PAKISTAN ENERGY CONFERENCE
Affordable electricity is the need of people in Pakistan
By AMANULLAH BASHAR
Apr 24 - 30, 2000
The Development Surcharge, the main instrument for collecting Rs70-80 billion for exchequer and consequently hiking oil prices in Pakistan is likely to go before or after the forthcoming federal budget this year.
This was indicated by Abdullah Yousuf, Secretary, Ministry of Petroleum and Natural Resources while talking to PAGE at the 'Pakistan Energy Conference' jointly organized by Pakistan & Gulf Economist and Pak-Kuwait Investment Company and other co-sponsors in Karachi.
This cutting edge energy policy, being evolved by the present government, will help bringing down oil prices specially the fuel oil at international prices with 15 per cent of GST. The step of slashing such a huge government tax in the form of development surcharge if implemented may bring unprecedented boom in the manufacturing activity besides resolving the IPP issue. The private sector power producers claim that they are compelled to charge higher tariff rates from WAPDA & KESC due to exorbitant oil prices in Pakistan.
When asked about the much-talked about import of gas through pipelines from neighbouring Central Asian States, Iran and Qatar, the Secretary Petroleum said that natural gas is a much cheaper substitute for the much costly imported oil. The cost for import of oil this year has to jump over $3 billion due to high international prices. The economy however is not in a position to pay such a high price and is bound to look for a cheaper source of energy obviously for natural gas. Gas pipeline from Turkmenistan has gone into doldrums due to continued political disturbances in Afghanistan, corridor for passing through the pipeline. Hence this project is out of question in the current scenario. The other project is the gas pipeline from Qatar. This project also not feasible as its entire route is offshore. However, the pipeline project from Iran is much attractive and a multi-dimensional project. Actually, the Iran pipeline is destined to India passing through Pakistan. If this project is materialized, it will be adding $500 million as transition fees to Pakistan's annual foreign exchange earnings. Currently, an Iranian delegation is visiting India to negotiate on this project. On completing this may bring regional cooperation besides boosting Pakistan's economy. This would be a source of a handsome income plus gas supply at a much cheaper rates. Replying to another question regarding the much delayed Iran-Pak Refinery, Abdullah Yousuf disclosed that the Iranian government had scrapped the Iran-Pak project due to what they called discriminatory attitude of the previous government. The previous government did not treat the IPRL project at par with PARCO Refinery, which is nearing completion near Multan. The incentives including 25 per cent rate of return offered to PARCO was limited for 3 years of Iran-Pak Refinery which discouraged the Iranians to come forward. Now the present government has again taken initiative in the recent visit of the Chief Executive to Iran and the subject is reopened for a result oriented dialogue, he said.
In fact the Pakistan Energy Conference was the center of attraction due to on-going tussle between WAPDA and HUBCO and the presence of their representatives in the Conference. However the two avoided converting the conference deliberations in to a hot debate.
Dr. Anjum Siddiqui representing HUBCO besides discussing the issue at a separate session also read out a paper of Khurshid Hussain, the Chief Executive Officer of HUBCO. The highlight of Khurshid's paper was HUBCO's proposal recently presented to the finance minister. According to Khurshid this offer delivers at least $3 billion worth of benefits to the government of Pakistan. Following is the summary of the proposal: a) It forgives $200 million in receivables up front, it reduces future dividends by $100 million, it also reduces the O & M contract by $1.4 million per annum and reduces the IRR from 18 per cent to 15 per cent. The proposal represents the maximum flexibility of the HUBCO project. The shareholders will not submit to a smaller rate of return on the investment, the paper argued.
On the other hand, Lt. Gen. Zulfiqar Ali Khan, the Chairman WAPDA, in his inaugural address attached great importance to the government policy to provide electricity to the poor masses at an affordable price. The goal of providing electricity at an affordable price is however seriously threatened by the Power Purchase Agreement (PPA) reached with the IPPs in the past.
Gen. Zulfiqar Ali said that our future generation would not forgive us if we blindly pass on the current heavily burdened WAPDA, including the unmanageable high tariff payments to certain IPPs, which have nearly bankrupted the WAPDA.
