Friday, October 14, 2011

Corruption & Incompetence Hobble Pakistan Power Sector

In spite of the injection of government's subsidies of $7.4 billion since 2008, the power crisis in Pakistan continues to worsen, according to credible reports attributed to Pakistan's Ministry of Finance.

The poster child of the waste, fraud and abuse is the Turkish Karkey rental power ship deal which sinks Rs. 780 million or nearly $9 million per month of public funds for providing very little power because of lack of sufficient fuel supply, according to The News.

There were credible reports in 2009 that the ruling PPP politicians, particularly President Zardari and his inner circle, ignored former Finance Minister Shaukat Tarin's key recommendations to address the acute power shortages in the country. Zardari's insistence on pushing rental power projects, rather than fix the huge circular debt problem in the energy sector first, specially frustrated the nation's former finance chief, and he eventually quit last year.

What is becoming increasingly clear is that the government's corruption and incompetence in the power sector, not just insufficient installed generating capacity blamed on Musharraf, are at the heart of the deteriorating energy situation in Pakistan.

Nine Independent Power Producers (IPPs), with a combined power generation capacity of 1,800MW, have now notified the government and central power purchasing agency (CPPA) that they are invoking sovereign guarantees for the recovery of their dues amounting to Rs. 31 billion.

The much-heralded reforms of the power sector designed to attract more private investment are stalled, and the current financial mess is scaring away potential investors. With circular debt touching Rs. 250 billion, or nearly 40% of the sector's annual revenue as estimated by ADB, new investors are hesitant to risk their capital. As a result, neither the short-term relief from load shedding nor the long term improvements in the energy sector appear to be on the horizon.

In addition to the long delayed structural reforms in the power sector, there is a total lack of will to tackle the widespread problem of power theft and the mounting unpaid electricity bills which account for as much as 40% of the industry revenue. This deprives the crucial sector of the cash it needs to operate as a sustainable and responsive business capable of satisfying its customers' requirements of reliable electricity service. Rather than deal with these underlying issues, the government is choosing to apply the temporary band-aid of uncertain periodic subsidies and repeated rate hikes.

The recent electricity riots and the approaching elections now appear to be having the effect of adding some sense of urgency at the cabinet level to deal with the long festering crisis. The Cabinet Committee on Restructuring (CCoR) on power sector Thursday approved the creation of a holding company to be led by an independent board of directors to finalize the restructuring of four power generation companies (GENCOs).

This holding company will supervise the management of four GENCOs to be managed in the private sector and would try will make sure of fresh investment in such GENCOs to improve power generation from existing 3,500 megawatts (MW) to 4,800 MW in near future to bridge the demand and supply gap, according to a report in Daily Times.

The paper also reported that the PEPCO (Pakistan Electric Power Co) would be dissolved by October 30, 2011 and replaced by CPPA (Central Power Purchasing Agency) with private management would be its successor. A source said that role of the ministries in power sector would be minimized and private sector would have complete administrative and financial authority under the reform process to improve the system.

It's absolutely essential that highly competent and fully empowered leadership be brought in urgently to lead the power industry from the dire straits it's in today. The political leadership in Islamabad must understand the following very clearly: Without first repairing the power sector, there can be no hope of fixing the economy and spur growth before the next elections.

Related Links:

Haq's Musings

Pakistan's Worsening Power Crisis

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


krash said...

Riaz Sahib,
I think it is a bit of misdirection by the establishment to refer to the government obligations to power producers as 'circular debt' . I think it is pretty linear and can be traced directly to the government itself.

I. KAMAL said...

Another great article,Riaz. When the present government came into power, noted columnist Ardeshir Cowasjee had quoted a saying in Gujrati which can be translated as: "When a 'beopari' (businessman) becomes the 'raja' (king) of a nation, the nation becomes a 'bhikari' (pauper)". Let's hope a miracle happens to save Pakistan going down this path.

Anis Ahmed said...

Too much money is siphoned off by the military. The military residence areas in Karachi have full power 24/7. However, my cousin - the poor chap doesn't have water let alone hot water because the pumps are idle.

You talk about Wall St. excess go visit these miltary colonies and how they live - I was shocked by their lavish lifestyle.

Shams said...

When it comes to public waster - before you cast dirt on Pakistan, let's have you look at your neighborhood - the US and California - and see what you find.

As we speak, I am writing a petition to a California court for an injunction barring the California State's and Cities' solar incentives through California Solar Initiative (CSI) , which incentives go towards solar panel installation on rooftops of California homes. There are ten reasons cited in my petition, all related to a lack of engineering feasibility of the solar panel installation on the rooftops, plus the toxicity of Cadmium Telluride that is used in the PVCs.

The CSI is expected to hand off $2 billion in incentive subsidies, motivating California homeowners to invest nearly $13.5 billion in solar panels. The US government is offering nearly $20 billion in federal tax breaks, also there are other rebates as well. There is also substantial other amounts coming in from other states.

This amount is a colossal waste since a rooftop solar system fails to meet the economy of scale basis for an project, and regardless of how you calculate it, the ROI on any such installation at best is 15 years. There is no saying if it will ever pay back at all.

Is the US Department of Energy brain-dead? I would say Absolutely. Three months before Obama handed off $528 million to Solyndra, I spoke with Solyndra's investor relations to question its accounting firms statement that said "There is a concern about Solyndra remaining a going concern". The DoE recommended that Obama invest, and you know the rest.

