The 1994 Power Policy: How One Year Locked Pakistan Into Thirty
The decisions made in a single year that defined Pakistan's electricity sector for a generation
By Asad Baig · Lahore · April 2026 · Approx. 9-min read
Why this one year matters
Every dysfunctional system has a moment of origin. A specific decision, made on a specific date, by specific people, that defined everything that followed.
For Pakistan's power sector, that moment was the 1994 Power Policy.
The contracts signed under that policy are still in force today, more than thirty years later. They cost Pakistani consumers approximately Rs. 2 trillion a year in capacity payments. They have made Pakistani electricity twice as expensive as Bangladesh's, Vietnam's, or India's. They have hollowed out Pakistani industry. They have produced one of the world's fastest-growing rooftop solar markets out of pure economic desperation.
If you understand what was decided in 1994, you understand the rest of the story. This article explains it, in nine minutes, in plain English.
The setting
Pakistan in early 1994 was a country in chronic crisis. The economy had been growing slowly. Foreign exchange reserves had dwindled. Industrial output was constrained by a power deficit that produced eight to ten hours of daily load shedding in major cities. The Bhutto government had returned to power with a mandate to fix the economy. They needed a quick win.
The Western financial institutions, the World Bank and the Asian Development Bank, had a template ready. It was called BOO/BOT, Build, Own, Operate or Build, Operate, Transfer. Private investors would build power plants. Governments would guarantee them returns. The model had been used in the Philippines, Thailand, Indonesia. It was presented as the modern solution to developing-world energy crises.
Pakistani technocrats and ministers absorbed this template. The 1994 Power Policy was the result. On paper, it was an industrial policy. In practice, it was a transfer mechanism.
The policy was approved by the federal cabinet in March 1994. The first major contracts under it were signed within months. By 1995, the policy framework was operational and the first round of IPP construction had begun.
What was not made public, in 1994 or in any year since, was that the specific terms of the contracts would lock Pakistan into paying for capacity it did not need for thirty years.
What the 1994 Power Policy actually said
The 1994 Power Policy committed the Pakistani government to seven specific provisions in every Power Purchase Agreement signed under its framework. Each provision had a justification. Combined, they created a structure where the investor took essentially no risk and the Pakistani consumer absorbed all of it.
| Provision | What the contract said | What it meant in practice |
|---|---|---|
| Return on equity | 15-18% annual return guaranteed | About three times what investors were earning in their home countries |
| Currency | Returns indexed to US dollar | When the rupee fell, payments rose automatically |
| Take-or-pay | Government must pay capacity charge regardless | Plant gets paid even if zero electricity is produced |
| Sovereign guarantee | Government of Pakistan guarantees performance | If WAPDA defaulted, the state was directly liable |
| Tariff ceiling | US 6.5 cents per kWh, negotiated not auctioned | Set by bureaucrats, not the market |
| Contract duration | 25-30 years | Locked in across multiple governments |
| Capital cost pass-through | All capital costs included in tariff | Inflated capital costs would equal inflated tariffs forever |
Each of these provisions, examined in isolation, has a justification. Investors needed protection. Currency risk had to be allocated. But combined, they created a structure where the investor took essentially no risk and the Pakistani consumer absorbed all of it for thirty years.
I have written about three of these provisions in dedicated posts. Take-or-pay is the structural foundation. The capital cost trick is the most damaging mechanism. The role of NEPRA is the regulatory failure that allowed it to continue.
Who signed it
It is important to understand that the 1994 Power Policy and the IPP contracts that flowed from it were not the work of a single person. They were a collective bureaucratic-political product, involving:
- The Prime Minister's Secretariat
- The Ministry of Water and Power, and its successor ministries
- The Privatisation Commission
- WAPDA (Water and Power Development Authority) leadership
- The federal cabinet that approved the policy
- Foreign consultants from international financial institutions
- Senior bureaucrats from the Pakistan Administrative Service
This is not a story of one corrupt prime minister. It is a story of a bureaucratic-political consensus that was wrong about almost everything fundamental, and that has never been held to account because the responsibility was so widely distributed that no individual could be cleanly blamed.
