Financial Mismanagement Worsening Power Cuts in Pakistan
It is becoming increasingly clear that it is the total absence of financial management, not just insufficient installed generating capacity, that is the crux of the worsening energy problems in Pakistan.
Riots have broken out as the Punjab, Pakistan's largest province, finds itself in the midst of the worst ever electricity crisis in the nation's history. The power shortfall has reached almost 9000 megawatts across the country, over half of the total demand of about 17000 MW.
Many public and private power producers have shut down their power plants due to the suspension of fuel supply by Pakistan State Oil, the state-owned oil company, according to a report in the Express Tribune. The oil company is demanding payment of Rs. 155 billion in outstanding dues from the power producers before resuming fuel supply.
The key players in this "circular debt" trap are the federal and provincial governments as the biggest deadbeats, the power distributors like LESCO and KESC, the power producers like Pepco and Hubco, and the fuel suppliers like government-owned Pakistan State Oil (PSO) and partially state-owned Pak-Arab Refinery Ltd (PARCO). This debt circle begins with the government as the biggest debtor and ends with a government-owned entity as the biggest creditor. So the obvious question is: If the government is both the biggest debtor and the biggest creditor, then why is it that the government leaders can not solve the problem? Is it the lack of will? or the lack of competence?
Increased load shedding in Pakistan has cost 400,000 jobs in recent years, according to the World Bank. Although the World Bank report does not address it directly, the anecdotal evidence suggests that almost all of Pakistan's 13 million jobs in the decade of 2000-2010 were created from 2000-2007 when the economy showed robust gdp growth.
Clearly, the circular debt problem has assumed alarming proportions, threatening Pakistan's future. The IMF and the US officials in their recent meetings with Pakistan government have described the circular debt as a significant threat to the country’s economy.
Unless the government urgently takes serious steps to manage and resolve this worsening electricity crisis by putting a fully empowered competent team in charge, it will only get worse and make life impossible for both businesses and consumers, and cause a total collapse of an already struggling national country.
Related Links:
Haq's Musings
Circular Debt and Load Shedding
Musharraf's Economic Legacy
Pakistan's Tops Jobs Growth in South Asia
World Bank Report on Jobs in South Asia
Pakistan's Twin Energy Crises
Pakistan's Worsening Electricity Crisis
Pakistan's Struggling Economy
Lahore School of Economics Paper on Circular Debt
Riots have broken out as the Punjab, Pakistan's largest province, finds itself in the midst of the worst ever electricity crisis in the nation's history. The power shortfall has reached almost 9000 megawatts across the country, over half of the total demand of about 17000 MW.
Many public and private power producers have shut down their power plants due to the suspension of fuel supply by Pakistan State Oil, the state-owned oil company, according to a report in the Express Tribune. The oil company is demanding payment of Rs. 155 billion in outstanding dues from the power producers before resuming fuel supply.
The key players in this "circular debt" trap are the federal and provincial governments as the biggest deadbeats, the power distributors like LESCO and KESC, the power producers like Pepco and Hubco, and the fuel suppliers like government-owned Pakistan State Oil (PSO) and partially state-owned Pak-Arab Refinery Ltd (PARCO). This debt circle begins with the government as the biggest debtor and ends with a government-owned entity as the biggest creditor. So the obvious question is: If the government is both the biggest debtor and the biggest creditor, then why is it that the government leaders can not solve the problem? Is it the lack of will? or the lack of competence?
Increased load shedding in Pakistan has cost 400,000 jobs in recent years, according to the World Bank. Although the World Bank report does not address it directly, the anecdotal evidence suggests that almost all of Pakistan's 13 million jobs in the decade of 2000-2010 were created from 2000-2007 when the economy showed robust gdp growth.
Clearly, the circular debt problem has assumed alarming proportions, threatening Pakistan's future. The IMF and the US officials in their recent meetings with Pakistan government have described the circular debt as a significant threat to the country’s economy.
