Pakistan, U.S. officials to hammer out energy ideas

WASHINGTON Fri Oct 16, 2009 6:06pm EDT

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WASHINGTON (Reuters) - Senior U.S. officials travel to Pakistan next week to hammer out strategies to tackle the country's chronic electricity crisis and find ways to lure foreign investment into the crumbling sector.

But U.S. officials and experts said there could be no "quick fix" to resolving the power shortages, a problem that is a hot-button political issue in Pakistan and is seen by economists as undermining growth potential in the country.

"The current government has the capacity to do more on the energy sector front and we are hoping to work with them to create opportunities for U.S. companies," a senior U.S. official said of the meetings in Islamabad late next week.

U.S. officials said the meetings would be wide-ranging and examine what kinds of regulatory and policy reforms could encourage investment, although analysts said it could be a hard sell to American firms.

"Investors are going to price in a lot of risk. It is going to be a challenge in the best of circumstances," said Will Pearson, an energy analyst at the Eurasia Group.

"Certainly they have a huge demand for more power stations and investment in the power sector but attracting investment in the power sector will be difficult."

Resolving the electricity crisis is seen as a test of Pakistan's fragile civilian government, which is also battling militants and helping the United States in its fight against al Qaeda and the Taliban in neighboring Afghanistan.

"The capability of the government to survive will be greater if they have electricity, roads and other infrastructure," said Senator Ted Kaufman, who visited Pakistan last month and met its leaders.

Many cities across Pakistan are afflicted with rolling blackouts and problems in the energy sector are a major burden on public finances.

There have also been protests over electricity shortages -- an issue the United States sees as a security problem.

"It is hard to go to school when there is no electricity. The impact that this is having is increasing unemployment which is drawing more people over to the insurgency," said the senior U.S. official, who asked not to be named.

PRICING IS KEY ISSUE

The State Department's coordinator for international energy engagement, David Goldwyn, will lead the U.S. delegation, which includes officials from the Energy Department, White House and the Overseas Private Investment Corp.

"As in any country, the real task is to get the macroeconomic picture right and then to find a way to enable people to recover their costs from investing in the energy sector but still take care of the poor," Goldwyn told reporters last week. "There isn't going to be any magic cure here."

A key issue on the table, said experts, was the pricing of electricity. Investors want to see tariffs raised but the government faces strong popular opposition to hikes.

The International Monetary Fund's quarterly report from July 31 on Pakistan's economic performance recommended three price hikes.

The first increase kicked in on October 1. According to the IMF report, there is an agreement with Islamabad for two more hikes.

"Given the high levels of instability in Pakistan, it is very difficult to maintain the higher prices of electricity. It is a very hard political issue to raise prices," said Eurasia Group's Pearson.

There is also strong debate inside Pakistan over how to resolve the crisis. The finance minister nearly resigned last month in opposition to a cabinet decision to hire rental power units from abroad to reduce the power shortage.

In the short term, U.S. officials are looking at sending in more rental units and focusing on energy efficiency. Various case models would be presented at next week's meetings, said the U.S. official, who declined to offer details.

"There is no quick fix to this by any means but we think we can provide some U.S. leadership here to help them," said the official.

U.S. officials said they were not going to the meetings armed with more funds for projects, although the United States has promised to help.

The $7.5 billion U.S. package of nonmilitary aid for Pakistan signed into law by President Barack Obama this week includes funding for electricity projects, although the money still has to be allocated by Congress.

(Editing by John O'Callaghan)

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