Pakistan Observer

Aftermath of energy crisis

Shaukat M Zafar

Tuesday, January 03, 2012 - The power outage for over eight to 12 hours per day has ruined the country. Four-year tenure of the incumbent PPP regime is characterized by extreme power shortage and load-shedding with a series of broken promises, un-kept pledges, misplaced priorities and a directionless journey. Industrial production is suffering, exports are on the decline, jobs are being lost, and the national economy is in array. By all indications, the power crisis in Pakistan is getting worse than ever. The deepening energy crunch is hitting industrial output badly, and has been singled out as the key culprit causing unprecedented production loss of billions of rupees everyday. Industry’s wheel is halting. Industrialists are shifting their industrial units to Bangladesh, Malaysia, Saudi Arabia, and other countries. Negative industrial growth has resulted in reduced output, missed export and revenue collection targets and monumental unemployment. Overall, in value-added export sector alone, Pakistan is losing more than $10 billion every year due to power shortage. Due to load-shedding of electricity and gas and resultant very high retrenchments job losses are greater than the jobs created and all the sectors have negative growth resultantly trade deficit is increasing. It is causing an estimated loss of Rs 230 billion annually, besides depriving about 0.4 million people of jobs. Energy and power crisis have crippled the industry while interest rates and inflation are also in double digits which is seen as the second most serious problem that has hit industry.

Increasing electricity tariffs have put a negative momentum on manufacturing and industrial sector due to high costs of production. It is responsible for the skyrocketing prices of different items of common use. Industrialists are already facing high cost of doing business due to critical law and order situation. Industrial workers’ morale is low, as they see job losses due to electricity and gas supply problems. We cannot afford the industry to suffer any kind of load-shedding, which causes heavy losses to the business community and the government exchequer, which ultimately will create labor unrest and law and order situation will become further deteriorated. Continuous upward revision in the tariff has also not helped bring power generating companies back to profit; it has not reduced line losses or helped tackle circular debt. The recent hike in tariff will not be able to resolve power crisis but it will devastate masses and prove fatal for the textile and other industry. The unreliable power supply is also frustrating plans and prospects for new investments and business expansion, as investors see no reason for optimism regarding the industrial sector.

With a volume of about $10 billions our textile industry contributes about 60 per cent to the country’s total exports and contributes about 46 per cent to the total output produced in the country. Pakistan is the eighth largest exporter of textile products in Asia. However, the textile industry currently faces massive challenges like electricity and gas shortage. Production of small units depends entirely on the electricity supply; the industry is suffering heavy financial losses due to load-shedding. High cost of utilities is also making Pakistan textiles uneconomical in the international market. The cost of production has increased as industrialists have to spend more money on alternative sources of energy. SBP reports that textiles, the country’s biggest industry, the largest employer and accounting for more than 60 percent of overall exports, recorded a 10.2 percent decline in output in the first four months, July-October of FY2011. Besides, load-shedding has badly hit daily-wage workers who are frustrated of starvations and discontinuation of education of their children. The people are spending sleepless nights. Construction sector, responsible for creating one million jobs for unskilled labour is also now stagnant. “The LSM sector has been badly affected during the last four years, owing to high cost of credit and higher interest rate regime in Pakistan, while the government is designing anti-growth and anti-investment policies. After the energy crisis, the high interest rate regime is the second biggest setback to industrial growth in the country,” Industrialists say. With increase in intensity of electric and gas load-shedding, the public anger over the unabated power outages in different parts of the country has gone up with women in some places taking to the streets for the first time against prolonged load-shedding. The electric supply companies are sending inflated bills. Amid the demonstrations, many influential segments of society have started appealing to the people not to pay their monthly power utility bills and to resist the power utility if it launched a disconnection drive. The recurring power outages had made the lives of the people difficult. It is disturbing the studies of students as they could not concentrate on their studies due to load-shedding. There are also complaints of water shortage due to prolonged load shedding.

Economic Survey 2010-11 indicates Due to high energy prices, there was a shift from expensive imported furnace oil to indigenous gas, creating a huge gap between demand and supply and compelling the government to tackle this with load management strategy, along with increase in prices. Currently, most IPPs are operating well below their generating capacity because they are not being paid billions of rupees owed to them. Paying them their dues should be the first step toward filling the supply-demand gap. Unless this done, the electricity rates will keep rising and load-shedding will be going on. The installed capacity of power generation in the country is 19,000 MW, “which is not being tapped due to the existence of a complicated circular debt in the energy sector”. Most of the IPPs have to obtain oil on credit from Pakistan State Oil, as they do not make enough cash because of power theft, transmission losses due to old and obsolete distribution network, and non-payment of electricity bills by large industrial-business consumers, and even government departments. One of the fundamental reasons why production is low is a huge circular debt. This problem has not been dealt with which, in turn, accounts for periodic inability of oil marketers to import fuel for the generating plants. A number of Government organizations in the energy sector had Rs258.5 billion stuck up in inter-corporate circular debt till April this year, ballooned to Rs. 275 billion by now, compared to Rs.103.9 billion during the corresponding period last year, indicating an increase of 147 per cent. Pakistan Electric Power Company (PEPCO) owes money to independent power producers (IPPs), who in turn owe money to oil companies. The government has not been able to resolve the crisis in four years. Receivables stood at Rs.775.2 billion and payables at Rs.516.7 billion. Out of Rs.258.5 billion, net receivables of PSO stood at Rs.51 billion, SSGCL Rs.7.1 billion, Pepco Rs.2.7 billion, OGDCL Rs.115.5 billion, Parco Rs.37.5 billion, KESC Rs.27.5 billion, GHPL Rs.9.6 billion and PPL Rs22.2 billion.

On the other hand, SNGPL has net payables of Rs.13.4 billion and the Karachi Water and Supply Board Rs.1.2 billion. Pakistan’s energy production relies heavily on expensive furnace oil and gas. With interruption in supply of oil and gas, it becomes impossible for energy generation to continue at the required pace. According to Mian Mansha, a renowned industrialist, the pattern of electricity production on any day is such that gas is supplied to highly inefficient public-sector power plants, while over 200 percent more efficient private-sector power plants remain closed. These plants could produce double the electricity from the same quantity of gas used by inefficient power plants. However the cheapest source of electricity is hydro power generation that costs only Rs. 2/- per unit whereas the electricity produced by oil driven IPPs and rental power are as expensive at a cost of Rs. 14/- per unit.

The government continues to state that long-term projects, which will take four to five years to start, to enhance power generation are in place. It is unfortunate that in our national grid 64 per cent of electricity comes through IPPs, while the share of power generation through hydro petroleum stands at 34 per cent only. It is widely alleged that the reasons for Government’s interest in rental power to fill the electricity gap is the heavy kickbacks offered by the rental power operators.

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