Financial Mismanagement Worsening Power Cuts in Pakistan

It is becoming increasingly clear that it is the total absence of financial management, not just insufficient installed generating capacity, that is the crux of the worsening energy problems in Pakistan.

Riots have broken out as the Punjab, Pakistan's largest province, finds itself in the midst of the worst ever electricity crisis in the nation's history. The power shortfall has reached almost 9000 megawatts across the country, over half of the total demand of about 17000 MW.

Many public and private power producers have shut down their power plants due to the suspension of fuel supply by Pakistan State Oil, the state-owned oil company, according to a report in the Express Tribune. The oil company is demanding payment of Rs. 155 billion in outstanding dues from the power producers before resuming fuel supply.



The key players in this "circular debt" trap are the federal and provincial governments as the biggest deadbeats, the power distributors like LESCO and KESC, the power producers like Pepco and Hubco, and the fuel suppliers like government-owned Pakistan State Oil (PSO) and partially state-owned Pak-Arab Refinery Ltd (PARCO). This debt circle begins with the government as the biggest debtor and ends with a government-owned entity as the biggest creditor. So the obvious question is: If the government is both the biggest debtor and the biggest creditor, then why is it that the government leaders can not solve the problem? Is it the lack of will? or the lack of competence?

Increased load shedding in Pakistan has cost 400,000 jobs in recent years, according to the World Bank. Although the World Bank report does not address it directly, the anecdotal evidence suggests that almost all of Pakistan's 13 million jobs in the decade of 2000-2010 were created from 2000-2007 when the economy showed robust gdp growth.

Clearly, the circular debt problem has assumed alarming proportions, threatening Pakistan's future. The IMF and the US officials in their recent meetings with Pakistan government have described the circular debt as a significant threat to the country’s economy.

Unless the government urgently takes serious steps to manage and resolve this worsening electricity crisis by putting a fully empowered competent team in charge, it will only get worse and make life impossible for both businesses and consumers, and cause a total collapse of an already struggling national country.

Related Links:

Haq's Musings

Circular Debt and Load Shedding

Musharraf's Economic Legacy

Pakistan's Tops Jobs Growth in South Asia

World Bank Report on Jobs in South Asia

Pakistan's Twin Energy Crises

Pakistan's Worsening Electricity Crisis

Pakistan's Struggling Economy

Lahore School of Economics Paper on Circular Debt

Comments

Riaz Haq said…
More band-aid solutions to severe financial and business problems in the power sector--PM injects Rs. 9 billion, according to The News:

ISLAMABAD: Amid countrywide protests against crippling power outages, Prime Minister Yusuf Raza Gillani on Monday ordered the release of Rs9 billion to Pakistan State Oil to ensure fuel supply to make Hubco, Kapco and other public sector power generation companies operational, a senior official, who attended the meeting on the power crisis held here with the prime minister in the chair, told The News.

The finance ministry has released the amount that will reduce power outages by a mere two hours. “Financial and administrative bankruptcy is the main cause of the power crisis in the country,” the official said. “We’re not going to be able to resolve it with peanuts.”

Over the last three and half years, the government has injected over Rs1,000 billion in the power sector to turn it around, but circular debt has swelled to Rs300 billion.

When contacted, finance secretary Dr Waqar Masud confirmed that he has released Rs9 billion immediately to help normalise fuel supply to Hubco (Hub Power Company) and Kapco (Kot Addu Power Company). Kapco was earlier generating just 200MW and Hubco 500MW but with the increase in fuel supply both powerhouses will start generating 2000-3000 MW of electricity.

Masud said that the ministerial committee on energy would finalise its recommendations today (Tuesday) to resolve the energy crisis on a short, medium and long-term bases. The recommendations will soon be placed for approval before the special cabinet meeting to be attended by the chief ministers.

He said Monday’s meeting also reviewed the energy conservation plan, which will also be placed before the special cabinet meeting for approval. The plan, which includes two weekly holidays and other conservation measures, requires the approval of the provincial governments for implementation.

An official at the ministry of water and power disclosed to The News that the prime minister has ordered Irsa to release more water to increase hydrogenation. The official said this decision is secretive keeping in view its sensitivity.