The PPP under Benazir Bhutto signed the original contracts. The PML-N under Nawaz Sharif inherited and expanded the system. The Musharraf government repeated the mistake in 2002. The PTI under Imran Khan promised reform and failed. The current PML-N government under Shehbaz Sharif has terminated five plants and renegotiated fourteen others, modest progress against the trillion-rupee scale of the problem.
No party gets a pass on this. I have written about the political-economy implications at my pillar on the IPP system.
The HUBCO story
To understand how the 1994 framework worked in practice, look at HUBCO, Pakistan's first major IPP.
HUBCO had a projected capital cost in 1988 of approximately $1.2 billion. By 1995, when the plant was financially closed under the new 1994 framework, the stated capital cost had risen to $1.766 billion. A 47 percent increase in seven years.
The reasons offered at the time included the Gulf War, currency volatility, and design changes. The reality, as subsequent investigations would suggest, was different.
A senior Pakistani banker, speaking to me off the record, described how the HUBCO contract was negotiated in the early 1990s. "The investors had a team of twenty people. Lawyers, financial advisers, engineering consultants from London, Tokyo, New York. They had been doing these deals for years. They knew every clause. Every comma."
"On the Pakistani side, you had three or four civil servants who had never negotiated an international contract before. Smart people, honest people, but completely outclassed. The investors would propose a clause. Our team would say, we need to consult. They would consult, meaning they would call WAPDA, and WAPDA was even less qualified to advise. So they came back and accepted."
"Most of those clauses were standard for the investors' home markets. They were terrible for Pakistan. We agreed to them because we did not know what we were agreeing to. And once we agreed, the contracts were locked. The investors had won before the negotiations finished."
That is how the 1994 framework operated. Hundreds of millions of dollars in contractual obligations, signed by people who were outmatched at the table, locked into thirty-year agreements that no subsequent Pakistani government could easily reopen.
WHY THIS MATTERS TODAY
Capital cost inflation in 1994-era IPPs translated directly into per-unit tariffs that Pakistani consumers have been paying for thirty years. The 2020 Power Sector Inquiry Report estimated approximately Rs. 1 trillion in recoverable excess profits across the 1994 and 2002 policy IPPs. The forensic audits that would identify specific recoverable amounts have not been conducted under any government since.
What the 1994 Policy produced over time
The cumulative effect of the 1994 framework, expanded under subsequent policies, is documented in the headline numbers of Pakistan's current crisis.
| Indicator | Value (FY2025 estimates) |
|---|---|
| Annual capacity payments to IPPs | Approximately Rs. 2,100 billion |
| Cumulative capacity payments 2015-2025 | Approximately Rs. 12,000 billion |
| Per-citizen equivalent (240 million people) | Approximately Rs. 8,500 per person per year |
| Excess capacity (paid for, not used) | 15,000+ MW |
| Cost of permanently unused capacity | Approximately Rs. 700 billion per year |
| Bill reduction if capacity payments were eliminated | Approximately 60 percent |
Read those numbers. The Rs. 12 trillion cumulative figure is roughly the cost of building twelve dams the size of Tarbela. We did not build the dams. We paid the capacity charges instead, under the contracts signed in 1994 and the contracts that followed.
If you want the full picture of what these numbers mean for Pakistani households, businesses, and the textile industry, see my complete guide to the electricity crisis.
What could have been done differently in 1994
The "no choice" defence is the standard response when this period is discussed. The economy was in crisis. Load shedding was severe. Foreign investors needed guarantees. Pakistan had to take the deal that was on the table.
After looking at this carefully, I do not accept that defence.
There were always choices. Pakistan in 1994 could have insisted on competitive bidding instead of negotiated contracts. It could have capped dollar indexation. It could have used shorter contract terms (15 years instead of 30). It could have invested the same effort in hydropower instead. It could have demanded longer construction periods to allow more careful contract preparation.
Most of these options were considered and rejected. Not because they were impossible, but because they were politically harder. Negotiated contracts were faster than auctions. Dollar indexation reassured foreign investors. Long contract terms allowed lower headline tariffs (which looked good politically) at the cost of long-term obligations (which would only become visible in successor governments).