The utility of solar power itself is not at issue here. It certainly would work if it is put up in a large utility scale installation where the panel mounting is optimal according to latitudes and with freon driven sun-trackers, which are not possible on a rooftops. In addition, the toxicity that will be released into homes and the residents' lungs in case of fires and earthquakes -- either cadmium or from crystalline silicon packed with highly toxic solvent binders -- is a serious threat to people. It is like asbestos problems that nearly everyone in the governments knew about and did nothing about, until it became a major lawsuit.

Anyway, as to the sub-prime decisions from the Pakistani government, the fact is that Pakistan's CSS require a BA, which draws the worst losers in the Pakistani government's bureaucracy. The military is even worse, as they draw the losers who could not even get an F.Sc., and all the F.A. 2nd divisioners become Kiyanis. (Kiyani had an FA second division).

Riaz Haq said...

Shams: "Kiyani had an FA second division"

And Steve Jobs was a college drop-out as is Bill Gates

vicks1980 said...

I am an Indian and I completely agree with what Anis says's a rather similar situation in India: the military sucks up an insane amount of resources and cash, while the rest of the country can pretty much go to hell.

Shams said...

Riaz, are you trying to tell me that you will be equally happy to let a college dropout perform a brain surgery on you?

It gets worse when nearly 99.99% of the bureaucracy is full of losers. The fact is that in the US, 99.999 % of college dropouts end up washing your car or changing your tires, and rightfully so.

Riaz Haq said...

Shams: "are you trying to tell me that you will be equally happy to let a college dropout perform a brain surgery on you?"

Bureaucrats and generals don't do brain surgery, nor do engineers, lawyers and accountants.

Besides, your whole argument comparing waste and fraud in California with Pak is simply ridiculous.

People in CA don't have to endure 20 hr power cuts because of what you think is waste in CSI.

Anonymous said...

Riaz Bhai, where is your stupid comparison with India in this case.

20 hrs without power. Yeah Pak has achieved more than India.

Riaz Haq said...

Anon: "20 hrs without power. Yeah Pak has achieved more than India."

Yes, India shines with electric light a couple of hours a day more than Pakistan.

Here's a recent story:

Mumbai, Oct 11 (IANS) The electricity authority in Maharashtra will implement 16 hours of power cuts for industries from Wednesday, two days after imposing loadshedding in urban and rural areas, an official said here.

The loadshedding for industries will be imposed once a week - on different days in different areas - coinciding with days when plants observe their weekly off, an official from the Maharashtra State Electricity Board said Tuesday.

The latest power-saving measure has been taken in view of an estimated shortage of around 3,500-4,000 MW power in the past three weeks.

Power generation in the state has been hit badly on account of severe disruptions in coal supply due to the Telangana agitation in neighbouring Andhra Pradesh and floods in Orissa.

This has resulted in Maharashtra power stations getting only around 12 rakes (trainloads) of coal against the daily requirements of 24 rakes.

The present demand is around 16,500 MW but the power generation is around 11,000 MW, necessitating loadshedding of three to seven hours in urban areas and 11-13 hours in rural areas, hitting domestic, commercial and agriculture sectors.

This is the first time this year that 'planned loadshedding' has been imposed in the state which has been showing an improvement in its power supply position in the past couple of years, mainly owing to a good monsoon.

The power cuts have angered people, with protests in at least two areas of Thane in the past two days and in Yavatmal Wednesday.

The coal supply has hit the MAHAGENCO thermal power generation plants in Parli (Beed), Chandrapur, Koradi, Khaparkheda, Paras - all in eastern Maharashtra, Nashik and Bhusawal in the northern parts of the state and Uran in Thane, besides smaller ones across the state.

I. KAMAL said...

Shams: "Kiyani had an FA second division"

Riaz Haq: "And Steve Jobs was a college drop-out as is Bill Gates."

Right on, Riaz Saheb. The education of Pakistan Army Officers starts at Kakul Military Academy, where the entry-selection proces involves more than degrees and grades. And what's there in a degree? Interior Minister Rehman Malik was just awarded a doctorate degree in philosophy, honoris causa, for looking askance while Karachi was turned into a city of murder and mayhem during his beat:

"Andhey jahaaN ke, andhey rastey -
JaayeiN to jaayeiN kahaaN"
(Blind are the ways of this blind world -
Where should we go, where should we go?)

Riaz Haq said...

From Global Warming Power Foundation:

New Delhi, Oct 12 (IANS) A severe shortage of coal has hit electricity output in the country and led to long and frequent power outages in many states, including the national capital, Maharashtra, Karnataka and Andhra Pradesh.

Most of the plants of the National Thermal Power Corporation (NTPC), the country’s largest power producer, have been generating significantly less power than their installed capacity for the last couple of weeks due to the shortage of coal supply, an official said Wednesday.

Heavy rains in coal producing areas and a two-day strike by workers of Coal India compounded the problems of many power plants across the country, he said.

From India Today:

The power sector is still struggling around the half-way mark of the ambitious target of 78,755 MW fixed for the 11th Five-Year Plan (2007-12), which was set to fulfil the UPA government's dream providing "power for all" by March 2012.

An acute shortage of coal and gas, environmental issues and the lack of funds for investing into new projects have been responsible for holding up the expansion plans in the power sector even as the demand has steadily been growing.

