The 2002 and 2006 Repeats: How Each Government Made Pakistan's Electricity Crisis Worse
After 1994 came 2002. After 2002 came 2006. Each government promised reform. Each delivered the same disease in different packaging.
By Asad Baig · Lahore · April 2026 · Approx. 8-min read
Why these two years also matter
If 1994 had been the only mistake, this article would not be necessary. A bad contract signed in difficult circumstances by a desperate government, that happens in many countries. The damage might have been contained. The contracts might have been allowed to expire. Pakistan might have moved on.
But 1994 was not the only mistake. It was the first of four.
In 2002, the Musharraf government signed an updated Power Policy that kept most of the 1994 structure. In 2006, also under Musharraf, a renewable energy framework was introduced that extended the IPP system to wind, solar, and bagasse plants. Each policy was justified at the time. Each was sold as the modern version of its predecessor. Each made the underlying problem larger.
This article walks through what happened in 2002 and 2006. The CPEC contracts of 2014 to 2018, the fourth and most damaging wave, are covered in a separate post: The CPEC Power Contracts.
The 2002 repeat
By 2002, the consequences of the 1994 contracts were already clear. Capacity payments were eating into the federal budget. Circular debt was beginning to grow. Industry was complaining about high tariffs. Anyone with eyes could see the structural problem.
The Musharraf government, advised by many of the same technocrats who had advised the 1994 government, introduced an updated Power Policy in 2002. The official line was that this policy "fixed" the problems with 1994.
The Return on Equity was reduced from 18 percent to between 12 and 13 percent. Some elements of competitive bidding were introduced. Some tax incentives were trimmed.
On the surface, this was an improvement. In substance, it was the same disease.
The dollar indexation was kept. The take-or-pay structure was kept. The capital cost pass-through was kept. The thirty-year contracts were kept. NEPRA, the regulator that had failed to do its job under the 1994 framework, was kept in charge of approving 2002 tariffs.
The 2020 Power Sector Inquiry Report would later find that 2002-policy IPPs had received excess payments above what their contracts even legally allowed of approximately Rs. 64 billion in just the nine years before 2020. The total excess over the remaining life of the contracts was projected at Rs. 209 billion.
The same patterns of cost over-statement. The same tariff inflation. The same comfortable arrangement between regulator and regulated. A different headline number for return on equity, but the underlying mechanics unchanged.
The Rental Power Plants scandal
The Musharraf government also introduced something new and even worse in the 2002-2008 period. Rental Power Plants. Mobile generators rented from foreign companies on short-term contracts to address load shedding while the IPP capacity was being built out.
The RPPs produced the most expensive electricity in Pakistan's history. Per-unit costs ran several times higher than even the inflated IPP tariffs. The plants were typically diesel-powered. The fuel was imported. The contract terms were written hurriedly, often without competitive bidding.
The RPPs were prosecuted as one of the largest corruption scandals of the era. Former Prime Minister Raja Pervaiz Ashraf, who had been federal minister responsible for power, was nicknamed "Raja Rental" in the Pakistani press. Cases were filed in the National Accountability Bureau. Almost none resulted in convictions or recovery of funds.
So 2002 added two things to the existing problem. A second wave of IPPs with the same structural defects. And a corruption scandal, the Rental Power Plants, that became its own legend.
THE 2002 IPP CONCLUSION
The 2002 Power Policy was sold as a reform of 1994. In substance it kept every damaging mechanism of 1994 with cosmetic adjustments to the headline return on equity. Pakistani consumers have been paying for these contracts for two decades, with approximately Rs. 209 billion in projected excess returns above contractual limits over the remaining life.
The 2006 expansion
In 2006, also under Musharraf, Pakistan introduced an updated framework for renewable energy projects. Wind farms. Solar plants. Bagasse plants that burn the waste from sugar mills.
The intentions were good. Renewable energy was the future. Pakistan needed to diversify its generation mix. Cheaper, cleaner power was the goal.
The execution was, as always, terrible.
