Energy crisis—an inheritance load PMLN can’t shed (Daily Times)

By Babar Ayaz

Sensibly Mian Nawaz Sharif is not willing to give a date when the energy crisis will be over and has asked people for patience. His younger brother had given many deadlines in the heat of electioneering.

But small and medium businessmen and common people, I met last week in Punjab are hoping that the new government will use its holy Saudi-friendship wand and much of the load shedding would be over in the first 100 days. “Nawaz Sharif is going to get a US$15 billion oil grant from Saudi Arabia and energy shortage issue would be solved, he has excellent relations with the royal family,” one exited exporter told me in Sialkot. He didn’t like me telling him that Saudis may give some oil on credit but they do not give free oil.

The reports are that the new government is giving top priority to the issue and has decided to merge the Ministry of Petroleum and Natural Resources and Ministry of Water and Power into one Ministry of Energy. It would be a courageous step because this idea was floated by Farooq Leghari when he was in Zulfikar Ali Bhutto’s government, but all governments failed to implement it. I had written an article in early 80s suggesting this, but Dr. Mahbub ul Haq told me all governments need more ministries to please the aspirants and the bureaucrats want their exclusive domains, so “your suggestion has no buyers.” He was right, at a Conference in Islamabad in 1995, I reminded President Farooq Leghari about his suggestion in the 70s,  he said “yes I gave this idea to the government, but the ministers opposed it.”

This merger is important perhaps as both ministries work cross-purpose most of the time and slows down decision making. But some recasting would be required. The Ministry of Energy should include power (including hydel power plants), petroleum and gas.  Water can be separated and put directly under the Ministry of Common Interest as its distribution between the provinces has always remained a ticklish issue. As almost 90 percent of water is used for agriculture purposes this division can also be added to the Ministry of Food Security. There is no need for having natural resources and minerals in the centre as these are provincial subjects.

This indeed should be the first step towards charting a short, medium and long term energy plan. People should be taken into confidence about these plans so that they don’t expect miracles as Nawaz Sharif wants them to have realistic expectations.

On a short-term basis reportedly, the PML-N team is considering to clear the circular debt and meet other demands of the power sector by floating Rs500 billion treasury bills. This may narrow the energy demand and supply gap for a few months. Unless energy sector comprehensive reforms are started simultaneously the circular debt glacier will emerge again before the government would be able to recoup with the first financial drain. This is not the first time that circular debt would be retired by borrowing from the banks, Musharraf and PPP-led governments took this easy route more than once.

Every time the circular debt crosses the danger line the government comes and injects a booster. But a booster is a booster and not a panacea of the actual disease. Why do we have the circular debt? Prominent reasons are: at an average a Rs3 subsidy is being given by the government on per Kwh. The electricity purchase and distribution companies face this loss because at an average 20-30% of the electricity is stolen and the government departments do not pay in time. All this adds to the per-unit value of the electricity making it expensive for the end-consumer. Now the theft and payments in time can be organised if the government adopts zero tolerance for electricity theft and supply discontinuation in the case of default, no matter whether the defaulter is the Senate or the President house.

Strong political-will will be required to stop this hemorrhaging power sector by giving direct subsidy to the subsistence electricity user and then charging the real cost price plus 10 to 15 percent profit from other users. Once the energy sector is reformed, which might take two to three years, the tariff may go down because at present we are paying for the electricity theft, running the inefficient power generation and distribution, skewed energy mix, corruption and non-payment/delayed payments of bills. The tough reforms, people should be informed, would bring a long term solution, so for a couple of years they will have to bear the brunt and in return they will have less load-shedding.

WAPDA was de-bundled, separating power generation, transportation and distribution companies, with the idea they would be privatized, but that did not happen. Even if the government does not want to privatise it should give these assets, except the National Transmission & Dispatch Company (NTDC), to the provinces, as it is electricity is a provincial subject now with the caveat that they can give permission for projects up to 50 MW. This ceiling should be removed. The deficit and surplus provinces can then buy and sell electricity to each other. This would localize the energy problems and we would not see provincial government backing energy protests and disputing supply of electricity to a city or a province, as it has happened in the last five years. The hydel power from the big dams, which are national assets, should however be distributed to the province as it would bring their average unit cost down.

Another reason for the high price of electricity is that the share of fuel oil is increasing in the power generation fuel mix. Indigenous natural gas share stands at almost 32%, oil 35%, hydel 30%, coal 0.1% and nuclear 1.8%. Electricity generation is thus mainly dependent on natural gas and imported furnace oil.

This is because the country is short of natural gas and the available resources are being exploited to the maximum. The electricity producers claim that they should have the first right over natural gas, domestic users burns it as a cheap fuel and want it even in the remotest village whether it is economically feasible or not. The fertilizer industry has its own claim also on the pretext that they supply to the essential agriculture input. Other industries are way down in the gas supply priority list.

Other cheaper sources have been neglected in the past or have been bogged down by the petty center versus provinces tussle of power. Coal contributes just 0.1% of our power generation needs in sharp contrast to the world’s 41%. It is not that we don’t have coal; it is for years that the federal government did not permit the provincial government of Sindh to harness the vast Thar Coal reserves. However, now the much-maligned PPP government resolved this issue and sufficient progress has been made to employ coal for electricity production.