Given the slow pace of implementing new projects, the Planning Commission had in its midterm review slashed the target for the 11th Plan to 62,000 MW. However, the capacity addition the end of March this year was a mere 34,462 MW.

The government has now reduced its power capacity addition target for the 11th Plan to 50,000 MW but even this is unlikely to be met in the remaining months of the current financial year as each of the ultra mega power plants of 4,000 MW and above has run into fuel linkage problems.

The initiative of private sector companies - such as the Reliance Power and the Tatas - buy coalmines in Indonesia and Australia to source coal has also come a cropper as these countries have changed their pricing policy to jack up the price of the fuel. These projects do not appear viable at the moment due to the low tariffs fixed for the electricity they are expected to generate.

The shortage of natural gas is also posing a problem as the output from the giant KG basin eastern offshore gas field, operated by the Reliance Industries, has fallen short of its target. The failure of Coal India Ltd to move out huge stockpiles of coal at the pitheads of its mines is also affecting existing power generation capacity, which is adding to the woes of the consumers.

Land acquisition for the power plants another hurdle as the government has been taking its time for formulating the new policy.

The estimated potential of the hydropower in the country has been put at 1,50,000 MW but only 30,000 MW has been harnessed. Sufficient investments are not being made in this segment despite a liberal policy, which allows the sale at market rates of up to 40 per cent of the total energy produced to the commercial sector.

The sharp rise in the interest rate - which has crossed the 13 per cent-mark - has also forced many power companies to take a relook at their investment plans since this has impacted the profitability of the proposed projects. Economists attribute the hardening of interest rates to the hawkish monetary policy of the RBI, which has raised key interest rates 12 times this year to control inflation.

Read more at:

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.

Mayraj said...

Today I had a conversation with someone who told me he was in Karachi for 6 years.
He was born and raised in Canada and went there for a job with Barclays. He does seem to have parents who were from Pakistan, however. He worked there and was involved in other banking industry orgs and also helped an NGO out.
I asked him for his impressions about the local system and the present state of the country. He has just returned home to Canada a few weeks ago.
He told me the system worked well and the mayor was a good mayor. He said he thought he did a very good job.
He also said right now country is in a deep mess. People in power seem to just want to take what money they can out of the system. he said this happening at all levels!

Riaz Haq said...

Here's a Business Recorder report on Pakistan's growing power requirements:

SLAMABAD: Former Water and Power Minister Raja Pervez Asharaf on Thursday told the Supreme Court that Pakistan need an addition of 1200 MW every year as the power requirement would enhance to 1,30,000 MW by the year 2030.

Appearing before a two-Judge bench of Chief Justice Iftikhar Muhammad Chaudhry and Justice Khilji Arif Hussain on suo motu case regarding alleged corruption in setting up Rental Power Projects, he defended himself and said that Pakistan's power shortage solution was in hydel power generation and not in thermal which was costly.

"Thermal generation is not our future because we can't afford it for being too expensive," he said, adding "We need to exploit hydel and coal assets.

"The run of the river project can alone have the potential of 7,500 MW while we have 187 million tones of coal reserves in Thar."

He said that unnecessary vilification campaign had led to develop a perception of a scam and swindle that hampered the installation of power plants.

"Even harsher mudslinging and denigration was the order of the day when the government of Benazir Bhutto introduced the Independent Power Producers (IPPs) in 1994," he added.

He said resultantly the big players shied away from investing in Pakistan's power sector when fingers were pointed at them. He also referred to the application of PML-Q legislator and Housing Minister Makhdoom Fasial Saleh Hayat who had levelled charges of corruption and mismanagement in setting up RPPs.

"The concept of RPPs as a stop-gap arrangement was introduced by the previous government of which Faisal Saleh Hayat was the minister and for being the cabinet member was equally responsible if wrong policy was pursued," Raja Ashraf recalled.

Justifying why Makhdoom Hayat was chasing him, Raja Asharaf said, being PPP's secretary general he was very vocal in criticizing Makhdoom Hayat's contesting the elections on his party's ticket and then joining Musharraf's government to become a minister in dictatorial regime.

He also announced that the current power situation in Karachi, the main business hub, would end in few days as the government had developed a mechanism.

Not a single investor or unsuccessful bidder ever raised allegation that he being the minister devoured the money in the grant of license to develop RPPs, he said and brushed aside the impression that he owned a palatial house in London.

The government of Musharraf paid no heed despite repeated warnings of a looming power crisis, he said, resultantly not a single mega watt of electricity was added to the national grid that crippled our industry.

The electricity shortfall which was at 1000 MW in 2005 surged to 5000 MW in 2008 when he assumed the office of the water and power ministry, he said adding he inherited the circular debt of Rs 400 billion.........

Riaz Haq said...

Here's a Business Recorder report (Part 2) on Pakistan's growing power requirements:

..."We had no solution to reduce the shortfall even when some fast track projects in the pipeline got delayed for over two years," he said.

He said "still we exempted our textile industry the main source of $35 billion foreign exchange earning from load shedding even during the difficult days".

The bids were invited for the commissioning of IPPs but no response came because of law and order situation even for the hydel plants.

"We are fast moving towards a different (darker) era," he feared and recalled that today Pepco was facing a shortfall of Rs 170 billion in subsidy for providing uninterrupted power supply to 6.5 million life line consumers when the total number of consumers were over 10 million.

