Sunday, October 2, 2011

Mismanagement Worsening Pak's Power Crisis

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 economy.

Related Links:

Haq's Musings

Circular Debt and Load Shedding

Integrated Energy Plan 2009-2022

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


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.

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

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.

Riaz Haq said...

Here's a report in The News about deadbeat govt depts with huge unpaid electricity bills:

SLAMABAD: The details of outstanding power dues against government departments were presented before the National Assembly on Monday, Geo News reported.

The figures presented by the Water and Power Ministry revealed that not just one but many departments were yet to clear their dues that run into the millions.

According to details, payable dues against Senate Secretariat stood at Rs49.5 million; amount payable against federal ministers and their residences at Rs8.552 million; Parliament Lodges Rs12.1 million; Pak Secretariat Rs9.423 million; Supreme Court hearing cases of power projects scams at Rs3.47 million; Election Commission of Pakistan Rs2.997 million; federal police Rs19.1 million; Intelligence Bureau Rs2.726 million; ISI Rs8.224 million; FIA Rs4.3 and; the payables against Interior Ministry were Rs1.57 million.

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 a PakTribune report on lack of budget allocation for power generation in Pakistan:

Not a single penny has been allocated in federal budgets for power generation for the last 19 years despite unprecedented electricity loadshedding in the country.

This was stated by former managing director of Pepco, Engineer Tahir Basharat Cheema, while addressing a seminar on “Pakistan power sector: past, present and the future” held here at Pakistan Engineering Congress on Wednesday.

Stressing the need for higher budgetary allocation to meet rising power costs, he observed that no government has allocated any fund in national budget for electricity generation after 1994.

“The National Highway Authority was given Rs92 billion in current budget while Rs16 billion was allocated only for a single constituency and if this amount was given to power sector that would have gone a long way in eliminate power loadshedding.” Cheema, who is presently heading an Energy Management Committee of the Ministry of Water and Power, stated that government's seriousness to control power crisis can be gauged by the fact that it allocated a minor amount of Rs15 billion for power sector but that was not released either and diverted to some other project.

“In order to tackle the energy shortages, maximum funds should be allocated for construction of dams or water reservoirs, besides tapping of Thar Coal, completion of Iran-Pakistan gas pipeline, energy conservation & energy efficiency, fuel mix and energy rationing.”At least Rs50 billion of the total budget should be allocated for hydel power projects, he stressed.

Reliance on costly thermal power has been jacking up the cost of production and the import bill as well. “The country is in dire need of an urgent shift in its energy-mix in favour of hydel power and local fuels. Use of biogas should be promoted throughout the rural sector both for electricity generation and gas for cooking besides producing bio fertiliser, said the power sector expert.He expressed that 175 billion tons of Thar coal reserves with a price tag of $13 trillion in the international market are enough to provide 100,000MW of electricity for 100 years. Uninterrupted and affordable power supplies can turn Pakistan into an economic powerhouse. While expressing the optimism for construction of Kalabagh Dam, he said that Sindh needs fresh water the most and it is the KBD, which would fulfill its dire need of fresh water..

Riaz Haq said...

Here's Daily Times on a TRL refinery planned for Pakistan:

KARACHI: Trans-Asia Refinery Ltd (TRL) has made a major announcement expressing its ‘total commitment’ to building the most complex refinery in Pakistan, producing more than 100,000 barrels a day and 4.0 million tonnes of petroleum products every year. The refinery will be located at Port Qasim, Karachi.
In a major boost to the country’s economy, TRL signalled the end of previous delays with an undertaking that ‘the investors have decided to push the project forward in the interests of all parties and the people of Pakistan’.
TRL’s determination to see the project through to completion is demonstrated by two important initiatives announced yesterday. First is the appointment of Descon to undertake a complete ‘health check’ inspection of the TRL refining equipment. The second is a newly-completed restructuring of TRL management to ensure the project proceeds with all possible haste.
TRL CEO Sultan Al Ghurair said he was delighted to have Descon on board in order to develop the project further. Descon is the leading engineering and construction company of Pakistan. The company said that, since the refinery had been delayed for some time, they will perform a health check of critical equipment before the EPC contractor is finalised.
The TRL project is a direct investment of Al-Ghurair Investment LLC, a UAE-based family conglomerate and one of the most diverse industrial groups in the Middle East. As the majority shareholder, Al Ghurair will play an important role in the future supply of fuel to the nation of Pakistan.
When completed, the TRL Refinery will annually produce 80,000 tonnes of LPG, 455,000 tonnes of Naphtha, 410,000 tonnes of motor gasoline, 422,000 tonnes of jet fuel, 1,000,000 tonnes of gas oil – from which 630,000 tonnes will be treated diesel – 1,050,000 tonnes of fuel oil and 200,000 tonnes of bitumen. All the products of the refinery are in high demand in Pakistan.
The TRL refinery will create at least 350 direct jobs and several thousand indirect job opportunities for Pakistani workers. Ghurair said: “Our parent company and major shareholder, Al Ghurair Investment LLC, has always been about creating long-lasting relationships - and TRL is committed to carrying on that tradition. Al Ghurair looks forward to playing a part in the future prosperity of Pakistan and its people - and the TRL refinery is proof of that commitment.”