Unless the government urgently takes serious steps to manage and resolve this worsening electricity crisis by putting a fully empowered competent team in charge, it will only get worse and make life impossible for both businesses and consumers, and cause a total collapse of an already struggling national country.
Related Links:
Haq's Musings
Circular Debt and Load Shedding
Musharraf's Economic Legacy
Pakistan's Tops Jobs Growth in South Asia
World Bank Report on Jobs in South Asia
Pakistan's Twin Energy Crises
Pakistan's Worsening Electricity Crisis
Pakistan's Struggling Economy
Lahore School of Economics Paper on Circular Debt
Comments
ALTHOUGH Pakistan makes international news for terrorist attacks, anti-American demonstrations and its alleged support for insurgents in Afghanistan, it is the basic inability to switch on a light that is pushing this volatile country closer to the edge. Popular anger over Pakistan’s crippling electricity shortage boiled over on to the streets this week, with riots that paralysed whole cities, unleashing running battles with the police and causing widespread damage to government offices.
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For ordinary people, the frustrations are endless. Refrigerators become useless. Water runs out because it relies on electrical pumps. Children do their homework by candlelight.
Insufficient capacity is not even the biggest problem. That is a $6 billion chain of debt, ultimately owed by the state, that is debilitating the entire energy sector. Power plants are owed money by the national grid and the grid in turn cannot get consumers (including the Pakistani government) to pay for the electricity they use. This week, the financial crunch meant that oil supply to the two biggest private power plants was halted, because the state-owned oil company had no cash to procure fuel.
The central government also continues to subsidise the cost of electricity to the tune of billions of dollars a year. That money, say the government’s critics, could be better used to pay its own bills and thereby free up unused capacity in power plants that are mothballed because of non-payment and disrepair. Cutting subsidies to people’s electricity bills, however, could lead to even more unrest. Critics argue that the government’s hand-to-mouth policymaking is self-defeating, and illustrates its general lack of planning.
In the long term, help could be at hand. Pakistan says it is about to start work on a giant dam, the $12 billion Daimer-Basha, in the far north-east, with backing from the Asian Development Bank. The dam would add a large amount of generating capacity. America may provide aid for the project. (India, which believes that the dam lies in disputed territory, in part of the former princely state of Kashmir, is inevitably against the dam’s construction.)
There are also plans for a gas pipeline from Iran, though the Americans have warned that the scheme could fall foul of their sanctions against Iran. Alternatives include access to Pakistan’s abundant untapped coal reserves, or importing gas and electricity from central Asia, across Afghanistan, a daunting proposition.
However, it is the short term that is the real problem. Unless the Pakistani government can solve its cycle of debt and disorganisation, ordinary Pakistanis will continue to vent their fury.
http://www.economist.com/node/21531495
ISLAMABAD: With the addition of over Rs1 billion per day to circular debt, the cash flow deficit faced by the power sector has surged to Rs418 billion, betraying the devastatingly poor management of the power sector, a senior official at the Finance Ministry told The News.
Currently, the power sector faces Rs302 billion circular debt, which continues to soar in the wake of mismanagement and inefficiency. The system loses Rs40 billion every year just due to excessive line distribution losses that have surged by 4 percent in recent months, from 21 to 25 percent. Another Rs6-7 billion islost every month because of slow recovery of bills while Rs24 billion goes to IPPs as late payment surcharge.
Previously, line losses stood at 16.5 percent and transmission losses at 3.50 percent (total losses 20 percent) but have now increased to 21 and 4 per cent respectively, pushing a total 25 percent. It is pertinent to mention that one percent loss translates into Rs7.50 billion.
In anther setback, the government continues to pay Rs9.6 billion as GST for electricity bills that it fails to recover. Similarly the government loses Rs2 billion per month in the wake of fuel adjustment loss due to 20 percent losses that have now increased to 25 percent. And because of decreased supply of gas to powerhouses, the government has to sustain the additional burden of Rs6 billion per month.