"The World Bank had suggested us to go for long term policies instead of wasting money on subsidies and overcoming load shedding as a short term", he added.

Referring to the question why Pakistan was not developing its own power generation units, he said such investment required Rs 1.2 to 1.4 billion per MW which they could not afford.

He also compared the situation in India which was faced with 40,000 MW of shortfall, while the situation in Bangladesh was worst, Sharjah also experiencing load shedding where consumers in London were paying different tariff for each hour per day.

"Availability and affordability of power is an uphill task though it may not be true for long term projects," he added.

Meanwhile Khawaja Tariq Raheem, representing Pepco, warned that the hydel generation the production of which would dip by 1000 MW in the next decade, would be stalled from the next month because of annual canal closure.

"We would need a prompt production of 500 to 600 MW of electricity which the existing machinery could produce," he informed.

Riaz Haq said...

Here's Express Tribune on govt appointees to reform power sector:

As part of its bid to reform the state-owned power companies, the government has finalised the appointments to a 12-person board of directors of a holding company meant to oversee the transition, and is likely to nominate the former head of the Karachi Electric Supply Company to serve as its chairman.

Sources in the finance ministry told The Express Tribune that the top economic management team had finalised the names and the formal announcement would be made by the water and power ministry soon.

The nominations come on the heels of the government’s decision to merge four state-owned power generation companies at the policy-making level while retaining their operational independence. It has already constituted a holding company to speed up the process of structural reforms.

Sources said that one name currently being considered to head the holding company was Naveed Ismail, who was CEO of KESC until October 2009, when he resigned from the position. He is known as a turnaround specialist, though he was unable to move KESC towards profitability.

All 12 names have been selected based on their experience levels and lack of political affiliation. Among the tasks of the transition team will be to appoint CEOs for the four power generation companies that they will have supervision over.

The four companies have an installed power generation capacity of 4,900 megawatts, though the government is only generating 2,000 megawatts from them due to inefficient fuel consumption. Efficiency levels at the plants range between 24% and 31% (an efficiency level of above 40% is considered acceptable).

In order to compensate for the low efficiency, the government has been raising power tariffs. Late last week, the National Electric Power Regulatory Authority (Nepra) increased tariffs by an average of Rs3.04 per unit on account of rising oil prices. The government is planning a further 12% increase before the end of the fiscal year to eliminate subsidies to the power sector.

Experts have been arguing that the government should accompany tariff increases with structural reforms in the power sector, something the government has struggled to do.

The power sector has exhausted the Rs11 billion injection of money that the government made in order to mitigate the financial crisis in the sector. This has again resulted in increases in the duration of power outages.

During the last cabinet meeting, no major decision on power sector reforms was taken except instituting two-day a week holiday in order to conserve energy. So far, only federal government institutions are observing a two-day weekend while Punjab, where most of the energy is consumed, has opposed the decision.

In the next cabinet meeting, the government is likely to take a decision about tackling the circular debt that according to various estimates ranges between Rs285 billion and Rs300 billion. Currently, the Pakistan Electric Power Company’s payables stand at Rs299 billion against Rs314 billion receivables.

The government has yet to find a solution to the penal charges problem. The independent power producers (IPPs) have worked out Rs24 billion penal charges on account of delay in payments. The IPPs are compelling the government to pay this amount which would ultimately be transferred to the end consumers.

Riaz Haq said...

Here's an Express Tribune story on a discussion at Inst of Business Admin in Karachi, Pakistan:

A vigorous difference of opinion among technocrats, economists and corporate leaders on a number of socio-economic issues was witnessed during an interactive session held at the Institute of Business Administration (IBA) on Saturday. And at the end it was unclear whether democracy was the answer, or a dictatorship, as advocates for both arguments came up with pretty convincing logic.

Speaking at the session organised by IBA in collaboration with Blinck, a youth resource group, under the title of “New Year Resolutions for the Economy of Pakistan,” panellists candidly expressed disagreements over the questions of foreign aid, democracy and the interplay of policy-making and implementation at the national level.

“Many people think that a non-democratic set-up is a panacea for the economic problems of Pakistan. They’re wrong. A non-democratic government is not sustainable,” said Ishrat Husain, former governor of the State Bank of Pakistan, who is currently serving as dean and director of IBA. “Democracy is slow and messy. It takes two steps forward and four steps backwards. Yet it’s the only option. The democratic process shouldn’t be interrupted.”

Husain said military regimes do make an extra effort in the beginning to improve the economy because they have not yet developed a constituency of their own. “But later on, they start making compromises.”

Claiming that a democracy needs low poverty and high literacy rates to prosper, Gillette Pakistan CEO Saad Amanullah Khan said Pakistan had only two eras of development: first, in the early 1960s, and second, during the first three years of the Musharraf government. “I don’t care if a dictator is there as long as he revamps the economy,” Khan said.

He said that the idea of a government led by technocrats that could bring the economy back on its feet had its relative merits. Khan emphasised the need for adopting a national vision for long-term growth, adding that the entire nation should work towards its realisation. “Go to Proctor & Gamble or Gillette, and they’ll tell you their five-year goals in detail. But ask a government representative what the vision for Pakistan is for the next five years, you won’t get any definite answer.”

Disagreeing with Khan, Husain said Pakistan did not need any more “visions,” as the problem existed in their implementation only. “The country is full of pious documents. These are beautifully written policy papers that nobody reads. We all agree on the substance of policy, but the implementation is the real issue.”

