Double Jeopardy

Energy and economy are conjoint twins. Pakistan is in double jeopardy, as both of these are in deep troubles. They pose hen and chicken dilemma as to which one caused the other. The new government has taken a right decision to fix both these sectors simultaneously. Promise to fix the energy crisis was one of the main drivers that brought this government to power; and when it assumed the affairs of state there wasn’t enough money to fix the energy problem. Anxiety over the nation’s struggling economy is one of the many challenges facing the new government. Pakistan and the IMF have reached an agreement for a three-year programme of at least

5.3 billion dollars under an extended fund facility. Finance minister said there was no option but request the loan to save Pakistan from defaulting. Aim of the programme is to bring down the fiscal deficit – which neared nine percent last year – to a more sustainable level, and reform the energy sector to help resolve severe power outages leading to sharp decline in economic growth. The IMF loan carries carry a floating interest rate of 3% and would be payable over a longer period than conventional arrangements to facilitate Pakistan in repaying its external debt. Pakistan had long been expected to seek a fresh bailout package from the IMF after abandoning a $11.3 billion loan facility in 2011, because it could not go along implementing the preconditioned financial reforms. The government is yet to pay attention to handle the monster of domestic borrowing.

 

Any IMF reform package comes with harsh conditions, it further degrades the living standard of a common man; by design these programmes are unpopular and entail political baggage. Hence, it is not surprising that most of such earlier programmes were prematurely abandoned as the respective governments were not able to carry out requisite reforms. The IMF expects Pakistan to reach a budget deficit target of six per cent of GDP as part of its bailout package. The successful conclusion of arrangement with the IMF came at a time when State Bank was left with about $6.25 billion, merely enough to cover less than six weeks of imports. The fresh programme with IMF is facilitate retirement of past liabilities and bring about structural reforms in the country; indeed a hard task for any elected government.

 

Almost concurrent with IMF agreement, the Executive Committee of the National Economic

Council (ECNEC) approved five energy projects amounting to Rs 1303 billion. After

 

completion of these energy projects more than 3500 MW power shall be added to the national grid. These include K-I and K-II Nuclear projects situated in Karachi with generation capacity

2200 MW, Nandipur project of 425 MW, and Neelum-Jhelum hydro electric project, having 969

MW capacity.

 

Fifteen years back, Pakistan’s energy mix was 75% based on cheap fuel and 25% on costly oil; whereas it has now reversed positions. Unless this lope-sided energy mix is corrected, no sustainable end to energy crisis is in sight. K-I and K-II & 2 will help move energy generation away from expensive imported fossil fuels, and lower the cost per unit. These two projects are scheduled to complete in seven years. However, it is possible to complete such projects in less than five years.

 

Government also took a bold decision to settle the circular debt which stood at Rs 503 billion. It has already paid Rs 322 billion to private power producers while the remaining would be settled within this month. This measure would add 1700 MW of electricity to the national grid. The IPPs have been asked to use coal instead of oil and bring about this change in the next

18 months which will bring down the average cost of power production. In reciprocation, the IPPs have agreed to: withdraw their cases against the federal government; generate additional power during the month of Ramadan; extend the credit period for payments from the current

30 days to 60 after due process etc.

 

To sustain such measures, sufficiency of economic resources is essential. A campaign has been launched to remove the show stoppers from the paths of held-up cash flows. A high-level Pakistani delegation has visited Saudi Arabia to strike the loan deal with the Saudi Fund for Development. Like China and Abu Dhabi, Saudi Arabia had withheld the loan during the tenure of the previous government. An effort is also on to persuade Abu Dhabi Fund to release

$100 million loan, which was stopped pending the settlement of a payment row with UAE’s

telecommunication giant Etisalat over privatisation of PTCL. China had also withheld $448 million facility for the Neelum Jhelum project, which has now been cleared.

 

Neelum Jhelum is a strategic project launched to secure water rights over Neelum River, where India is also constructing Kishanganga Dam. Pakistan and India are locked in a legal battle in the International Court of Arbitration and a final decision is expected by the end of current year. Here, time is the essence; country completing the project earlier is likely to get the water rights.

 

The new government, in its drive to end energy shortages, as quickly as possible, has also radiated some confusing signals. As the government fine tunes its new energy policy, the news about putting Iran-Pakistan (IP) gas pipeline project on the backburner has not gone down well with the people. Supposedly the government has decided to divert the funds generated through the imposition of the Gas Infrastructure surcharge elsewhere.

 

Energy governance is another issue that is likely to dampen the government effort to resolve the energy issues. Two state-owned utility companies, Hyderabad Electric Supply Company (Hesco) and the Sukkur Electric Power Company (Sepco), have decided that they will not try to collect unpaid bills and have managed to get billions of rupees in losses written off. Hesco and Sepco have the highest line losses in the country, which are compounded by a pathetic bill collection capacity. Of the electricity it buys from the national grid, Hesco loses 28 per cent to theft and poor infrastructure and then loses further 31 per cent by not being able to collect

 

bills from its consumers. Performance of Sepco is even worse: line losses are 40 per cent and losses on uncollected bills account for another 49 per cent.

 

Pakistan’s energy generation capacity is over 23000 MW which far exceeds the peak summer demand of electricity. Theoretically, Pakistan is a power surplus country and not a power deficit country! What Pakistan needs is not just more electricity, but essentially cheap electricity. New government has decided to place energy security on top in the 10th Five-Year Development Plan. Unlike the past when sub-sectors of water, electricity and gas were disintegrated at the planning stage, in the 10th plan the policy for these areas will be formulated on an integrated basis. The power crisis in the country needs three fundamental course corrections: cheap fuels, efficient distribution, and effective revenue collection. Unless we focus on all three simultaneously, circular debt would resurface and economy would remain on life support.

 

{Carried by Pakistan Observer on July 10, 2013}

 

Writer is Consultant, Policy & Strategic Response, Email: khalid3408@gmail.com