This means that the government will suffer Rs72 billion additional losses per year if it is unable to supply gas to power plants, given that it will have to use costly furnace oil. Informed sources told The News that the Ministry of Petroleum and Natural Resources has committed to providing 76 million cubic feet gas per day (mmcfd) to powerhouses since the government has decided to give top priority to providing gas to the power sector. “We expect addition of 200 mmcfd gas to the system in December, of which 100 mmcfd each will be allocated to the power and fertiliser sectors,” secretary petroleum and natural resources Mohammad Ijaz Chaudhry told The News. “The decision to accord priority to supplying gas to the power sector was taken during the high level meeting chaired by President Asif Zardari on the energy crisis.”
The official said the Finance Ministry has asked the Ministry of Water and Power to improve its revenues outlook by improving recovery and paying arrears to IPPs and PSO. IPPs’ arrears currently stand at Rs208 billion, while those of PSO are Rs165 billion. However, the receivables of Pakistan Electric Power Company (Pepco) stand at Rs307 billion.
The finance ministry has already told IPPs it will now pay Rs45 billion to them next month. This amount was to be paid before October 15, 2011 but Pepco failed to meet the deadline because of acute financial constraints.
Meanwhile, the government has decided, the official said, to re-introduce uniform electric power tariff across the country, while the subsidy, which power consumers enjoyed, will go to the government. Currently 20 million consumers receive electricity bills under differential power tariff regime and the subsidy, which the government pays directly to the distribution companies, is mostly misused.
“The government has decided no to raise the power tariff by 4 percent as suggested by the Ministry of Water and Power in the summary sent to PM Secretariat until and unless the power tariff rationalisation plan is implemented after its approval by the federal cabinet,” the finance ministry insider said.
http://www.thenews.com.pk/TodaysPrintDetail.aspx?ID=72877&Cat=2
Energy and Security: Natural Gas and the Example of Pakistan
By Paul Sullivan,
Georgetown University
I recently got a question the other day about Pakistan. It is having a serious electricity crisis. One of the solutions proposed to me was that a pipeline be built from a neighboring country, Iran, which has a lot of natural gas in order to fuel the power stations of this South Asian state.
Fuel is not enough.
The electricity generating stations in Pakistan need to be better maintained. Many plants are simply not running due to bad maintenance. More people need to be paying their electricity bills. The pricing of electricity needs to be more rational. Without the right amount of payments coming into an electricity company, even if it is a public sector company, the company cannot remain solvent and well run for long. Pakistan’s electricity is produced by two public sector utilities and about 20 plus independent power producers.
Part of the problem with this in some developing countries is that in the villages and even the large cities one can see thousands of “informal” wires being connected from the electrical poles to houses and businesses without any meters (or even safe connections, but that is another story). Income losses from essentially stolen electricity are gigantic.
Pakistan’s electricity demand growth of about 10-11 percent per year is overwhelming its supply of electricity.
About 55 percent of Pakistan’s people use biomass, such as cow dung, other agricultural waste, garbage and more to heat, cook, etc. These people will likely have an increasing want for electricity connections in the future. Pakistan will not develop even near to its potential if this huge proportion of its population is not connected with electricity, either on a grid or via distributed energy systems at the village and town levels.
These distributed systems could use the vast wind, solar, geothermal and other renewable energy resources available, but severely underutilized in the country. Setting up distributed power systems in villages and small towns could also prove to be a lot cheaper than extending Pakistan’s often shaky and overused grid....
http://ubpost.mongolnews.mn/?p=4213
#Pakistan has #electricity overcapacity but it still suffers #power shortages because of lack of #grid capacity. #PTI govt to increase investment in grid and delay about 10,000 MW worth of planned #coal/#wind power projects. #cost #debt #economy #PMLN https://www.bloomberg.com/news/articles/2021-01-27/pakistan-struggles-to-tackle-an-unfamiliar-glut-of-electricity
After spending decades tackling electricity shortages, Pakistan now faces a new and unfamiliar problem: too much generation capacity.