Responding to a question, former Asia editor for The Economist Simon Long said it was wrong to attribute Pakistan’s dismal economic performance of six decades to its culture or laid-back attitude to work. He said that 35 years ago people often assumed China’s poor economy was a consequence of Confucianism. He said it was now obvious that Confucianism had nothing to do with the slow growth in the economy of China.

Talking about Pakistan’s economic indicators, Long said an economy with a tax-to-GDP ratio of less than 9% was not sustainable. He said it was hard for him to understand how Pakistan’s economic managers would bring down the fiscal deficit in next two to three years.

In response to the comment of a business student that Pakistan should stay away from all kinds of foreign aid and assistance to achieve self-reliance, Husain said the assumption that the Pakistani economy depended on US aid to survive was wrong. “Isolationism won’t solve our problems. Transfer of knowledge and technology is important. You’ve to be outward-oriented.”

Riaz Haq said...

Here's a Dawn report on widespread gas theft in Pakistan:

The Sui Northern Gas Pipelines Limited and Sui Southern Gas Company Limited are causing a cumulative annual loss of about Rs300 billion to national economy, almost six times the losses caused by power sector, because gas shortage leads to civil unrest and affect businesses, transport and households.

The colossal loss has so far remained off the public eye because the gas shortage affects the public life only for three winter months and gas companies are paid at least 17 per cent guaranteed return on assets even if these continue to make losses. If these losses are controlled, about 700 million cubic feet of gas a day could be added to the overall supply, reducing the current shortfall by almost half.

A senior government official in the planning commission told Dawn that the transmission and distribution losses – described in the official jargon as unaccounted for gas – of the two utilities that went up to 13 per cent were resulting in wasteful consumption of 350 million cubic feet per day (mmcfd).

Given the fact that furnace oil is used as replacement fuel for power generation and industrial use, every million British Thermal Unit (mmbtu) costs the economy an additional burden of $20 per mmbtu, according to planning commission`s member energy Shahid Sattar. As such, the daily additional cost on import of furnace oil comes to about $7000, translating into an annual additional burden of $2.55 billion, he said.

Likewise, domestic geysers are described as gas guzzlers whose efficiency could be increased by 20 per cent by putting in a small conical baffle costing Rs500 per piece in every geyser and the efficiency could be further improved by up to 45 per cent by installing instant geysers. These two measures alone could provide another saving of 250 mmcfd, reducing import bill by $450 million or Rs40 billion in three winter months.

In comparison, the transmission and distribution losses of Wapda`s power companies currently stand at about 22 per cent which translates into an annual loss of about Rs60 billion. The official said the power losses at about 10-12 per cent were globally acceptable compared with 2-3 per cent losses in the gas distribution system.

SNGPL Managing Director Arif Hamid says his company`s system loss stood at 11.7 per cent in October 2011 which was scaled down to 11.4 per cent in November. He is of the view that six per cent gas losses are globally acceptable.

Ogra, in consultation with gas companies, had set a target of reducing system losses to 4.5 per cent by financial year 2010-11 when actual losses stood at about seven per cent and have since been increasing.

The planning commission official said that Ogra had successfully brought down gas distribution losses to 4.5 per cent through mandatory one per cent loss reduction every year until 2008 but the previous Ogra chairman appointed on political grounds, and then sacked on orders of the Islamabad High Court and then the Supreme Court of Pakistan, raised these benchmarks to about 11 per cent.
This additional cost estimated at over Rs70 billion over the past four years has not only created an additional demand of about 500 mmcfd but has also translated into gas tariff as expenditure incurred by the companies because the two utilities are guaranteed 17 per cent and 17.5 per cent return on assets under international covenants with the World Bank.
The economic value multiplies manifold in view of the fact the supply is already short of demand by about 50 per cent in winter months. Giving an example, the official said a private domestic fertiliser plant was generating an annual revenue of about Rs15 billion by consuming only 35 mmcfd of gas. Its ultimate contribution to agriculture, employment generation and the national economy was manifold and not included in these estimates, the official said.

Riaz Haq said...

Here's a NY Times report on India's fuel shortages hurting electricity generation:

India — India has long struggled to provide enough electricity to light its homes and power its industry around the clock. In recent years, the government and private sector sought to change that by building scores of new power plants.

But that campaign is now running into difficulties because the country cannot get enough fuel — principally coal — to run the plants. Clumsy policies, poor management and environmental concerns have hampered the country’s efforts to dig up fuel fast enough to keep up with its growing need for power.

A complex system of subsidies and price controls has limited investment, particularly in resources like coal and natural gas. It has also created anomalies, like retail electricity prices that are lower than the cost of producing power, which lead to big losses at state-owned utilities. An unsettled debate about how much of its forests India should turn over to mining has also limited coal production.

The power sector’s problems have substantially contributed to a second year of slowing economic growth in India, to an estimated 7 percent this year, from nearly 10 percent in 2010. Businesses report that more frequent blackouts have forced them to lower production and spend significantly more on diesel fuel to run backup generators.

The slowdown is palpable at Sowmya Industries, a small company that makes metal shutters that hold wet concrete in place while it solidifies into columns and beams, a crucial tool for the construction industry.

The company, located outside this city on the southeast coast of India, is struggling with several issues, including a 20 percent increase in the price of raw materials and falling orders.