The renewable IPPs were given the same upfront tariff structures, the same capacity payment guarantees, the same dollar indexation as the conventional 1994 and 2002 IPPs. Some wind plants were approved at costs four times higher than comparable plants in Bangladesh and Vietnam. Some bagasse plants were structured to give sugar mill owners additional income streams from electricity sales, making sugar mills, in effect, dual-revenue enterprises subsidised by the electricity consumer.
This is where the 2006 framework becomes its own scandal. Bagasse is the fibrous waste left after sugar cane is crushed for juice. It is essentially free. The sugar mills were already producing it. Burning it for electricity required boilers and steam turbines but no fuel cost. The marginal cost of bagasse-fired electricity should have been very low.
Instead, NEPRA approved tariffs for bagasse IPPs that included a "fuel" component as if the bagasse had been purchased on a commercial market. The result was that sugar mill owners received both the original sugar revenue and a windfall on the bagasse byproduct that should have been close to free. The Pakistani electricity consumer paid the windfall, monthly, in their bills.
Who benefited from the bagasse loophole
The list of bagasse IPP owners is a list of Pakistan's politically connected sugar industry.
JDW Sugar Mills Units 2 and 3 are owned by Jahangir Tareen, who was disqualified from parliament for life by Pakistan's Supreme Court in 2017 for financial dishonesty. He continues to operate the IPPs. He has been paid roughly Rs. 2.5 billion in capacity charges in recent years.
Chiniot Power Limited is owned by Suleman Shehbaz, son of Pakistan's current Prime Minister, Shehbaz Sharif. Suleman has been a proclaimed offender in a Rs. 16 billion FIA money-laundering case since 2020. He lives in London. The plant continues to receive capacity payments.
The full list extends across other sugar dynasties: the Khairpur, Hamza, Shahtaj, Mehran, and Al-Moiz groups, each operating bagasse IPPs of typically 30-60 MW under the 2006 framework.
The 2006 framework gave the upper class of Pakistan's sugar industry, already politically powerful, already protected by sugar import controls and price supports, an additional channel of state-guaranteed income. They are called "renewable" because they technically use a renewable input. In practice, they are a transfer mechanism wearing a green label.
I have written about these owners in detail at The 40 Families Who Own Pakistan's IPPs and at Why Does a Fugitive's Power Plant Still Get Paid.
The pattern across both years
The common element across 1994, 2002, and 2006 is not any single bad decision. It is the pattern of decisions.
Each policy was justified as the modern, improved version of the previous one. Each was claimed to fix the problems that had become visible. Each kept the structural defects that mattered most while adjusting cosmetic details.
The fundamental design choice, that private investors should be guaranteed dollar-indexed returns regardless of consumer demand, was preserved through every iteration. The regulatory structure that allowed inflated capital costs to be locked into tariffs was preserved. The take-or-pay obligations were preserved. The thirty-year contract durations were preserved.
What changed across iterations was the pretense. 1994 was sold as solving the load shedding crisis. 2002 was sold as fixing 1994's excesses. 2006 was sold as the renewable future. Each layer added to the underlying problem rather than replacing it.
By the time the cumulative weight of all four policy waves became visible, around 2015-2020, the system had grown to the scale we see today. Approximately Rs. 2 trillion per year in capacity payments. Twelve trillion rupees over the past decade. A fleet of 45,605 megawatts against a peak demand of 28,000-30,000 MW. Pakistani electricity tariffs double those of Bangladesh, Vietnam, and India.
This is what each repeat produced. Not new problems exactly. The same problems, larger.
What you should take away
Three things to remember about 2002 and 2006.
Reform requires structural change, not headline adjustment. Reducing the return on equity from 18 percent to 13 percent in 2002 looked like reform. It was not. The structural mechanisms that produced the excess returns, dollar indexation, take-or-pay, capital cost pass-through, were preserved. Real reform requires confronting those mechanisms, not just adjusting numbers around them.
