There is a version of Pakistan’s energy sector story that sounds like 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 fall into a power crisis; it lent itself to one of design. The political economy of large infrastructure debt rewards the act of financing over the discipline of planning, while the coalition that benefits from the capacity expansion—governments looking for tape-cutting opportunities, lenders injecting capital and developers earning guaranteed returns—has always been more coherent and influential than the diffuse public ultimately left to pay the costs.
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 almost every condition that makes that theory work. Take-or-pay contracts transferred demand risk from investors to consumers. Government guarantees transferred default risk from lenders to the government. Indexed tariffs transferred currency and inflation risk from developers to electricity buyers.
At each stage, the private sector retained the upside while the public sector absorbed the downside. This is not infrastructure funding. It is a structured transfer of tax liability dressed in the language of private investment, and it continued for two decades because the parties who designed the contracts were not the parties who paid for them.
Pakistan pays for the right to use plants at prices that assume near full utilization, while overall utilization of thermal plants was below 45%. The economic logic would be indefensible in any other sector. A government that contracts to pay a hotel 80% of room revenue regardless of occupancy will face immediate public scrutiny.
Pakistan’s electricity sector did just this across dozens of contracts over two decades, and the review came only when the fiscal consequences became impossible to absorb. This delay is itself a political-economic finding: the costs were spread over millions of consumers and a national circular debt stock, while the benefits were concentrated in project companies with direct access to the political decision-making process.
Karot Hydropower went into operation with $1.358 billion in debt against a $1.698 billion project cost. Suki Kinari had $1.280 billion against $1.707 billion. Punjab Thermal Power assumed a 75:25 debt-to-equity ratio in its tariff structure. Coal works followed the same economic philosophy. High leverage works when revenue is predictable.
In Pakistan’s electricity sector, revenues were contractually guaranteed but collected through a circular debt mechanism that by 2025 had metastasized into one of the largest fiscal contingent liabilities in the country’s history. The debt did not fund capacity. It financed the illusion of capacity while the actual liability accumulated on the public balance sheet at compound interest.
And don’t get me started on Neelam-Jhelum. A 969 MW hydroelectric project financed with about $2.7 billion through government loans that cracked, flooded and ceased production in 2022 due to geological faults that would have surfaced sufficient pre-feasibility work. It sits today as perhaps the most expensive idle asset in Pakistan’s public infrastructure portfolio and still carries debt service obligations that Wapda and ultimately the electricity consumer must absorb. Neelam-Jhelum is not an anomaly in Pakistan’s power sector. That 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 import dependency with another, priced in dollars, routed through the Strait of Hormuz and subject to precisely the kind of geopolitical disruption that materialized when the US-Iran conflict closed LNG shipping routes in 2026.
About 6,000 MW of RLNG capacity produced about 500 MW at the peak of the outage. Debt servicing continued. Capacity payments continued. The plants sat. This is not a scenario that requires 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 straightforward: the decision makers who approved the contracts bore none of the fuel supply risk, while the consumers who bore it all had no seat at the bargaining table.
The case for abolishing debt-based capacity growth is not ideological. It is empirical. The model has been tested across two investment cycles, the thermal build-up of the 1990s under the 1994 power policy and the post-2014 RLNG and hydel expansion, and it has produced the same result twice: stranded liabilities, circular debt build-up, tariff escalation and renewed loadshedding. Repeating it a third time would not be a policy error. It would be a political choice made with full knowledge of the consequences, which is considerably worse.
What will replace it is a framework built on three organizing principles: grid modernisation, decentralization and capacity rationalisation.
Grid modernization means investment 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 suffers significant technical losses, operates with limited real-time visibility and cannot withstand high deployments 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. It’s a categorically different economy than adding another imported fuel plant behind another superb warranty. It also produces a different political economy: the beneficiaries are dispersed consumers rather than concentrated developers, which is precisely why it receives less institutional enthusiasm than it deserves.
Decentralization recognizes what the 2026 crisis demonstrated empirically. Pakistan’s more than 19,000 MW of crowdfunded solar, built without government funding or sovereign guarantees, provided more robust service during geopolitical disruptions than several billion dollars worth of centralized RLNG capacity. Distributed generation financed from private balance sheets does not accumulate on the public balance sheet, does not require currency for capacity payments and does not pass 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 investment. It redirects it towards a model that allocates risks efficiently, where those who invest bear the risk and those who benefit pay the cost. That it simultaneously dismantles the political economy with centralized capacity rent extraction is a feature, not a complication.
Capacity rationalization addresses the existing stock honestly. Pakistan cannot walk away from signed PPAs without triggering sovereign credit consequences. But rationalization can be achieved through commercial renegotiation, fuel switching where technically feasible, conversion of base load thermal assets to flexible peaking operation and structured early retirement of plants whose capacity payments exceed any plausible economic value of continued operation. The opposition will come from the same coalition that benefited from the original contracts. Identifying this coalition and designing the negotiating strategy accordingly is as much a task of political economy as of financial engineering.
Economics has already given its verdict. Debt-financed centralized capacity, priced through capacity payments, guaranteed by the government and fueled by imports, is not a development strategy. It is a responsibility accumulation strategy with a generational component, supported by a political economy that consistently privatizes gains and socializes losses.
Pakistan lent itself into darkness. The path out runs through the grid, through rooftops, and through the disciplined withdrawal of the obligations the old model left behind.
The author holds a PhD in energy economics and works as a research fellow at the Sustainable Development Policy Institute (SDPI).
Disclaimer: The views expressed in this piece are the author’s own and do not necessarily reflect Pakinomist.tv’s editorial policy.
Originally published in The News
