Political economy of power failure

There is a version of Pakistan’s power sector story that reads as a financing tragedy. Billions of dollars borrowed, capacity built, tariffs indexed, guarantees issued – and the lights still went out.

That 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 were never about megawatts, but about institutions, incentives and the allocation of risk.

Pakistan did not stumble into a power crisis; it borrowed its way into one by design. The political economy of large infrastructure debt rewards the act of financing over the discipline of planning, while the coalition that benefits from capacity expansion – governments seeking ribbon-cutting opportunities, lenders deploying capital and developers earning guaranteed returns – has always been more cohesive and influential than the diffuse public ultimately left to pay the cost.

The economics of debt-financed power capacity rest on a coherent theoretical foundation: long-lived assets, predictable revenue streams and financing matched to productive asset life. Textbook infrastructure finance. The problem is that Pakistan’s IPP model violated nearly every condition that makes that 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 transferred currency and inflation risk from developers to electricity buyers.

At each step, the private sector retained the upside while the public sector absorbed the downside. This is not infrastructure financing. It is a structured transfer of fiscal liability dressed in the language of private investment, and it persisted across two decades because the parties who designed the contracts were not the parties who paid for them.

Pakistan is paying for the right to use plants at rates that assume near-full utilisation, while overall thermal plant utilisation was below 45%. The economic logic would be indefensible in any other sector. A government contracting to pay a hotel 80% of room revenue regardless of occupancy would face immediate public audit.

Pakistan’s power sector did precisely this across dozens of contracts over two decades, and the audit arrived only when the fiscal consequences became impossible to absorb. That delay is itself a political-economy finding: costs were dispersed across millions of consumers and a national circular-debt stock, while benefits were concentrated in project companies with direct access to the policymaking process.

Karot Hydropower entered operation carrying $1.358 billion in debt against a $1.698 billion project cost. Suki Kinari carried $1.280 billion against $1.707 billion. Punjab Thermal Power assumed a 75:25 debt-to-equity ratio in its tariff structure. Coal plants followed the same financial philosophy. High leverage works when revenue is predictable.

In Pakistan’s power sector, revenue was guaranteed contractually but collected through a circular debt mechanism that by 2025 had metastasised into one of the largest contingent fiscal liabilities in the country’s history. The debt did not finance capacity. It financed the illusion of capacity while actual liability accumulated inside the public balance sheet at compound interest.

And do not get me started on Neelam-Jhelum. A 969MW hydropower project financed at roughly $2.7 billion through sovereign borrowing that cracked, flooded and ceased generation by 2022 due to geological failures that adequate pre-feasibility work would have surfaced. It sits today as 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. It is the model taken to its logical conclusion.

The RLNG fleet crystallises the broader argument. Pakistan borrowed to build Bhikki, Haveli Bahadur Shah, Balloki and Punjab Thermal Power, totalling nearly 4,900MW of combined RLNG capacity, to address a gas shortage caused by domestic reserve depletion. The solution replaced one import dependency with another, priced in dollars, routed through the Strait of Hormuz, and exposed to precisely the kind of geopolitical disruption that materialised when the US-Iran conflict closed LNG shipping lanes in 2026.

Approximately 6,000MW of RLNG capacity was producing around 500MW at the peak of the disruption. The debt service continued. The capacity payments continued. The plants sat. This is not a scenario requiring exotic modelling; 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 straightforward: the decision-makers who approved the contracts bore none of the fuel-supply risk, while the consumers who bore all of it had no seat at the negotiating table.

The case for abolishing debt-based capacity addition is not ideological. It is empirical. The model has been tested across two investment cycles, the thermal buildout of the 1990s under the 1994 Power Policy and the RLNG and hydel expansion after 2014, and it has produced the same outcome twice: stranded obligations, circular debt accumulation, tariff escalation and renewed loadshedding. Repeating it a third time would not be a policy failure. It would be a policy choice made with full knowledge of the consequences, which is considerably worse.

What should replace it is a framework built on three organising principles: grid modernisation, decentralisation and capacity rationalisation.

Grid modernisation means investing in the transmission and distribution infrastructure that determines whether existing generation, all 40,000+ MWs of it, can actually reach consumers at acceptable quality and cost. Pakistan’s transmission system incurs significant technical losses, operates with limited real-time visibility and cannot withstand high penetrations of variable renewable energy without stability risks.

A dollar invested in smart metering, advanced distribution management and real-time system monitoring yields returns across all generation sources simultaneously, without creating a new capacity payment obligation. That is categorically different economics from adding another imported-fuel plant behind another sovereign guarantee. It also produces a different political economy: beneficiaries are dispersed consumers rather than concentrated developers, which is precisely why it receives less institutional enthusiasm than it deserves.

Decentralisation recognises what the 2026 crisis demonstrated empirically. Pakistan’s 19,000-plus MWs of people-financed solar, built without state financing or sovereign guarantees, provided more resilient service during geopolitical disruption than several billion dollars of centralised RLNG capacity. Distributed generation financed from private balance sheets does not accumulate on the public fiscal balance sheet, does not require foreign exchange for capacity payments and does not transit the Strait of Hormuz.

A regulatory framework that accelerates distributed solar, battery storage integration, time-of-use pricing, and virtual power plant aggregation is not abandoning infrastructure investment. It is redirecting it toward a model that allocates risk efficiently, where those who invest bear the risk and those who benefit pay the cost. That it simultaneously dismantles the political economy of centralised capacity rent extraction is a feature, not a complication.

Capacity rationalisation addresses the existing stock honestly. Pakistan cannot walk away from signed PPAs without triggering sovereign credit consequences. But rationalisation is achievable through commercial renegotiation, fuel-switching where technically feasible, conversion of baseload thermal assets to flexible peaking operation and structured early retirement of plants whose capacity payments exceed any plausible economic value of continued operation. The resistance will come from the same coalition that benefited from the original contracts. Identifying that coalition and designing the negotiating strategy accordingly is as much a task of political economy as of financial engineering.

Economics has already delivered its verdict. Debt-financed centralised capacity, priced through capacity payments, guaranteed by the sovereign and fuelled by imports, is not a development strategy. It is a liability-accumulation strategy with a generation component, sustained by a political economy that consistently privatises gains and socialises losses.

Pakistan borrowed its way into darkness. The path out runs through the grid, through rooftops and through the disciplined retirement of the obligations the old model left behind.

The writer has a doctorate in energy economics and serves as a research fellow at the Sustainable Development Policy Institute (SDPI).

Disclaimer: The viewpoints expressed in this piece are the writer's own and don't necessarily reflect Geo.tv's editorial policy.

Originally published in The News