“The power crisis will end only when the government generates Rs104 billion to pay IPPs in one month and an equal amount next month,” said an expert. “IPPs, which withdrew their notices earlier issued to the government seeking sovereign guarantees against default by the Pakistan Electric Power Company, are still in hot water.”

The IPPs, which have the capacity to generate 8000MW, are producing 5000MW because of the government’s inability to pay them their dues. Importantly, the government is paying $9 million a month as capacity charges to the Karkey rental ship, which produces a mere 30MW electricity.

In the last three years the government has increased the power tariff by 125 percent, but failed to improve its efficiency as line losses have swelled to 28 percent, officially shown at 23 percent. Likewise, Discos have failed to recover Rs89 billion dues from running defaulters whose electricity connections are still intact.


http://www.thenews.com.pk/TodaysPrintDetail.aspx?ID=9294&Cat=13
Riaz Haq said…
Here are some excerpts from a Financial Times story on protests against power cuts spreading in Pakistan:

Concerns over blackouts, inflation and unemployment are a far more pressing worry for many in the country of 180m people than the risk of the militant bombings or sectarian attacks that periodically rock Pakistan’s cities.

In the industrial hub of Gujranwala in the eastern Punjab province, hundreds of protesters defied a shower of tear gas canisters fired by police to hurl stones and block a railway line, witnesses said. Mobs burnt six electricity company offices in the city on Monday.

“The policemen are firing (tear gas) shells but the demonstrators are simply coming back with more rocks,” said Muhammad Tufail, a television reporter covering the protests.

Similar clashes broke out in Faisalabad, Pakistan’s textile centre, where hundreds of workers laid off due to power cuts at their factories hurled stones at police. The cities of Peshawar, Quetta and Karachi have also witnessed protests this week after an unusually severe period of outages.

Adding to the misery, Pakistan is battling an outbreak of dengue virus, which has claimed more than 150 lives in Punjab, according to media reports.

Pakistan’s government, also facing a stubborn Taliban insurgency, had sought to rally its opponents into a united front last week to face allegations from Washington that the country’s military is backing Afghan insurgents.

But Nawaz Sharif, Pakistan’s most prominent opposition leader and a former prime minister, has seized on the power crisis to lambast the government and threaten more protests. “We will be on the streets of Pakistan with our people if the government continues to fail in dealing with this situation,” said a senior leader from Mr Sharif’s PML-N party.

Several ministers and other officials from the PML-Q, one of the parties in Mr Zardari’s coalition, submitted their resignations from cabinet posts on Tuesday, though the party has not formally left the government.

“This is a time when we feel we have to show solidarity with our people who are protesting over the electricity shortages,” said Mushahid Hussain, a senior PML-Q leader.

The power sector is hobbled by the government’s chronic failure to pay bills owed to companies that supply oil to power plants. Power prices charged to consumers have failed to generate sufficient revenue to sustain state-owned electricity companies.

The government says it is releasing emergency funds to settle its bills, though an official warned that it could take several more days to curb the current spike in blackouts.

The government’s chronic late payment of fuel bills reflects its broader failure to rein in spending. The International Monetary Fund halted payments to Pakistan last year after disbursing about 70 per cent of $10bn loan, mainly due to the government’s failure to control its growing budget deficit


http://www.ft.com/intl/cms/s/0/7cfee85c-ee9b-11e0-9a9a-00144feab49a.html#axzz1Zpttm1X2
Riaz Haq said…
Here's a piece on Pak power woes in Foreign Policy Mag:

Dubbed the circular debt issue, power companies have racked up billions in unpaid dues to petroleum companies, which supply them oil to run their powerhouses. On Sunday, Pakistan State Oil (PSO), tired of waiting for the dues long promised to them, decided to stop the petroleum supply to the power companies, leading to an increase in the already inhumane cuts.

While the Government of Pakistan (GoP) has now released some funds to appease PSO, this is not a long-term solution. The Federal Minister for Water and Power Naveed Qamar responded to the most recent protests by saying that there were no quick fixes, and then turned around and announced that the situation would improve in 24-36 hours. Last week in Washington DC, the Finance Minister of Pakistan Hafeez Sheikh solemnly announced that the government understood the severity of the circular debt issue, and would resolve it in the weeks to come. But with a growing fiscal deficit, and a refusal of the Asian Development Bank to fund programs in Pakistan after the GoP decided to end their International Monetary Fund (IMF) loan program, how Pakistan plans to resolve the circular debt issue is anyone's guess.