But Sowmya’s manager, R. Narasimha Murthy, said the lack of reliable power was an even bigger problem. His company loses three hours of power every evening. And all day on Wednesdays and Saturdays — euphemistically called “power holidays” — it receives only enough electricity to turn on the lights but not enough to use its large metal-cutting machines.
A major problem is the anemic production of coal, which provides 55 percent of India’s electricity. Coal production increased just 1 percent last year while power plant capacity jumped 11 percent. Some electricity producers have been importing coal, but that option has become more untenable recently because India’s biggest supplier, Indonesia, has doubled coal prices.
For many businesses, the power shortage has become debilitating.

In the southern state of Tamil Nadu, Srihari Balakrishnan, a textile factory owner, said he goes through 6,300 gallons of diesel fuel on an average day to keep his operation running, spending $3,000 more than he would if power were available around the clock.

“We are not able to use 20 to 30 percent of our capacity,” he said. “We can’t use grid power for two full days of the week. When we have power, we have a six-hour cut,” he added, using an Indian term for blackouts.
Other companies are also stuck. Reliance Power, controlled by the investor Anil Ambani, says it has stopped construction on a large electricity plant nearby because it can no longer afford to buy coal from Indonesia as planned.

Riaz Haq said...

Here's an excerpt from The Economist magazine on Pakistan's energy crisis:

SUMMER in the plains of Pakistan is excruciating enough without the added joy of 20 hours of power cuts a day. Earlier this month protesters in several towns in Punjab, Pakistan’s wealthiest province, smashed windscreens, blocked motorways, shut down markets and set fire to the offices of parliamentarians and an electric utility. They clashed with police who brought out handcuffs and tear gas and fired live rounds in the air.

It was a reaction to electricity shortages that had plunged parts of the province into darkness and scorching heat. At one point the gap between supply and demand hit 7,500 megawatts (MW), or nearly 40% of national demand.

Under the current government, the power sector has neared the top of a list of security, political and foreign-policy problems that includes some heavyweight contenders. Last week’s confluence of events once again underlined how easily Pakistan’s power sector can slip into collapse. The system’s many weaknesses find it all too easy to conspire. Cool weather in the north meant a reduced flow of hydroelectricity. Demand shot up as summer temperatures further south soared into the forties and air-conditioners strained to keep pace.

Meanwhile, several private power producers had to halt or slash production because the state-run power purchasing company hadn’t paid them. They had not been able, because the biggest consumers (especially provincial and federal governments) had not paid their own electricity bills. The bills that were paid are not enough to cover the cost of generation.

This so-called “circular debt”, currently about $880m, is an ongoing problem. The government usually bites the bullet, as it did this time, by paying off a portion when power producers are about to sue for default, enabling them to start generating again—for the moment. What remain unaddressed are the structural issues that cause the debt to pile up again: poor recovery of dues (receivables stand at $4 billion), electricity theft, transmission losses, reliance on imported oil and politically sensitive subsidies for certain groups. Perpetuating all of this is a lack of efficiency and co-ordination across a maze of state-owned agencies including a power purchaser, distribution and generation companies, a regulator and various ministries. The gap between the effective cost of generation and payments received is estimated at $12 billion over the past four years.

Riaz Haq said...

Here's ET on electricity bill collection problems in Pakistan:

The government has failed to collect Rs495 billion worth of electricity bills in the last eleven months, taking recovery ratio to 47%, one of the lowest ever in the country’s history.

The unrecovered amount is two times more than what the government claims is the circular debt, which has caused massive load-shedding across the country, leading to riots across Punjab and Khyber-Pakthunkhwa.

According to a fact sheet, prepared by the finance ministry on the basis of information provided by finance department of Pakistan Electric Power Company, from July to May (2011-12) all the distribution companies, including Karachi Electric Supply Company, billed consumers Rs895.3 billion while collection remained at only Rs400.8 billion, which is 47% of the total billing.
During this period, Syed Naveed Qamar was the Federal Minister for Water and Power, who has recently been assigned the portfolio of Minister for Defence after he failed to improve electricity supply in the country.

The collection has significantly dipped despite the fact that the government has obtained a $325 million loan from the Asian Development Bank to improve the efficiency of power distribution companies. A cabinet committee on energy, headed by Finance Minister Dr Abdul Hafeez Shaikh also could not improve the situation.

According to the details, February was the worst month in terms of collection when the power distribution companies (Discos) collected only Rs26 billion against total billing of Rs99.2 billion, showing a gap of Rs73.2 billion in a single month. October was the second worst month when the Discos collected only Rs45.9 billion against total bills of Rs114.1 billion, showing a gap of Rs68.2 billion.

In May this year, the total collection remained at Rs35.9 billion against the billing of Rs87.4 billion- a gap of Rs51.5 billion. In April, the Discos billed Rs79.4 billion but collected only Rs30.2 billion, in March against Rs51.8 billion billing the collection remained at Rs31.3 billion and in January the collection was Rs29.3 billion against total billing of Rs77 billion.

November was the only month when the collection rose to 71% as the Discos managed to collect Rs41.2 billion against total bills of Rs57.6 billion.
The spokesman for the Water and Power Ministry contested the low collection figure. Zargum Khan said that Discos excluding KESC billed Rs534.3 billion consumers from July 2011 to April 2012 and managed to collect Rs461 billion, showing 86.3% recovery rate. The amount is inclusive of distribution margins of Discos.