The South Asian nation’s power supply flipped to a surplus last year after a flurry of coal- and natural gas-fired plants were built, mostly financed by the Belt and Road Initiative launched by Chinese President Xi Jinping in 2013. Pakistan is slated to have as much as 50% too much electricity by 2023, according to Tabish Gauhar, special assistant to Prime Minister Imran Khan for the power sector.
That is problematic because the government is the sole buyer of electricity and pays producers even when they don’t generate. To help tackle the issue, the government has negotiated with producers to end that system, lower their tariffs and asked them to delay the start of new projects, according to Gauhar. It is also trying to convince industries to switch to electricity from gas.
“We have a lot of expensive electricity and that is a burden,” he said.
While the Chinese financing and the surplus is a welcome change after years of shortages that left exporters unable to meet orders and major cities without electricity for much of the day, two main problems remain. The first is a creaking network, and the second is the need to supply cheaper power while keeping emissions in check.
“Pakistan has overcapacity, yet it still has power shortages because of the unreliability of the grid,” said Simon Nicholas, an analyst at the Institute for Energy Economics & Financial Analysis. “They haven’t invested in the grid the same way they’ve invested in power plants.”
The last nationwide blackout happened just last month after an outage at the country’s largest facility. While the new plants have also boosted coal generation to a record fifth of the power mix, Pakistan plans to increase the share of wind and solar to 30%, while another 30% will be generated from river-run dams.
Pakistan will pay private power producers 450 billion rupees ($2.8 billion) in overdue electricity bills in a deal to reduce future tariffs. The government targets to pay 40% of that bill by the end of February, with the second payment slated before December, according to Gauhar. A third of the payment will be made in cash, with the rest in fixed income instruments, he added.
About 8 gigawatts worth of government-owned power plants will also have tariffs reduced. And Pakistan plans to negotiate lower tariffs for mining and power generation at the Thar coalfield, said Gauhar.
The government aims to delay about 10 gigawatts worth of planned power projects, including coal and wind plants, since there won’t be any need for them next year, said Gauhar.
https://www.arabnews.com/node/2592811/pakistan
Pakistan’s government is negotiating 1.25 trillion Pakistani rupee loan with commercial banks
Plugging unresolved power sector debt is top priority under ongoing IMF bailout program
KARACHI: Pakistan’s government is negotiating a 1.25 trillion Pakistani rupee ($4.47 billion) loan with commercial banks to reduce its bulging energy sector debt, the power minister and banking association said.
Plugging unresolved debt across the sector is a top priority under an ongoing $7 billion International Monetary Fund (IMF) bailout, which has helped Pakistan dig its way out of an economic crisis.
“The loan will be repaid over a period of 5 to 7 years,” Power Minister, Awais Leghari told Reuters, adding that the term sheets are yet to be signed.
Pakistan’s government, the largest shareholder or owner of most power companies, faces a challenge in resolving debt due to fiscal constraints. To address this, Islamabad has raised energy prices, as recommended by the IMF, but still needs to settle the accumulated debt.
“We’ve approached many banks, let’s see how many participate. It’s a commercial transaction and they have the choice of participating, however, we think there is liquidity in the system for it and banks have the appetite,” Leghari said.
The government plans to reduce “circular debt” — public liabilities that build up in the power sector due to subsidies and unpaid bills — this year by eliminating government-guaranteed debt and moving to a revenue-based system.
This approach is expected to lower financing costs, enabling the government to pay off interest and service debt obligations, he added.
“Such repricing of liabilities induces more efficiency, and reduces cost for consumers,” said Ammar Habib Khan, adviser to the power minister.
Zafar Masud, Chairman of the Pakistan Banks Association, told Reuters that the interest rate would be a floating exchange rate and the country’s top banks would participate, in addition to those who are already part of the outstanding loan.
“This will help in clearing up all the debt in the next 4 to 6 years which has been sitting on banks’ balance sheets,” he said.
Masud added that more than half of the 1.25 trillion debt is already on the banks’ books and is undergoing restructuring through self-liquidating facilities, which currently lack identifiable cash flows to support them.