Pakistan's zombie power sector
sunk cost fallacy
Zombie firms are firms that are fundamentally insolvent but are kept alive through subsidies from others. In simpler words, the cost of running these firms far exceeds what these firms can generate as revenue from fair market - yet they are kept alive through artificial life support. Zombie firms come straight from a horror movie - they stay alive by sucking the blood of healthy firms in the economy, killing more firms in the process.
Pakistan’s entire power sector has become a zombie sector - and it is sucking the blood out of the rest of the economy. The proof is simple: Pakistan is selling electricity at one of the highest prices in the world, about 21 cents per kWh (with taxes), and yet the sector as a whole runs in a loss. The true market price of electricity should not be more than 8-9 cents per kWh (just look at neighboring India), but the government is charging an exorbitant price in order to keep the zombie alive.
In essence, Pakistan’s government refuses to recognize that its power sector is bankrupt - itself the the result of a broken nervous system over the past three decades. The government is keeping this bankrupt zombie sector alive by passing on its extremely high cost to ordinary citizens. Since energy is a fundamental input to practically every other sector of the economy, passing on the buck through higher electricity prices ends up seriously damaging the rest of the economy as well.
In an ideal world, these zombie power companies would be declared bankrupt and forced to go through a corporate reorganization, writing down the value of bad debt until the total value of these power companies reflects their true market value. Unfortunately, this cannot be done that easily because governments of the past, in their infinite wisdom, gave sovereign guarantees to these bloated private companies (that’s why I keep saying that Pakistan’s nervous system is broken). I will perhaps write separately someday on how non-sensical the design of these power contracts has been since 1994.
For now, let’s take these sins of the past as given, and ask the question: what should be done with this zombie sector that is currently unsustainable? The answer is the same we teach students in econ 101, do not fall for sunk cost fallacy. Price electricity at its fair efficient market price so you do not distort the rest of the economy. Separate the power sector into good assets that can be sustained at fair price, and bad assets that either have to be restructured through a legal process, privatized or their losses put on general government balance sheet.
Think about more efficient ways to pay for the losses of the bad assets, rather than adding them as additional cost per kWh. For example, cut government expenditure, ask provinces to run a larger surplus (rather than give away free solar panels which makes the zombie problem worse), remove tax subsidies for military and civilian officers on property sales, etc. Even adding to petroleum levy to pay for the bad assets would be more sensible - it would hasten the renewable electrification transition that is the only viable future for Pakistan. And of course change the power sector policies that lead Pakistan to this zombie apocalypse in the first place.
The pertinent need is not just to “restructure the power sector”, but in fact re-design the entire economic & governance system.
A vast majority of what you term as “zombie firms” (in almost every sector) are either owned/managed by the govt/state or its patronised entities (political, military & private-sector).
Hence, the decision-making & policy priorities are not to run economically sustainable sectors (& firms, zombies or otherwise), but to perpetuate their existence to ensure extraction.
The systemic sin here is the absence of any competitive internal markets (in almost all sectors) & the insistence on using the Govt as the single purchaser thus nullifying the process of price discovery.
Therefore, the govt isn’t falling into the ‘Concorde fallacy’, the fallacy is a policy tool to ensure continued extraction (from the people) & redistribution (to the patronised entities).
You should definitely write in more detail on this sector - especially your thoughts on how to deal with the issue of sovereign guarantees. No one in Pakistan seems to know how to go about it.