One solution, according to Prime Minister Yousaf Raza Gilani, was that the United States "should help Pakistan solve its energy crisis if it wanted better ties." The United States has previously said that it is investing in dams in Pakistan to help add to the power grid, and has helped in the reconstruction of existing dams in the country.

However, Pakistan needs to stop looking towards the West for a solution (or a scapegoat), and perhaps redirect its attention to how to fix its problems internally first -- perhaps by collecting payment of unpaid bills, or cracking down against those stealing electricity. First, though, it has to deal with the political ramifications of these protests. The PML-N has played its cards right; by blaming the political center of which it is no longer part, it has easily scored political points while the PPP becomes the fall guy -- and to an extent, perhaps deservedly so. Pakistan's government, in turn, can only do so much. Strapped for cash, it barely has the funds to invest in power generation, and in cases where it has, such investments have barely led to a meaningful increase in the electricity grid.

Additionally, in the face of all of these problems, if Pakistan raises power tariffs on those that have been suffering for the last many years, the law and order situation could become even more perilous.


http://afpak.foreignpolicy.com/posts/2011/10/04/pakistans_power_woes
Riaz Haq said…
Here's an excerpt from The Economist on Pakistan's worsening energy crisis:

ALTHOUGH Pakistan makes international news for terrorist attacks, anti-American demonstrations and its alleged support for insurgents in Afghanistan, it is the basic inability to switch on a light that is pushing this volatile country closer to the edge. Popular anger over Pakistan’s crippling electricity shortage boiled over on to the streets this week, with riots that paralysed whole cities, unleashing running battles with the police and causing widespread damage to government offices.
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For ordinary people, the frustrations are endless. Refrigerators become useless. Water runs out because it relies on electrical pumps. Children do their homework by candlelight.

Insufficient capacity is not even the biggest problem. That is a $6 billion chain of debt, ultimately owed by the state, that is debilitating the entire energy sector. Power plants are owed money by the national grid and the grid in turn cannot get consumers (including the Pakistani government) to pay for the electricity they use. This week, the financial crunch meant that oil supply to the two biggest private power plants was halted, because the state-owned oil company had no cash to procure fuel.

The central government also continues to subsidise the cost of electricity to the tune of billions of dollars a year. That money, say the government’s critics, could be better used to pay its own bills and thereby free up unused capacity in power plants that are mothballed because of non-payment and disrepair. Cutting subsidies to people’s electricity bills, however, could lead to even more unrest. Critics argue that the government’s hand-to-mouth policymaking is self-defeating, and illustrates its general lack of planning.

In the long term, help could be at hand. Pakistan says it is about to start work on a giant dam, the $12 billion Daimer-Basha, in the far north-east, with backing from the Asian Development Bank. The dam would add a large amount of generating capacity. America may provide aid for the project. (India, which believes that the dam lies in disputed territory, in part of the former princely state of Kashmir, is inevitably against the dam’s construction.)

There are also plans for a gas pipeline from Iran, though the Americans have warned that the scheme could fall foul of their sanctions against Iran. Alternatives include access to Pakistan’s abundant untapped coal reserves, or importing gas and electricity from central Asia, across Afghanistan, a daunting proposition.

However, it is the short term that is the real problem. Unless the Pakistani government can solve its cycle of debt and disorganisation, ordinary Pakistanis will continue to vent their fury.


http://www.economist.com/node/21531495
Riaz Haq said…
Here's an excerpt from The News on mounting debt in the power sector:

ISLAMABAD: With the addition of over Rs1 billion per day to circular debt, the cash flow deficit faced by the power sector has surged to Rs418 billion, betraying the devastatingly poor management of the power sector, a senior official at the Finance Ministry told The News.

Currently, the power sector faces Rs302 billion circular debt, which continues to soar in the wake of mismanagement and inefficiency. The system loses Rs40 billion every year just due to excessive line distribution losses that have surged by 4 percent in recent months, from 21 to 25 percent. Another Rs6-7 billion islost every month because of slow recovery of bills while Rs24 billion goes to IPPs as late payment surcharge.