Renewable framings can hide transfer mechanisms. The 2006 bagasse framework was sold as climate-conscious renewable energy. In substance, it was a state-guaranteed income stream for politically connected sugar mill owners. Future policy must distinguish between renewable energy generation that genuinely reduces system costs and renewable framing that disguises rent extraction.
Continuity of bureaucratic personnel matters. Many of the technocrats who advised the 1994 government also advised the 2002 government. The same bureaucracy that approved 1994 tariffs continued to approve 2002 tariffs. The institutional memory was the same. The institutional incentives were the same. The institutional outcomes were the same. Reform of the technical mechanisms requires reform of the institutions that operate them. I have written about this at NEPRA: The Regulator That Did Not Regulate.
The 2002 and 2006 repeats are why we cannot simply wait for the 1994 contracts to expire. Each subsequent layer extended the obligations. The earliest 1994 contracts are now reaching the end of their thirty-year terms, but the 2002 contracts run into the 2030s, the 2006 framework continues, and the CPEC contracts run until 2040 to 2045.
The trap is bigger than 1994. It was extended in 2002. It was extended again in 2006. It was extended most damagingly in 2014-2018 with CPEC.
Now you know the pattern. Pass it on.
Thank you for reading.
, Asad Baig, Lahore, April 2026
Frequently asked questions
What was the 2002 Power Policy? An updated power generation policy adopted by the Musharraf government that reduced the return on equity from 1994's 15-18 percent to 12-13 percent, introduced limited competitive bidding elements, and trimmed some tax incentives. The dollar indexation, take-or-pay structure, capital cost pass-through, and 30-year contract terms were preserved.
What was the 2006 renewable energy framework? A federal framework introduced under Musharraf that extended Pakistan's IPP structure to renewable energy projects including wind farms, solar plants, and bagasse plants that burn sugar cane waste. Renewable IPPs were given the same upfront tariff structures, capacity payment guarantees, and dollar indexation as conventional IPPs.
Who were the Rental Power Plants? Mobile diesel-powered generators rented from foreign companies on short-term contracts during the 2002-2008 period to address load shedding. They produced the most expensive electricity in Pakistan's history. Former Prime Minister Raja Pervaiz Ashraf, who was federal minister responsible, was nicknamed "Raja Rental" after their corruption scandal became public.
Why are bagasse IPPs controversial? Bagasse is the essentially free fibrous waste from sugar cane crushing. NEPRA approved tariffs for bagasse IPPs that included fuel costs as if bagasse had been purchased on a commercial market. The result is that sugar mill owners receive both their sugar revenue and a windfall on bagasse-fired electricity. Owners include Jahangir Tareen (JDW Sugar Mills Units 2 and 3) and Suleman Shehbaz (Chiniot Power Limited).
How much did 2002-policy IPPs over-charge consumers? The 2020 Power Sector Inquiry Report found 2002-policy IPPs had received excess payments above contractual limits of approximately Rs. 64 billion in nine years before 2020, with total excess over remaining contract life projected at Rs. 209 billion.
Sources and notes
- Power Sector Inquiry Report 2020, Government of Pakistan, headed by Muhammad Ali, former SECP Chairman (ARY News mirror)
- NEPRA State of Industry Reports 2015-2024 (nepra.org.pk)
- IEEFA Reports on Pakistan Power Sector by Haneea Isaad (2024-2025)
- Times of Islamabad, Mian Mansha's Nishat Power taking highest ever profits of 32% while all other IPPs take 17% profit (15 January 2019)
- Bolan Voice, Who owns private power plants in Pakistan and do bagasse plants also receive capacity payments? (13 August 2024)
- The News, What is really going on in power sector? (2 April 2017)
Related reading from Asad Baig
The pillar this explainer supports
Sibling explainers in this cluster
- The 1994 Power Policy: How One Year Locked Pakistan Into Thirty
- The 2020 Inquiry Report That Was Buried
- The CPEC Power Contracts: Terms, Costs, and Why They're Worse Than 1994
Asad Baig