He, however, admitted that during the first ten months of the fiscal year all power generation companies generated 74 trillion units of electricity but Discos sold 72 trillion units while the rest were lost on account of technical losses and theft.

100% collection of data is not possible as 10-12% of the billed amount is retained by power distribution companies as distribution margins while there are also some justified line losses, Khan said.

To a question, he said Rs166 billion dues were outstanding against private consumers and the amount has surged due to stay orders granted by courts against fuel price adjustment charges. Khan admitted that in some cases collection was as low as 5.5% (tribal regions) and 29% (Quetta) but in other cases the ratio was 100% for Gujranwala and 99% for Faisalabad regions.

Riaz Haq said...

Here's a Business Recorder story on energy generation in Pakistan:

Till the introduction of Power Policy 2002, there were 13 IPPs operating in the country with an installed capacity of 4,340 MW. These include Hub Power 1,292 MW, AES Lalpir (now Pakgen Power) 362 MW, AES Pak-Gen (now Pakgen Power) 365 MW, Altern Energy 29 MW, Fauji Kabirwala 157 MW, Gul Ahmed 136 MW, Habibullah Coastal 140 MW, Japan Power 120 MW, Kohinoor Energy 131 MW, Liberty Power 235 MW, Rousch Pakistan 412 MW, Saba Power 114 MW, SEPCO 135 MW, Tapal Energy 126 MW and Uch Power 586 MW. In subsequent years, another 12 IPPs of total installed capacity of 2,468 MW were commissioned, whereas WAPDA-owned KAPCO of 1,638 MW also emerged as an IPP. Power plants commissioned after implementation of the Power Policy 2002 are Attock Gen 165 MW, Atlas Power 225 MW, Engro Energy 227 MW, Foundation Power (Daharki) 110 MW, Halmore Power 225 MW, Hub Power Narowal 225 MW, Liberty Power Tech 202 MW, Nishat Power 202 MW, Nishat Chunian 202 MW, Orient Power 225 MW, Saif Power 225 MW and Sapphire Electric 235 MW. A number of small IPPs, or SPPs, generate electricity with a total capacity of over 700 MW, of which mostly are in-house or captive power plants.

The long list includes ICI Pakistan 26 MW, Sapphire Power 26 MW, Crescent Power 11 MW, Ellicott Spinning 22 MW, Gulistan Power 40 MW, Kohinoor Mills 25 MW, Monno Energy 5 MW, Mahmood Textile 40 MW, DS Power 2 MW, Sitara Energy 78 MW, Bhanero Energy 17 MW, Quetta Textile 31 MW, Ideal Energy 12 MW, Ghazi Power 21 MW, Genertech 28 MW, Nimir Industries 18 MW, Zeeshan Energy 7 MW, Ibrahim Fibers 32 MW, Crescent Bahuman Energy 23 MW and Kohinoor Power 15 MW. In addition, DHA CoGen of 94 MW and Pakistan Steel Mills power plant of 110 MW have in-house power generation facilities. The role of the captive power plants is, nonetheless, significant as these have eased-out the demand on national grid. The SPPs and many captive power units provide their surplus electricity to the network--up to 182 MW to PEPCO-NTDC and 40 MW to the KESC. Textile sector, having an installed captive power plants to achieving dependable and uninterrupted power supply for hi-tech machinery, is the main contributor to NTDC system.

In the power system, a balance between electricity generation and consumption has to be continuously maintained. It was planned to make available a committed net power generation to the level of 23,726 MW (compared to existing 18,580 MW) by June 2012 but the target could not be achieved. A total of 3,400 MW installed generation capacity has been added to the national grid instead since 2008. To overcome power shortages in short term, an investment of RS 32.5 billion was envisaged through the 2011-12 national budget, whereas 14 on-going power projects of cumulative capacity of about 3,000 MW were scheduled for completion during October 2011-June 2012.

Riaz Haq said...

Here's a BR story on massive Rs 1.2 trillion subsidy to power sector in last 4 years:

Prime Minister Raja Pervez Ashraf has said that the government has provided Rs1,200 billion subsidy on electricity over the past four years. Moreover, he added, the government initiated short-, medium- and long-term projects to bridge the demand-supply gap.

Addressing a function organised in connection with Independence Day celebrations here on Tuesday, the Prime Minister highlighted the PPP-led coalition government’s performance over the past four years, criticised the previous government and said that it was responsible, especially for the energy crisis and security situation in Balochistan.

Raja Pervez Ashraf also acknowledged that people were also facing problems because high inflation and unemployment. He said that the government had provided subsidy to the people through Utility Stores Corporation (USC) to minimise their problems.

Raja Pervez Ashraf said that the government had “inherited energy problem” but after coming into power had been making serious efforts to address it.

According to him, the government had added more than 3,500 megawatts of electricity in the national electricity network.

“We have initiated short-, medium- and long-term projects to bridge the demand-supply gap. We are working for quick completion of these projects,” he added.

The Prime Minister said that to address the grievances and complaints of the provinces about unequal electricity distribution, the Council of Common Interests (CCI) had formed a special committee to submit suggestions in this regard.

The government, he said, had also decided to exploit 175-billion-ton coal reserves in Thar on a fast-track basis for electricity generation.

