Pakistan's Power Crisis

Pakistan’s economy has recently been growing at 7-8% per year, doubling its GDP over the last 7 years. The industrial growth rate has been closer to 12.5% per year during this period, contributing 38% of the total economic output of Pakistan. Per capita energy consumption of the country is estimated at 14 million Btu, which is about the same as India's but only a fraction of other industrializing economies in the region such as Thailand and Malaysia, according to the US Dept of Energy 2006 report. To put it in perspective, the average world citizen uses about 65 million BTUs and an average American consumes 352 million BTUs. With 40% of the Pakistani households that have yet to receive electricity, and only 18% of the households that have access to pipeline gas, the energy sector is expected to play a critical role in economic and social development. With this growth comes higher energy consumption and stronger pressures on the country’s energy resources. At present, natural gas and oil supply the bulk (80 percent) of Pakistan’s energy needs. However, the consumption of those energy sources vastly exceeds the supply. For instance, Pakistan currently produces only 18.3 percent of the oil it consumes, fostering a dependency on imports that places considerable strain on the country’s financial position. On the other hand, hydro and coal are perhaps underutilized today, as Pakistan has ample potential supplies of both.

Pakistan’s rising energy demand, according to the U.S. Department of State’s Paul Simons, creates opportunities for regional cooperation. To this end, the U.S. Trade and Development Agency convened a meeting a couple of years ago in Istanbul that produced an agreement on examining options for exporting Central Asian electricity to Pakistan. It should be noted here that US does not favorably look upon any Iran-Pakistan cooperation in the energy sector. At an Asia Program event organized by Wilson Center in 2006, Vladislav Vucetic of the World Bank provided a troubling assessment of the state of Pakistan’s electricity sector—demand is approaching maximum production capacity, while institutional capacity for policy development and implementation remains low. Worse, failing to resolve these problems may cause investment delays and hamper Pakistan’s economic growth. Sanjeev Minocha of the IFC, a major source of private sector financing, noted the paucity of domestic private sector initiatives in Pakistan. The IFC has sought to raise investor confidence through its funding of private Pakistani energy companies, including the new firm Dewan Petroleum. Ultimately, stated Minocha, it is crucial that investment projects take into account the interests of local communities.

In early 2008, Pakistan's industrial consumers are facing an electric power deficit of up to 3,600 megawatts (MW)due to low water levels at hydroelectric dams and damage to two main power lines attacked during the three days of violence following Bhutto's assassination. More than anything, this represents the failure of long term energy planning to go with the economic growth forecasts.

Among the temporary issues exacerbating the larger power crisis, the two main power transmission lines were blown up in January 2008 in Sind, creating a shortfall of 1,000 MW. The business community complain that lopsided and unplanned shutdowns have resulted in closures in almost all industries. Subsequent production losses will be reflected in further pressure on exports and lead to increased imports.

Water levels have fallen by 32% compared with last year, according to the Pakistan Electric Power Company (PEPCO). Pakistan's current installed capacity is around 19,845 MW, of which around 20% is hydroelectric. Much of the rest is thermal, fueled primarily by gas and oil. PEPCO also blames independent power producers (IPPs) for the electricity crisis, as they have been able to give PEPCO only 3,800 MW on average out of 5,800 MW of confirmed capacity. Most of the IPPs are running fuel stocks below the required minimum of 21 days.

While there are many economic successes of the Musharraf-Aziz administration in terms of reviving the Pakistani economy and putting it on a growth path again, the energy sector represents its biggest failure. This failure has the potential to threaten Pakistan's economic future, unless immediate steps are taken to bring this crisis under control over the next few years.

Comments

Riaz Haq said…
Here's an ET story on decline in circular debt:

The good news is that circular debt in the energy sector is going down. The bad news is that it is doing so for all the wrong reasons.

Circular debt has now become shorthand for the crippling string of financial liabilities that energy companies owe each other because the federal government fails to live up to its promise to pay out energy subsidies that it announces as vote pleasers. This debt has resulted in a massive cash shortage virtually all along the energy chain and significantly reduced the ability of power companies to operate at full capacity, which in turn causes massive power outages throughout the country, particularly during the summer months of peak demand.

But now at last, it appears that the government is paying out what it owes in subsidy payments. Azfar Naseem and Sateesh Balani, research analysts at Elixir Securities, an investment bank, estimate that total circular debt throughout the energy chain has not only stopped growing, but has shrunk by about Rs137 billion during the first six months of the fiscal year ending June 30, 2013.

Part of this reduction has come from higher subsidy payouts to the energy sector from the finance ministry, which rose to Rs160 billion between July 1 and December 20 of this year, about 5% higher than the net payouts throughout the whole previous fiscal year that ended June 30, 2012.

Another significant chunk came when the government effectively forced the state-owned Oil & Gas Development Company (the largest company in Pakistan by market capitalisation) to buy about Rs82 billion in government bonds meant to clear out the outstanding liabilities. The bonds do not mean that the government has paid out its liability: they just mean that they forced OGDC to pay the rest of the energy chain and promised to pay OGDC back.
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The government was given this fiscal breathing room by the inflow from the United States in the form of $1.1 billion in outstanding dues on account of the Coalition Support Fund. That entire amount, by some accounts coming out of the finance ministry, was spent on power subsidies. Yet the government may well be running out of accounting tricks to patch up the power sector before the elections.

The reason the government has tried to juggle around its scarce cash reserves is because it wants to make sure that the power companies have enough cash to buy the fuel they need to keep the lights on in the country, at least most of the time, in the run-up to the elections, expected around May 2013.

These techniques appear to be having at least some positive impact: the outstanding receivables at Pakistan State Oil, the largest oil retailer in the country, are down by almost 40% to around Rs120 billion. Receivables at Hub Power Company and Kot Addu Power Company (which supplies politically important regions of southern Punjab) are also down substantially....


http://tribune.com.pk/story/485765/energy-crisis-circular-debt-is-going-down-but-not-for-the-right-reasons/

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