Today, WAPDA Chairman said, Pakistan's entire energy sector is at a crossroad. 'We must formulate effective strategies in partnership with industry and the private sector'. The ultimate objective of our initiatives is to provide affordable energy to the majority of our population. We cannot ignore the 50 million or so people without electric power and even a larger number without an affordable fuel source for their house household needs. During last few months WAPDA has accelerated and launched new initiatives to overcome the problems accumulated over the past decades. In summery these are: Massive efforts under a managed plan to reduce total system losses. After the induction of Army Monitoring System, WAPDA has achieved 10 per cent overall reduction in losses which translates to a benefit of almost Rs15 billion. Managed billing and collection resulting in increase of billing in 1998-99 to Rs133 billion versus Rs117 billion the preceding year, whereas revenue collection increased to 122 billion from 93 billion in the same period. Negotiated settlement with 13 IPPs for an average level tariff of 4.75 cents resulting in over $1.5 billion savings over the life of the projects for the benefit of our next generation. Induction of a new Customer Focus culture based on providing quality services to customers. Increased maintenance and planning reduce technical breakdowns and losses to industry and other customers. Special incentives for agriculture and industry to promote growth and increased power usage for more production in support of the National economy. Special incentives and facilities to sick industry and under utilized plants for extra consumption for increased industrial production.
Lt.Gen. Zulfiqar Ali Khan, Chairman WAPDA said that energy is the force that provides us the ability and the means to achieve a better quality of life of the people. It cannot be achieved without affordable electric power. Pakistan's economic, industrial and social growth has been greatly hampered in the past decades due to increasing gap in power demand, versus capacity. Various Five-Year Plans, by successive governments, continued to put power generations and distribution, as a priority on their agenda. Unfortunately, all thoughts of providing adequate and affordable electric power failed to materialize ostensibly due to fiscal constraints, but in reality for paucity of visionary commitment to national development and self- reliance. And today, after the inclusion of 13 IPPs under the 1994 Energy Policy, due to certain fatal flaws, the scenario has reversed. The capacity has increased, beyond demand growth, but it is an irony that electric power is not affordable for a majority of the population and has become an increasingly non-economic input for industry.
Tracing back the discovery of 'electricity' and the development of electric utility industry, Gen. Zulfiqar said that it was in 1752 that Benjamin Franklin discovered electric energy in his famous kite flying experiment but it took nearly 50 more years for the invention of electric battery in 1800. Another 21 year later the first electric motor was invented in 1821 by Faraday and another 50 plus years elapsed till Thomas Edison invented the light bulb in 1878. In fact, he had unleashed a world of opportunity for mankind that become a driving force of all technological inventions and development into next millennium. It was the advent of electric power and its demonstrated utility for lighting and power for industry business and the home that drove the industrial development in the later 19th century and well into the 20th century. This was a unique period of history which witnessed the largest number of inventions ranging from telegraph, wireless, radio, telephone, radar, semi conductors, computers, mobile phones, satellites, robots, household appliances, industrial tools, machinery, defence equipment, missiles, the list goes on endlessly. The one thing in common is the driving force of all i.e. electric power, be it in micro amps and Millie-volts or giga-watts and 500 KV plus transmission systems. If there were no electric power, we would still be in the 'dark ages' literally.
Now moving on to Pakistan, we find an interesting parallel in the forties (1940) to that of the west in 1880's. On the creation of Pakistan in 1947 we only had a meager base of about 50MW. Some large cities and privately owned small local power generation and distribution companies. The companies included KESC (Karachi) REPCO (Rawalpindi), MEPCO (Multan) etc. There was little development in the power sector in the period up to 1957-58. Then total generating capacity was a meager 119MW in all of the West Pakistan with a customer base of 300,000. Thus was born, Pakistan's Central Electric Utility Company in 1958, namely WAPDA on the pattern of the Tennessee Valley Authority (TVA) in the United States. WAPDA was conceived as a Water and Power resources development body. Distribution was added to WAPDA's mandate to create a homogeneous entity of a large central utility on the model of the utilities, in other developed and developing countries.