Previously, line losses stood at 16.5 percent and transmission losses at 3.50 percent (total losses 20 percent) but have now increased to 21 and 4 per cent respectively, pushing a total 25 percent. It is pertinent to mention that one percent loss translates into Rs7.50 billion.

In anther setback, the government continues to pay Rs9.6 billion as GST for electricity bills that it fails to recover. Similarly the government loses Rs2 billion per month in the wake of fuel adjustment loss due to 20 percent losses that have now increased to 25 percent. And because of decreased supply of gas to powerhouses, the government has to sustain the additional burden of Rs6 billion per month.

This means that the government will suffer Rs72 billion additional losses per year if it is unable to supply gas to power plants, given that it will have to use costly furnace oil. Informed sources told The News that the Ministry of Petroleum and Natural Resources has committed to providing 76 million cubic feet gas per day (mmcfd) to powerhouses since the government has decided to give top priority to providing gas to the power sector. “We expect addition of 200 mmcfd gas to the system in December, of which 100 mmcfd each will be allocated to the power and fertiliser sectors,” secretary petroleum and natural resources Mohammad Ijaz Chaudhry told The News. “The decision to accord priority to supplying gas to the power sector was taken during the high level meeting chaired by President Asif Zardari on the energy crisis.”

The official said the Finance Ministry has asked the Ministry of Water and Power to improve its revenues outlook by improving recovery and paying arrears to IPPs and PSO. IPPs’ arrears currently stand at Rs208 billion, while those of PSO are Rs165 billion. However, the receivables of Pakistan Electric Power Company (Pepco) stand at Rs307 billion.

The finance ministry has already told IPPs it will now pay Rs45 billion to them next month. This amount was to be paid before October 15, 2011 but Pepco failed to meet the deadline because of acute financial constraints.

Meanwhile, the government has decided, the official said, to re-introduce uniform electric power tariff across the country, while the subsidy, which power consumers enjoyed, will go to the government. Currently 20 million consumers receive electricity bills under differential power tariff regime and the subsidy, which the government pays directly to the distribution companies, is mostly misused.

“The government has decided no to raise the power tariff by 4 percent as suggested by the Ministry of Water and Power in the summary sent to PM Secretariat until and unless the power tariff rationalisation plan is implemented after its approval by the federal cabinet,” the finance ministry insider said.


http://www.thenews.com.pk/TodaysPrintDetail.aspx?ID=72877&Cat=2
Riaz Haq said…
Here's an excerpt from an Op Ed by Dr. Ashfaque Khan published in The News:

Reviving the economy will require addressing both near and medium-to-long term economic challenges. The solution to these challenges boils down to restoring macroeconomic stability on the one hand and promoting economic growth through growth critical reforms on the other.

Let me share my thoughts on these economic challenges. For addressing near term economic challenges, the commitment to fiscal discipline is a pre-requisite. A sound fiscal position is essential to achieving macroeconomic stability, which is increasingly recognised as a critical ingredient for promoting strong and sustained economic growth and lasting poverty reduction. An adequate level of revenue generation is sine qua non for the public policy to fulfil growing expenditure requirements.

The thrust of revenue mobilisation must include reducing tax rates, broadening the tax base, shifting the incidence of taxes from imports and investments to consumption and incomes, and providing a congenial environment to increase tax compliance. Every sector of the economy must be brought under the tax net. An equitable taxation system demands that income originating from any sector, if it crosses the threshold level, must be taxed.

Potential areas which can be brought under the direct tax net include agricultural income, incomes of doctors, lawyers, beauty parlours, chartered accountants, wholesalers and retailers and transporters to name a few. Improving withholding tax regime would increase the government’s tax revenue immensely. Taxes are being collected by withholding tax agents but are not being deposited in the government’s treasury. I am glad that the FBR has taken note of this and is making efforts to address this issue.

On the expenditure side, the government will have to take a bold decision as to the future of the rotten PSEs. In particular, how long can the government bail out these bleeding institutions from taxpayer money? The time has come to offload some of them even at a rupee each and appoint the best team available to manage the others. The government can save at least over Rs300 billion which can be spent on millions of defenceless poor and improving the country’s physical and human infrastructure.