He said that the size of the Public Sector Development Programme (PSDP) had been increased from Rs416 billion to Rs873 billion over the past four years and remittances had crossed $13 billion mark....

Riaz Haq said...

Here's Express Tribune of disproportionate impact of energy crisis on small textile mills:

The energy crisis has hit Pakistan’s textile industry badly, but not all textile companies are hurt: the largest players are doing just fine, relying on a combination of the advantages of their economies of scale but also government-sanctioned privileges not available to smaller industrial players.

At least part of the reason why the bigger companies are doing better than the smaller ones appears to be the natural advantages that come with being a larger player, such as having a vertically integrated business model.

Kamal Yousaf, CEO of the Kamal Group of Industries, a textile conglomerate based in Faisalabad, says that part of his group’s advantage over smaller rivals in their ability to harness synergies within the group. The weaving, processing and dyeing, garment manufacturing, and trading arms all work as a unit, helping the group weather price hikes in raw material or other issues.

The Nishat Group, meanwhile, benefits from the fact that it owns the fourth-largest bank in the country – MCB Bank – allowing it to avoid cash flow issues and raise capital for efficiency improvement projects. Nishat Textile, therefore, never has a problem in paying wages to its employees and was able to raise Rs1 billion to invest in a 6.2-megawatt power generation unit that runs on biomass. Electricity produced in this manner is expected to be about 6% more expensive than that provided by the grid, but is far more reliable at a time when Punjab’s industry is especially hampered by severe power outages that last several hours a day.

And many larger textile mills are able to purchase large stocks of raw materials that insulate them from price shocks. More than half the cost of producing a piece of clothing is often still the cost of cotton, even for some of the largest players.

Yet at least part of the advantage appears to be built in by the government. One of the biggest reasons why larger textile mills, particularly in Punjab, have been able to do well is that most have installed captive power plants that – despite operating at one-third the efficiency of the grid’s power station – are getting gas supplies to produce power at a marginally lower cost than what they would get from the grid.

However, these captive plants have been getting gas even at the expense of the rest of the grid, meaning that even while the largest and richest textile exporters save a few pennies on their production costs (power accounts for 3% of all costs for the larger firms), all of Punjab is going through massive power outages because the power plants that supply electricity to ordinary citizens and smaller industries are getting less gas, sometimes even no gas.

Meanwhile, smaller textile players have less reliable power from the grid, a supply that is made more intermittent by the fact that the fuel for the grid’s power goes to their larger textile rivals. At the same time, banks charge the smaller players higher interest rates, since they are viewed as bigger risks for not having their own captive power supply.

“The smaller guys cannot afford to run their factories on diesel generators,” said Muzammil Aslam, managing director at Emerging Economics Research....

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.
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....

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....

Riaz Haq said...

#Ramadan #power outages in #Pakistan pile pressure on PM #NawazSharif. #loadshedding #electricity … via @FT

Nawaz Sharif has ordered power companies not to cut electricity supplies in the hours before or after the daily Ramadan fast, as outages in the first few days of the Muslim holy month threaten to embroil Pakistan’s prime minister in a political crisis.

As the fasting period began on Sunday, residents of Karachi, the country’s largest city, were unexpectedly plunged into darkness. The national distribution company blamed a line fault that caused two power stations to fail.

But the outage has highlighted the fragility of Pakistan’s electricity network — a problem that threatens to undermine the country’s economic recovery and which is set to become a significant political issue in the run-up to next year’s general election.

Recent power cuts have already prompted widespread protests, during which two people reportedly died.

“These power cuts in Ramadan will severely undermine the government’s reputation further,” said Hasan Askari Rizvi, a political commentator. “If the government fails to manage the electricity situation, the risks for Nawaz Sharif will mount.”

Pakistan has endured an energy shortfall for years, but this summer the gap between supply and demand at peak hours has reached six gigawatts — equivalent to the output of 12 medium-sized coal-fired power stations.

Ministers hope that $35bn of Chinese investment in the country’s power sector, part of the China-Pakistan Economic Corridor, will help close the gap.

Unscheduled cuts during Ramadan have particularly angered residents. During the month, Muslims fast during daylight hours, putting extra importance on having power to cook just before dawn and just after dusk.

Usually the government keeps the lights on during religious festivals by paying independent companies to restart expensive mothballed power plants. But it has not done so this year because Ramadan has fallen close to the end of the financial year and the government does not want to exacerbate the fiscal deficit just before it reports its final figures, according to analysts.

The power crisis threatens to undermine Pakistan’s improving economic growth, which has been boosted by a few years of relative political stability. Figures released last week alongside the budget show annual output growth for the year to the end of June are projected to exceed 5 per cent for the first time in a decade.

The other factor that might threaten economic stability is Pakistan’s increasing current account deficit, which is depleting its stock of foreign currency, analysts warn.

Last week’s data show that alongside faster growth, the current account deficit is projected to more than treble from $2.5bn in the last fiscal year to $8.3bn this yearas Pakistan begins to pay Chinese companies for work carried out as part of the CPEC project.

Abid Hasan, a former World Bank economist who has worked in Pakistan, said: “The higher current account deficit will eventually turn into a crisis. This situation has to be managed before it gets out of control.”

But the solutions — whether allowing the rupee to devalue to boost exports or making people pay their electricity bills — are politically unpalatable just a year away from a general election, say officials and analysts. “Reforming Pakistan is tough business,” said one western diplomat.