ENERGY SECTOR NEEDS HUGE INVESTMENTS
SHABBIR H. KAZMI
Dec 19 - 25, 2011
For any developing country that aims at boosting its GDP growth rate, foreign investment plays very important role. Not only that there is an inflow of much needed capital and foreign exchange but technology transfer also improves production and productivity of the manufacturing units. India aims at achieving around 10 per cent GDP growth rate but Pakistan barely manages to achieve 2.5 per cent GDP growth rate, whereas its population is growing at three per cent per annum.
Due to various factors, more and more people are being pushed below the poverty line, which further decreases savings to GDP ratio and hardly any fresh investment is made by the local entrepreneurs. Experts are of the opinion that if local investors are shy the country will never succeed in luring the foreign investors and even the overseas Pakistanis to invest in Pakistan.
There cannot be two opinions that one of the major factors keeping the entrepreneurs shy is the acute shortage of electricity and gas. Many of the experts strongly believe that the present energy crisis is not the outcome of demand surpassing supply but gross mismanagement and inefficiencies.
There is a massive and rampant pilferage of electricity and gas. The employees of utilities are involved in pilferage because consumers, particularly consumers of gas, cannot pilfer without the connivance of employees of gas distribution companies.
It is said that nearly 200mmcfd is being pilfered by CNG stations in Punjab alone. Pilferage of electricity and gas cannot be contained without revamping the distribution networks. This requires massive investment, which electricity and gas distribution companies can't undertake because of poor cash flow.
It is known to all that electricity demand in Pakistan is growing at around 10 per cent per annum. However, the successive governments have failed miserably in ushering investment in power generation. Whatever scanty investment has been made in power generation has come in the shape of independent power plants. This has put the cart before the horse. Every year state owned electricity distribution companies are adding billion of rupees losses because of massive transmission and distribution losses, hovering around 40 per cent and mainly comprising of theft. In an attempt to improve cash flow of distribution companies, there has been regular and substantial increases in tariffs but losses of these companies are on the rise.
Experts also say that the issue being faced by Pakistan is that its power generation is highly skewed towards thermal generation, which is not only expensive but highly vulnerable to the movement of crude oil prices in the global markets.
At present nearly 70 per cent of the total electricity in the country is being generated by the thermal power plants, mostly operating in the private sector.
Share of hydel generation is not only on the decline but varies significantly due to availability of water in the dams. Pakistan has an installed hydropower generation capacity of 4,600MW but actual generation drops to less than half when water touches 'dead level' in the dams.
Pakistan has not been able to construct new dams due to paucity of funds. Lately, experts have suggested flotation of Ijarah Sukuk to mobilize funds for the construction of hydropower plants.
It is also on record that exploration and production (E&P) activities in Pakistan have remained subdued. One of the factors is said to be poor cash flow of the E&P companies, an outcome of rising inter corporate debt. However, experts say that government of Pakistan (GoP) forces the board of directors of the state owned E&P companies to distribute huge dividend every year to compensate for the shortfall in revenue collection.
They also say that dwindling production of oil and gas is because of the precarious law and order situation around oil and gas fields. It is estimated that the country can produce additional 1000mmcfd gas if conditions become conducive even at couple of the mega field discovered lately.
Production of another 800mmcfd gas can be ensured by resolving ongoing litigations. However, all these steps can be taken when there is a political will. Some of the cynics say that 'oil lobby' does not want any increase in indigenous production of oil and gas and groups having vested interest also do not allow construction of hydel power plants. The non-availability of funds is the flimsiest excuse.
Thar coal can help in generating up to 25,000MW at least but the target could not be achieved over the last two decades. It is evident that the only way to exploit this potential is creation of integrated mining and power generation units, commonly known as 'mine moth power plants'.
It is also suggested that instead of burning coal directly, the gasification process has to be followed but little progress has been achieved over the last two decades. Though efforts are being made to encourage public-private investment, 'confidence deficit' is keeping the private sector apprehensive.
One of the suggestions was to allow the private sector to construct the LNG terminal and handle its import and distribution. Fertilizer manufacturing units had at one time expressed their willingness to sponsor this project. However, one of the lacunas is that the government has signed long-term agreement with these units at agreed price and LNG will be far expensive than indigenous gas.
It is on record that the cost of imported urea is nearly three times the cost of locally produced one. To insulate the farmers from any surge in global prices of urea the government has been paying billions of rupees subsidy. Therefore, the government can pay the difference in cost of LNG and locally produced gas to overcome the immediate problems.
These are only a few examples of investment opportunities. However, in order to enable the private sector to achieve the financial close, the government will have to give certain sovereign guarantees. As a first step, it should resolve inter corporate debt issue plaguing the entire energy chain. Once cash flow of utilities is improved, they would be able to mobilize funds for adding new capacities and revamp transmission and distribution networks. Ensuring uninterrupted supply of energy at affordable cost is the key to success.