WAPDA led the National Momentum of growth and development. It executed the works under Indus Basin Treaty including Mangla and Tarbela dams and completed several Thermal power stations. However during 5th & 6th five-year plans WAPDA was not able to meet the rapid demand growth of electric power due to financial constraints of Government of Pakistan, policy issues and political impediments.
As such in 1985 under a Tripartite Agreement of World Bank, Government of Pakistan and WAPDA, a new strategy and policy was launched for induction of the private sector for setting up thermal generation plants. Numerous proposals were received from international consortiums and groups in 1985 and onwards. Unfortunately, due to policy contradictions and political issues, none of the projects materialized. Even HUBCO, for which an LOI was issued in 1988, could not finalize its Power Purchase Agreement (PPA) up to 1992. However, financial close was not achieved and the project was stalled. WAPDA expecting HUBCO to materialize did not cater to back-up the 1200 MW. Some other thermal projects were also delayed resulting in acute shortage of power in the late eighties and onwards. A restructuring plan for WAPDA initiated in 1992 also stalled due to political factors.
In the early nineties, acute power shortage resulted in frequent power breakdowns and extensive periods of load-shedding which caused colossal damage to the national economy. Recognizing this, the government set up a Task Force on Energy. A national energy policy was formulated. The then Prime Minister announced a new Energy Policy in March 1994. Foreign investment was solicited for setting up private thermal power plants. Extensive incentives were offered to independent power producers (IPPs) to set up thermal power plants on a fast track basis. In September 1994 a high level delegation under the leadership of US Secretary of Energy participated in the Energy Conference organized by the Government. Investors, bankers, businessmen IPPs and US Department of Energy officials attended the conference. MOUs worth more than $20 billion were signed for power projects of about 6000 MW. Out of these 17 projects achieved financial close for power production amounting to about 3200 MW. Ultimately 13 IPPs with a capacity of about 2700 MW finalized PPAs with WAPDA.
Todate, 11 IPPs have commenced operation and another 2 are scheduled to come online in the next 3-6 months. HUBCO with a capacity of 1200 MW came on-line on March 31,1997. Thus a total of 3900 MW was added through IPPs to the installed capacity of 7493 MW of the country. Meanwhile, the past decade witnessed a stalled industrial sector, resulting in actual decrease in electric power demand. This decrease in demand has been further amplified due to set up of Captive Power Plants by large industry amounting to over 1000 MW. But what must be noted is the monumental achievement of WAPDA in adverse circumstances is the building up of the National Power Utility infrastructure which today consists of: 4825 MW Thermal, 4689 MW Hydel, 5666 MW IPPs capacities which comes to a total of 15180 MW installed generation capacity.
WAPDA has launched a major restructuring programme of its Power Wing under the government policy supported by the World Bank, ADB and IMF. Under this initiative WAPDA's power wing has been restructured into 12 distinct corporate entities. A management company namely Pakistan Electric Power Company (PEPCO) has been formed that has been entrusted the task of managing the transition of 12 WAPDA companies from a bureaucratic structure to a corporate, commercial and productive culture.
Munnawar, the Managing Director of PECO spelling out the restructuring programme said that the key objective of this restructuring is to manage 12 WAPDA companies towards becoming commercially oriented individual profit centres. When a question was volleyed from the audience that how the tariff of these commercial companies would be managed when they would be run purely as profit making entities. He said that for that purpose government has already constituted a regulating authority in the name of NEPRA which will protect the interest of the customers. Although it would be a difficult task in the case of some distribution companies providing heavily subsidized electric power in certain areas and provinces. This process will give immense value, a viable and profitable entity. This will also provide an opportunity to international investors by participating in this restructuring programme. The process of restructuring is on fast track and is likely to be the new emerging model of Pakistan's power sector. He expressed the hope that it will provide higher quality services at an affordable cost to the customers and sound opportunities for commercial operations.
Others who also spoke on the occasion include Zafarullah Khan, Secretary, Ministry of Water & Power, Zafar Ali Khan, Secretary, Privatization Commission, Shukat Mirza, CEO, Pakistan State Oil, Irfan Siddiqui, GM, Pak-Kuwait Investment Company and CEO of Al-Meezan Investment Bank and Peter Cockcroft from Premier Shell Pakistan.