Inept handling of the power sector has resulted in the accumulation of unsustainable circular debt. By raising the power tariff alone, the government has caused circular debt to balloon. Raising the power tariff is tantamount to raising tax rates. It is common knowledge that if we keep on increasing tax rates people will avoid paying taxes. Similarly if we keep on raising power tariffs it will encourage people to use unfair means to avoid paying electricity bills. As long as there are line losses and power theft, the issue of circular debt will always be there.

The government will have to reduce fiscal deficit from 6.5 percent of GDP last year (2010-11) to three percent by 2013-14. This can be achieved, provided there is commitment to fiscal discipline. Reduction in fiscal deficit will reduce the government’s borrowing requirements which in turn will help the SBP to reduce interest rate thereby freeing more credit for the private sector. This would also help the government to lessen its borrowing from the SBP and to moderate inflation.

Restoring fiscal discipline would help maintain price stability provided the government maintains moderation in enhancing government administered prices such as support price of wheat, and power and gas tariffs. Mobilising more resources through taxation on POL products would not help in reducing inflation. Thus, reducing budget deficit, moderation in government administered prices and maintaining exchange rate stability would be critical to bringing inflation down to a single-digit...


http://www.thenews.com.pk/TodaysPrintDetail.aspx?ID=78636&Cat=9
Riaz Haq said…
The World Bank on Thursday said it would provide Pakistan with $5.5 billion in development aid over the next two years, according to AFP:

“The Bank has responded flexibly in the face of the tremendous challenges Pakistan has gone through over the past year or so,” said its Pakistan country director Rachid Benmessaoud.

“We will continue our strong support to Pakistan, while keeping a keen eye on implementation to ensure that these efforts translate into real results on the ground,” he said.

The bank’s progress report on its Pakistan program said its efforts had been disrupted over the past two years by the devastating floods of 2010-2011, ongoing security problems as well as “slow economic reform”.

“Shifting the focus and resources in response to the floods led to a delay in infrastructure investments,” it said.

It said Pakistan’s economic recovery from the floods and other problems remains slow, with growth of 3.9 percent expected next year.

“A range of governance, corruption and business environment indicators suggest that these areas remain a challenge,” it added.

The funds include $4 billion in development assistance and $1.5 billion from the bank’s International Finance Corporation, which helps private sector firms.

“We are committed to helping Pakistan realize its potential especially in key sectors such as infrastructure, renewable energy and agribusiness,” said IFC Middle East director Mouayed Mahlouf

http://tribune.com.pk/story/310881/world-bank-sets-5-5-billion-in-aid-for-pakistan/
Riaz Haq said…
Here's a piece on Pakistan's energy crisis:

Energy and Security: Natural Gas and the Example of Pakistan
By Paul Sullivan,
Georgetown University
I recently got a question the other day about Pakistan. It is having a serious electricity crisis. One of the solutions proposed to me was that a pipeline be built from a neighboring country, Iran, which has a lot of natural gas in order to fuel the power stations of this South Asian state.
Fuel is not enough.
The electricity generating stations in Pakistan need to be better maintained. Many plants are simply not running due to bad maintenance. More people need to be paying their electricity bills. The pricing of electricity needs to be more rational. Without the right amount of payments coming into an electricity company, even if it is a public sector company, the company cannot remain solvent and well run for long. Pakistan’s electricity is produced by two public sector utilities and about 20 plus independent power producers.
Part of the problem with this in some developing countries is that in the villages and even the large cities one can see thousands of “informal” wires being connected from the electrical poles to houses and businesses without any meters (or even safe connections, but that is another story). Income losses from essentially stolen electricity are gigantic.
Pakistan’s electricity demand growth of about 10-11 percent per year is overwhelming its supply of electricity.
About 55 percent of Pakistan’s people use biomass, such as cow dung, other agricultural waste, garbage and more to heat, cook, etc. These people will likely have an increasing want for electricity connections in the future. Pakistan will not develop even near to its potential if this huge proportion of its population is not connected with electricity, either on a grid or via distributed energy systems at the village and town levels.
These distributed systems could use the vast wind, solar, geothermal and other renewable energy resources available, but severely underutilized in the country. Setting up distributed power systems in villages and small towns could also prove to be a lot cheaper than extending Pakistan’s often shaky and overused grid....


http://ubpost.mongolnews.mn/?p=4213

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