Daily Times

Pakistan is faced with many crises. While terrorism is at the top of the crises list, which has to be dealt with by the government, the second place in this list is being competed for by energy shortages and inflation. Both are closely linked with each other. Much has been written on the ongoing terrorism and rising challenge to the writ of the state by the jihadi hydra and, for many years, this will remain a hot topic.

Minister for Power Naveed Qamar was right when he said that the government does not have a magic wand to bridge the yawning gap between power demand and supply overnight. He is right because, over the years, the problem has become too complex. Some of the major factors that have led to the present heavy load-shedding are: bloating circular debt, high cost of fuel, non-availability of cheaper fuels, slower investments in new projects, inefficient power generation and distribution systems, power theft and non-payment of electricity dues.

The circular debt issue in the energy sector is nothing new. Previous governments also faced this problem. Once circular debt crosses the danger line, the government comes and injects a booster. But a booster is a booster and not a panacea for the actual disease. Why do we have circular debt? Prominent reasons abound. The government is giving an average of three rupees subsidy per kilowatt hour. Electricity purchase and distribution companies face this loss because, at an average, 20-30 percent of electricity is stolen and government departments do not pay in time. All this adds to the per unit value of electricity, making it expensive for the end-consumer. Theft and payments due can be addressed 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’s House. A good suggestion given at the recent Pakistan Energy Conference 2011 was that electricity theft should be declared a criminal and non-bailable offence.

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 percent, oil at 35 percent, hydel at 30 percent, coal at 0.1 percent and nuclear at 1.8 percent. Electricity generation is thus mainly dependent on natural gas and imported furnace oil.

This is because the country is short on 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 as domestic users burn it as a cheap fuel and want it even in the remotest village, whether it is economically feasible or not. The fertiliser industry has its own claim also on the argument that they supply 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 centre versus provinces tussle for power. Coal contributes just 0.1 percent of our power generation needs in sharp contrast to the world’s 41 percent. It is not that we do not have coal. It is for years that the federal government did not let the provincial government of Sindh harness the vast Thar coal reserves. I have personally seen federal bureaucracy claiming that, as electricity is a federal subject, the Sindh government cannot move on the Thar coal project for power generation without their approval. However, now the much-maligned present government has resolved this issue and sufficient progress has been made to employ coal for electricity production. For the first time, I am not cynical about the future of this project, where a good company like Engro has taken the lead in signing a joint venture with the Sindh government. But, as the gestation period is not less than 3 to 4 years, it is possible that the benefit of Pakistan shifting to coal-based energy in a big way would go to the government that will be sworn in in 2013.

Another cheaper source of energy in Pakistan is hydel. It contributes to almost 30 percent 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. For example, these days, hydel energy production in the country is around one-fourth of its capacity because of low water flows. The temperature in the north has not risen enough to melt the glaciers, which are a major source of water in our rivers. New investment in hydel should be in mini run-of-the-river power generation projects so that there is no political opposition, as we have seen in the case of Kalabagh. The Bhasha Dam, which is to be inaugurated shortly, is also a long gestation project. Here, another problem is that not many foreign investors are keen to come to Pakistan for long term investment in a capital intensive hydel project. The deal has to be made on a government-to-government level, provided our superior judiciary realises the economic implications of shooting down such deals in the name of transparency. Tied loans are not fair to the borrowing countries but they are better than having no loans and investment.

Coming back to circular debt, it has to be noted that it is also becoming a red herring for foreign investors. Take the case of Hubco. It has receivables close to Rs 100 billion, which is more than its equity. “In a business environment where the payments guaranteed by the government are delayed for months, who in their right mind will venture into a new project?” one IPP executive asked me at the conference. Now that the government is thinking of floating some kind of exchangeable bonds to raise money for retiring close to Rs 300 billion of the circular debt, the question is: what is the guarantee that once this deck is cleared another will not be back on the table? Perhaps none, because we are not focusing enough on removing the cause of this problem.

The writer can be reached at ayazbabar@gmail.com