The decisions were made for short-term political reasons that produced long-term structural damage. The decision-makers retired with honours. The damage continues.
I have written about the choices that existed at every stage of this story at My Position on Pakistan's IPPs.
What you should take away
Three things to remember about the 1994 Power Policy.
It was the origin point. Every subsequent IPP contract, including the 2002, 2006, and CPEC contracts, was built on the structural template established in 1994. Reform of the broader system requires understanding what was accepted in 1994 and why.
The terms were extreme by international comparison. The 15-18 percent dollar-indexed return on equity guaranteed in 1994 contracts was about three times what investors were earning in their home countries on similar investments. Take-or-pay structures combined with capital cost pass-through were standard in BOO/BOT models, but the specific Pakistani terms were generous even within that template.
The political and bureaucratic responsibility was widely distributed. Hundreds of officials over many years were involved in the 1994 contracts and their successors. No single individual can be cleanly blamed. This is, paradoxically, why none of them has been held to account.
The 1994 Power Policy was a moment of decision. The decisions made were wrong. The consequences are visible in every electricity bill paid in Pakistan today.
Now you know what was decided. Pass it on.
Thank you for reading.
, Asad Baig, Lahore, April 2026
Frequently asked questions
What was the 1994 Power Policy? The 1994 Power Policy was a federal government policy framework adopted by Pakistan in March 1994 that committed the country to procuring electricity from privately built and owned independent power producers (IPPs) under a "Build, Own, Operate" structure with guaranteed returns paid in US dollars.
Who signed the 1994 Power Policy? The policy was approved by the federal cabinet under Benazir Bhutto's PPP government in March 1994. The IPP contracts that flowed from it were signed by various federal entities including WAPDA, the Privatisation Commission, and the Ministry of Water and Power. Hundreds of officials were involved in the negotiation and execution.
What were the main provisions of the 1994 Power Policy? Seven provisions defined the framework. 15-18% guaranteed return on equity, returns indexed to the US dollar, take-or-pay obligations, sovereign guarantee, tariff ceiling negotiated rather than auctioned, 25-30 year contract duration, and full capital cost pass-through into tariffs.
Was the 1994 Power Policy unique to Pakistan? The Build-Own-Operate (BOO) and Build-Operate-Transfer (BOT) frameworks were promoted by the World Bank and Asian Development Bank in multiple developing countries during this period. The specific Pakistani terms, however, were extreme even within that template. Returns were higher, currency risk was fully transferred to the consumer, and contract durations were longer than in many comparable frameworks.
Can the 1994 Power Policy contracts be cancelled now? Not unilaterally without consequences. The contracts include international arbitration clauses. Cancellation triggers arbitration, awards include damages plus interest, and the damages can be larger than the capacity payments would have been. The cleaner path, recommended by the 2020 Power Sector Inquiry Report, is bilateral conversion to take-and-pay structures combined with forensic audits that establish documented bases for renegotiation.
How much have Pakistani consumers paid under 1994 Policy IPPs? Cumulative payments under the 1994 framework, including its 2002, 2006, and CPEC extensions, total approximately Rs. 12 trillion over 2015-2025 alone. Annual payments are now approximately Rs. 2 trillion, more than the federal defence budget.
Sources and notes
- Power Sector Inquiry Report 2020, Government of Pakistan, headed by Muhammad Ali, former SECP Chairman (ARY News mirror)
- World Bank PPP Knowledge Hub, Lessons from the Independent Private Power Experience in Pakistan
- SDPI, History of Private Power in Pakistan (Fahd Ali and Fatima Beg)
- IEEFA Reports on Pakistan Power Sector by Haneea Isaad (2024-2025)
- NEPRA State of Industry Reports 2015-2024 (nepra.org.pk)
Related reading from Asad Baig
The pillar this explainer supports
Sibling explainers in this cluster
- The 2002 and 2006 Repeats: How Each Government Made the Crisis Worse
- The 2020 Inquiry Report That Was Buried
- The CPEC Power Contracts: Terms, Costs, and Why They're Worse Than 1994
Asad Baig