have revealed adequate pre-feasibility work. It now constitutes perhaps the most expensive idle asset in Pakistan’s public infrastructure portfolio, still carrying debt service obligations that Wapda and ultimately the electricity consumer must absorb. Neelam-Jhelum is not an anomaly in Pakistan’s power sector. This is the model taken to its logical conclusion.
The RLNG fleet crystallizes the broader argument. Pakistan borrowed to build Bhikki, Haveli Bahadur Shah, Balloki and Punjab Thermal Power, totaling nearly 4,900 MW of combined RLNG capacity, to address a gas shortage caused by depletion of domestic reserves. The solution replaced one dependence on imports with one, priced in dollars, transported through the Strait of Hormuz and exposed to precisely the type of geopolitical disruption that materialized when the US-Iran conflict closed LNG transport routes in 2026.
Around 6,000 MW of RLNG capacity was generating around 500 MW at the peak of the disruption. Debt servicing continued. Capacity payments continued. The plants sat down. This is not a scenario requiring exotic modeling; it appears in the first chapter of any energy security curriculum. Pakistan borrowed billions to build a fuel import machine and called it energy security. The political economy explanation is simple: the decision-makers who approved the contracts bore no risk related to the fuel supply, while the consumers who bore all of that risk did not have a seat at the negotiating table.
The arguments for abolishing debt-based capacity augmentation are not ideological. It’s empirical. The model was tested over two investment cycles, the thermal development of the 1990s under the 1994 energy policy and the expansion of RLNG and hydro after 2014, and it produced the same result twice: stranded bonds, circular accumulation of debt, rising tariffs and further load shedding. Repeating it a third time would not constitute a political failure. It would be a political choice made in full knowledge of its consequences, which is much worse.
What should replace it is a framework built on three organizing principles: network modernization, decentralization and capacity rationalization.
Grid modernization involves investing in the transmission and distribution infrastructure that determines whether existing generation, over 40,000 MW, can effectively reach consumers at acceptable cost and quality. Pakistan’s transportation system suffers significant technical losses, operates with limited real-time visibility, and cannot withstand high penetration of variable renewable energy without stability risks.
A dollar invested in smart metering, advanced distribution management and real-time system monitoring generates returns on all generation sources simultaneously, without creating a new capacity payment obligation. This is a totally different economic situation than adding another imported fuel plant behind another sovereign guarantee. It also produces a different political economy: the beneficiaries are dispersed consumers rather than concentrated promoters, which is precisely why it arouses less institutional enthusiasm than it deserves.
Decentralization recognizes what the 2026 crisis has demonstrated empirically. Pakistan’s more than 19,000 MW of publicly funded solar power, built without state funding or sovereign guarantees, has provided a more resilient service in the face of geopolitical disruption than several billion dollars of centralized RLNG capacity. Distributed generation financed by private balance sheets does not accumulate in the public budget balance sheet, does not require foreign exchange for payment for capacity and does not transit through the Strait of Hormuz.
A regulatory framework that accelerates distributed solar, battery storage integration, time-of-use pricing, and virtual power plant aggregation does not abandon infrastructure investments. It reorients it towards a model that effectively distributes risks, in which those who invest bear the risk and those who benefit pay the cost. That it simultaneously dismantles the political economy of centralized extraction of capacity rents is a feature, not a complication.
Capacity rationalization honestly addresses existing stock. Pakistan cannot renounce signed PPAs without incurring sovereign credit consequences. But rationalization is achievable through commercial renegotiation, fuel switching where technically possible, conversion of core thermal assets to flexible peaking operation, and structured early retirement of plants whose capacity payments exceed any plausible economic value of continued operation. Resistance will come from the same coalition that benefited from the initial contracts. Identifying this coalition and designing the negotiation strategy accordingly is as much a matter of political economy as it is financial engineering.
The economy has already delivered its verdict. Centralized capacity financed by debt, priced by capacity payments, guaranteed by the state and fueled by imports, does not constitute a development strategy. It is a liability accumulation strategy with a generational component, supported by a political economy that systematically privatizes gains and socializes losses.
Pakistan has taken its path towards obscurity. The exit path crosses the network, the roofs and the disciplined removal of bonds left by the old model.
The writer holds a PhD in energy economics and is a researcher at the Sustainable Development Policy Institute (SDPI).
Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect the editorial policies of PK Press Club.tv.
Originally published in The News