Another cheaper source of energy in Pakistan is Hydel. It contributes to almost 30% of the total production. But the problem of its availability is dependent on the flow of water in the rivers which makes its supply inconsistent. New investment in hydel should be in the mini run-of-the-river power generation projects so that there is no political opposition, which we have seen as in the case of Kalabagh. The Bhasha Dam, which was inaugurated by the last government, has already run into difficulties as the World Bank is hesitant to finance this project

A short-term solution was rental power, but the scandalous handling of agreements has led to the Supreme Court’s intervention. The present government should approach the Supreme Court to permit it to strike a favourable deal for Pakistan in an out-of-court settlement. A Turkish company has already invoked international arbitration claiming $600 million damages as their ship has been impounded by Pakistan. There are strong chances that Pakistan would end up paying this penalty.

It is also imperative that gas prices are brought closer to the oil prices as this would encourage exploration and production companies to invest in Pakistan. In any case there has to be parity between imported LNG or piped gas and the local gas pricing. The only way to give some relief on pricing is that the government cuts down its taxes on oil and gas and relies on direct and consumption taxes.

Undoubtedly, PML-N has been left with a tough choice between having energy at its real cost or having no energy. Energy sectors long term reforms have to make electricity a profitable business as no business in the world can afford to meet the growing investment needs unless it accumulates surplus value—the profit. It sounds heartless doesn’t it? But economic realities are cold, can’t help it.

 (ayazbabar@gmail.com)

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  1. #1 by Rashed Aurakzai on June 3, 2013 - 4:41 pm

    Read yesterday. The whole country is facing circular debt not alone the power sector. If privatization of power sector was a solution to the problem, KESC should have been a success story by now. It’s her tenth year now since we sold her for Rs. 24 billion with an yearly subsidy promise of Rs.2billion for a specified time. That subsidy has reached to Rs.70 billions last year and this year till May we have already given her Rs. 40 billions ie Rs. 6 billion/month. Whereas Wapda subsidy for last year stood at Rs.150 billion. Compare their consumer banks and distribution networks too.

    It’s not alone our problem, Check India’s experience with privatization of power and you will find that utilities’ services have worsened after privatization. Those still in public sector are better in all parameters including tariff, stability, reliability……. Refer to Bombay and Delhi distribution companies.

    KESC is milking the state by blackmailing the state through blackouts. Every now and then they get a bailout. Certain services like power, railway and post should remain with the state and subsidized too. How can we compete for exports if per unit power is bought at Rs. 25. An example of Wapda capability was restoring it’s system on at least ad hoc basis in one month after Quake 2005. Other dept are still lingering on. Imagine the cost of 5 completely damaged substations and part of their transmission lines. It was less than Rs.2 crore because it was done by wapda herself. Wapda is now paying multinational companies double for what it could do in half. Thanks to confused privatization vibe of the 90s. NS followed by military rule withered Wapda’s capabilities to build substations, transmission lines and power houses. Generation experts were sent to distribution and transmission people to generation. Construction and substation formations was disbanded or given to distribution companies which had no experience, interest or spares for them. The ultimate solution which you forgot to advise NS and who like all political elites don’t want to see is increasing the income tax base. Just like Dr. Ikram ul Haq points it out in every of his article, Pakistan at least has 10million people earning above Rs. 15 lakh per year. Whereas return filers are only 1.5 million, nearly all salaried class. bringing these 10 million in tax net and taxing them at existing rates will earn state Rs. 5 trillion. We’ll have enough to please the military, run grid, railways, health, post and schools.

    Wapda does take subsidy but then noone has ever been shown it’s balance sheet. It keeps 150,000+ direct jobs and million others in the industry and corporate sector. Wapda is believed to have crossed Rs. 500 billion revenues target last year. Less than 20% of this is it’s workhead including maintenance. What is draining it is expensive units price from the IPPs which sometimes reached Rs. 25/unit when oil was at it’s peak. It sells the same at less than Rs.10 after losing considerable amount in power outages and as line losses due to deteriorating system. Our power system was better than the Oiled Gulf back in 90s. It’s worst than that of India now.

    The theft is because of poorly paid workforce and law & order situation. The state is itself the biggest defaulter and wapda is used by military, bureaucracy, politicians, Judiciary,clergy and outlaws as their keep and fiefdom.

    Just check with any SDO of local sub division how the police and judiciary use Kundas to run their ACs. How should they stop theft then? Revenue will further be lost in war torn zones of KP, FATA and Balochistan where even the military is struggling. How can one expect Wapda to collect bills. The best thing is to free Wapda from the ministry and make it an independent corporation headed by it’s own employee as Chairman. Let it do it it’s own calculations and based on that their expansions. Gen Zulfiqar scrapped all project in the pipline which were based on demand forecast terming it excuse for corruption. The present darkness is his fruit of his short term efficient military style management.

    Wapda did reduced line losses but on paper only. Everything was being brushed under the carpet by Wapda technocracy.

    The corporation can be supervised by a parliamentary committee. Subsidy should be maintained for as long as Wapda doesn’t offset the thermal production with cheap renewable sources.

    Regards. Ex SDO Wapda.

    Date: Mon, 3 Jun 2013 07:49:31 +0000 To: aurakzai@hotmail.com

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