DISADVANTAGES OF LOAD SHEDDING

FOZIA.ISHAQUE (fozia.ishaque@hotmail.com)
Feb 02 - 08, 2009

Misallocation of resources, collapse of stock exchange, inflation, unemployment, illiteracy, political instability, and last but not least law and order are the most highlighted and colossal issues facing Pakistan. But now load shedding has also been added to this long list and become one of the major issues. Load shedding in the country played havoc with the industrial sector, as textile, plastic, steel and other units have suffered heavily. Under present situation, trade deficit has increased and the government is not able to meet export target. If the current power shortage prevails then the export target would fall short at least of 15% and resolutely trade deficit would increase.

Energy is the oxygen of economic life and its insufficiency can seriously endanger the development of trade and industry. It can be denominated as the most reliable indicator of economic development in terms of per capita consumption of the electrical energy. Due to incessant and rapid growth in population, urbanization, and industrialization in Pakistan in recent years and most importantly no new induction in national grid despite acute shortage, the demand for electric power is much greater than its production. This has resulted in a serious energy crisis. Presently Pakistan is facing 12-14 hours load shedding countrywide which has not only adversely affected the economy but is likely to have serious repercussions in future. The load shedding in the industrial sector has caused severe problems in production cycle and resolutely the cost of production has quadrupled.

It is not possible to achieve high or moderate economic growth without producing sufficient energy. Electricity is used in industrial and agricultural output, transportation, hospitals, educational institutions, and research centers. The frequency of power outages in Pakistan is alarmingly soaring. As a matter of fact when energy supply of an industry is restricted, its output decreases while cost of production increases resultantly many industries shut down leaving labor unemployed.

REASONS:

In Pakistan the power policy was developed and executed on ad-hoc basis after the emergence of IPPs. This step was taken without realizing the macro economic variables. In order to capitalize the attractive benefits, entire investment was made in imported oil instead of development of coal reserves in Thar. When oil prices in international market went up to 147 Dollar a barrel, the entire system collapsed. Although international oil prices have reduced by almost 110 dollar a barrel the government has not reduced the prices proportionately. Some other factors have also disabled the government to pay off its dues against private producers. This has depleted the oil reserves of the IPPs and consequently lowered down the operational efficiency of those IPPs.

IPPs are equally responsible for all this mess. Historically, IPPs deliberately reduced their statutory required oil reserves to their own estimate when government was procuring only 25-30% average electricity from them and thus transferred entire working capital as dividend to their sponsors. Now when there is a need to run the plant at full capacity, these IPPs are unable to purchase fuel from PSO because of their tight liquidity position. Under these circumstances it is not possible to replenish oil tanks to the required statutory level but if they would not have given early dividends from the working capital this situation could have been avoided. Interestingly the only action government can take against these IPPs is to issue a notice to abridge the oil deficit instead of imposition of penalty, termination/suspension of agreements etc...

REPERCUSSIONS:

It is important for the government to take urgent measures to overcome the energy deficit as it is affecting the whole economy. Load-shedding is hitting the industrial production hard. The country had not been achieving the export target for the last two years and if the situation persists it would be very difficult to meet the target set for the current fiscal year. According to a newspaper report, President of Quaid-e-Azam Industrial Estate (QIE) claimed that there were more than 400 industrial units in QIE, out of which 70% units were export-oriented. Most of them are now unable to execute export orders due to power outages. This closure will not only reduce the foreign exchange inflow of the country but will also deprive more than 40,000 people of their jobs. Textile garments and products is one of the major exports of Pakistan but the electricity shortage has also badly affected their output. Federal Minister for Textile Industry Rana Farooq Khan said on various occasions on the protest of textile industry that there would be no power load-shedding for the textile and clothing sector by the end of January 2009. But all promises seem to meet a dismal fate.

According to the Pakistan Electric Power Company, Wapda is facing a shortage of 3,500 MW due to closure of canals. In addition, the textile sector would not be able to meet export deadlines, which would blot country's image in the international market. Textile exports have already declined by 6% during the first half of the current year. It is also important for the government to deduct the textile sector from load-shedding hit areas, and if unavoidable, stakeholders should be taken into confidence, and an agreed schedule be followed in letter and spirit. Usually there is an electricity outage of minimum 2 hours duration every second hour. In this grim situation it is more viable for industry and domestic consumers that authorities plan schedule in a way that industry gets at least 10 hours without break i.e. instead of 1-2 hours outage after every hour they make a schedule where they supply electricity for 10 hours continuously so that factory could complete a shift without interruption.

So far, hundreds of industrial units have been closed due to energy shortage but no serious effort has been made by the government. Nothing material has come out for the development of thar coal and other cheap resources. According to APTMA, textile industry has more than 60% share in country's exports, 27% in industrial value addition and 38% in employment sector but energy deficit pushed this large sector to the wall. Exporters are unable to meet their export orders therefore the government should wake up and take steps on urgent basis to rescue the sector. Textile export orders worth $5 billion were lost at Heimtextil Fair Germany this year while 60,000 jobs are in danger as a result of the downfall in industrial production in Faisalabad region due to severe load shedding of electricity and gas.

Ever increasing prices of raw material, inputs and overhead expenses, high cost of production in the country is making our textile exports uncompetitive in the international market. Resultantly, country's textile items are considered to be very costly by the foreign buyers. The buyers are also reluctant to place orders as they fear that drastic electricity and gas shortage would hamper production and Pakistani exporters would not be able to honor their export commitments on time. Exporters are demanding that export oriented units be exempted from electricity and gas load shedding and the government should refund the duties and levies paid by exporters on raw material and inputs, in order to reduce the cost of doing business in the country. The government should also provide a level playing field to our exporters enabling them to compete successfully with their regional rivals in the international market.

Around 25% of textile units have been closed because of shortage of electricity while still a number of units are at risk of closure. Out of around 1,200 textile units, 300 mills including spinning, weaving and ginning have closed in Punjab while same numbers of mills are facing problems. According to an estimate, the textile products are the major exports of the country and at least six million people are directly or indirectly associated with the industry. Spinning industry is already in extreme worst position due to increase in cost of doing business. The energy crisis has appeared as death warrant of the industry and could cause total collapse and disaster, in addition trade deficit of the country have reached to $7.5 billion in the first half of current fiscal year and under the prevalent situation this trade deficit will further expand due to current heavy electric load shedding. It is beyond any doubt that under the prevalent sate of affairs, the export target of $19.2 billion fixed for the year 2007-08 will not be achieved at all.

The plastic industry has also been affected and cost of production of plastic items including pipes, bags, tables, chairs and others has increased at least by 20%. According to the plastic industry stakeholders when there is a load shedding with intervals then it becomes impossible for them to produce goods. The generators make the production at least twice expensive and it creates inflation. The continuous power breakdown causes problems in the machines while the raw material is also wasted. The government should come up with a solid strategy to cope with the shortage of electricity in the country as the fast increasing gap between the demand and supply is hitting the industrial sector hard. It is feared that the load shedding would hit the overall exports of the country badly and it would not be able to meet export target.

REMEDIES:

It is important for the government to make a comprehensive plan for overcoming the problem otherwise besides the trade deficit, unemployment and inflation will also increase. The government could overcome the situation through short-term and long-term measures. In short-term measures, the government should talk to IPPs and evolve a strategy for rapid power production while in long term planning it should focus on making dams. Protection of domestic consumer lies in smooth running of the industry and if the industry of the country would be facing closure threat, government would not be able to maintain growth rate.