15 - 21, 2010

With massive power cuts in major cities on a daily basis, Pakistan is currently undergoing its biggest energy crisis. The country's economic growth revival largely hinges on the performance of the manufacturing sector. The soaring power and gas tariffs are likely to put additional burden on the industry and squeeze the gross margins of the industry. The acute energy crisis in Pakistan has not only suffocated the industry but also made the lives of 170 million Pakistanis unbearable, as they face frequent power outage and hours long load-shedding of gas and electricity in cold winter weather.

Lack of rains to run hydro power plants exacerbates a long-running power shortage in the country. On the other hand, the ruling elite in Islamabad plan to install the expensive rental power plants (RPPs) at a cost of $5 billion, instead of working out a comprehensive strategy to grapple with energy shortages in the country.

The government will have to hike the electricity tariff by an additional 45 per cent if it allows installation of 14 RPPs to generate 2,250 megawatts of electricity, according to a recent report of the Asian Development Bank (ADB). The ADB has declined to approve the government's plan for installation of rental power projects, as it would need a significant increase in consumer tariff and consume more than $5 billion of nation's foreign exchange in five years. As per agreement with the International Monetary Fund (IMF), the government is committed to increase electricity rates by 30 per cent and it has already notified 18 per cent tariff increase.

The ADB was assigned the job of third party evaluation under a decision of the federal cabinet to examine agreements with rental power projects sponsored by the water and power ministry to end electricity shortage, following public criticism over RPPs for being too expensive.

The RPP agreements had been 'signed in haste', and without examining in detail the fiscal and contractual obligations of the government, according to the ADB's report. The ADB has reportedly proposed that the government should take in hand only eight RPPs with a total generation capacity of about 1200MW. This, too, would entail about 24 per cent increase in power tariff, in addition to about 30 per cent increase in electricity rates already committed by the government with multilateral lender under the IMF programme.

Despite a payment of more than Rs15 billion as mobilization advance out of taxpayers' money, most of the RPPs have reportedly failed to meet contractual deadlines of electricity generation required for ending shortfalls.

The government in response to the issues raised by the ADB's report has stated that the report has ignored the key issues including loss of around Rs 219 billion borne by the industrial sector due to power shortage per annum. The government contends that the report did not discuss the loss to the economy suffered in particular by the load shedding, which according to certain estimates is in the vicinity of Rs 219 billion per annum as far as industrial sector is concerned with the loss of 400,000 jobs and exports worth Rs 75 billion. The report did not consider the international practices in power acquisition programs in emergency situations, adverse impact of crises in international and domestic financial markets on investment in power sector especially the government's IPP program.

Presently, the gas shortfall reached its record high in the country, with a gas demand of around 4050 million cubic feet (MMcfd) and the supply around 3110 MMcfd. The domestic consumers are currently facing gas load-shedding in the winter.

Sui Southern and Northern Gas Companies have suspended supply to many units as the increase in demand pushed the shortfall to 940 MMcfd.

The shortfall of compressed natural gas (CNG) and its load curtailment has increased the petrol demand in the country. Import of petrol increased by 274 per cent in November and December compared to the same period last year. The country imported 96,001 tons of petrol or motor gasoline during the last two months compared to 25,668 tons imported in December 2008, while there were negligible imports in November 2008.

The analysts see a major role of the US in rehabilitating the country's energy sector, as the US can engage international financial institutions, including EXIM bank, the US Trade and Development Agency, IMF, ADB and World Bank together with its private sector. Last month, Petroleum Minister, Syed Naveed Qamar met with the visiting US Special Representative Richard Holbrooke in Islamabad and sought the US investment to establish a liquefied natural gas project to meet the short-term energy requirements of the country.

Holbrooke said that the US government is keen to address the country's need by extending support in areas of oil and gas and water. US trade promotion agencies are expected to provide financial backing for some of the projects in power sector.

Many operators with US equity were showing increasing interest, especially for short and medium-term energy projects, according to the official sources.

In August 2009, Holbrooke reportedly submitted a document on Pakistan's ailing energy sector to President Asif Ali Zardari. The United States believes that the country's electricity supply shortages result from distorted pricing, weak management, conflicting responsibilities and the absence of a comprehensive plan. Non-payment by customers and non-payment of government subsidies to producers and generators have resulted in a large stock of outstanding private and public debt (guaranteed by the government) totalling $4.6 billion or two to three percent of the gross domestic product (GDP), which also prevents producers from purchasing sufficient fuel to operate at maximum rates.

The increased power tariffs and power outages have already crippled the industry, causing widespread discontentment in the business circles. The recent 13.5 per cent increase in power tariff adversely affected the export-oriented industry and lifeline consumers in the country.

The government to meet energy demand is aggressively pursuing Exploration and Production (E&P) of oil and gas and licensing of 37 blocks have been issued. Increasing demand for natural gas has forced the government to resort to the gas load management. The government is also trying to meet gas demands from internal as well as external resources. About the supplement gas reserve, the Ministry of Petroleum and Natural Resources has sent a summary to the Economic Coordination Committee for import of LNG and establishment of a terminal.