Gas: Is APTMA spinning tears?

The tussle between the All Pakistan Textile Mills Association (APTMA) and Ministry of Energy (MoE) is turning into a feud with the former taking GoP to the court and to media for trial. In the process, the silent majority within the textile industry has become the casualty. This is the story of gas provisioning and pricing to textile industry, which has taken the news cycle by storm.

At heart lies the provisioning of gas at subsidized pricing ($6.5/MMBtu). The subsidy was initially offered in early 2020 for a limited period. Later, it was extended after the onset of pandemic to not allow the industry to come under stress; nonetheless, the pandemic turned into a bonanza for textile industry. Now, with rising imported gas prices and shortfall in winters, the government has decided to raise the tariff to $9/MMBtu.

In response, the industry moved the court to obtain stay order against increase in gas prices. To signal its resolve, government has dug in its heels by suspending supply of gas to captive power plants. A war of nerves has ensued, and the industry has little choice but to move to electricity at 9 cents/unit if it hopes to continue operations.

APTMA is one of the most powerful trade lobbies in the country. The PML-N government snubbed industry’s most demands, as the then finance minister, Ishaq Dar, perceived himself to be a bigger bully. Thus, PTI came to power with vocal support from local textile manufacturing and exporting industries. Textile exports that had stagnated for most of past decade have also been inching up in the last two years.

Independent observers claim that APTMA is attempting to put a spin on the issue as incompetence of MoE for not procuring enough LNG for winter halting the supply of gas to Punjab’s textile exporting industry. However, the real issue appears to be price increase, against which industry has gone to court to obtain stay order against price revision. Mind you, APTMA’s energy expert is the same person who once criticised the energy minister of the previous government (PML-N) over its long-term LNG contracts, accusing him of misusing authority and causing potential $2 billion loss over 15 years to the exchequer. Now, APTMA has aimed all guns blazing against the incumbent energy minister.

It may be worthwhile to recall that back in June 2019, APTMA’s hue and cry was all over the media when zero rating regime was suspended. Crocodile tears were shed and a narrative was built that exports will suffer as a result due to delays in refunds. The then FM Sheikh assured the industry of smooth refunds processing. Two years later, textile exports are performing rather well. Fixed investment (through subsidized lending under TERF and LTFF) is growing: long term concessionary debt stock of textile has almost doubled from $936 million in June 2019 to $1,684 million in June 21, and growing.

Zero-rating was removed due to fears of misuse. Domestic sales were wrapped as exports to evade taxes. Industry has always insisted that the quantum of domestic sales is too small. Today, the issue is now behind us, and the new system is working just fine. Today, the apprehension of energy ministry is similar: that some within the textile industry are using subsidized gas for inefficient captive power generation, with no distinction between output onwards used for local versus exports sales. Regionally, competitive rates are only for exports, not local sales. It makes little sense to supply expensive imported fuel (RLNG) for inefficient use in captive generation when there is abundance of grid energy available. However, gas availability for processing (where gas is better suited than electricity for purposes of uninterrupted supply) continues.

The industry, however, argues that majority (80 percent) of captive units are of cogeneration (Cogen). They use steam and hot water in the production process. The Cogen plants’ efficiencies are even higher than RLNG IPPs’. Moreover, processing units require uninterrupted supply and there are losses due to fluctuations on the grid. However, spinning and weaving face no such issues. APTMA insists that the mills with Cogen facilities do not have alternate source for steam and hot water, as these cannot run on electricity.

Industry’s version alone cannot be relied upon. A mechanism must be brought into place to ensure which Cogen units cannot run without gas. Last year, when the government had discontinued subsidy on gas to textile exporting industry, the industry came up with similar points. Then the government decided to audit the facilities to differentiate between efficient and inefficient plants and to separate processing from spinning and weaving.

However, the industry had also obtained a stay order from court against any audit. They claim that government’s audits would not be up to the mark. Interestingly, at the time, Cogen facilities were less than what the industry claims today. Ministry believes that some players in the industry are using dummy boilers to make captive generators look like Cogen and they have obtained certification for the same by using grease money. Industry players not aligned with APTMA also second this apprehension. This can only be confirmed through audits. If ATPMA is losing in real sense, why don’t they let the audit happen?

Nevertheless, after observing all anomalies, and unfunded energy subsidies to exporting sector, the government has decided to supply the gas at $9/MMBtu. Again, APTMA has obtained a stay order from the high court against the price revision. As explained above, in a tit-for-tat, the government suspended the supply of gas for captive generation. Had the industry been cooperative, the issue would have never risen in the first place. It is in the interest of both the government and textile industry to have a working relationship with each other. The plea against audit, among other things, has shown that the maneuvering by the industry association is in bad taste.

As government and textile industry come head-to-head with each other, non-lobbyist firms that play by the book are suffering. One big textile player in Punjab is of the view that the industry is happy to pay $9/MMBtu for gas if it is available for processing. The government has consistently maintained the position that that processing units supply is not being cut. However, many independent processing units are inefficient. Some use inefficient boilers for steam generation. It is better to allow Cogen in processing (such as dyeing). The gas should not be available for spinning and weaving units.

However, its cumbersome to conduct audit. Moreover, it may not be transparent. Better option is providing gas at $9/MMBtu for processing. Pakistan Textile Exporters Association (PTEA) is also on-board with the new pricing. Most non-aligned players in the industry are not interested in litigation as it will inevitably lead to suspension of operations, cost overruns, and order delays/cancellations. Most of these are integrated and large players. On the flipside, APTMA primarily represents the interests of spinning and to a lesser extent, weaving units. Its leadership is very proactive; and intriguingly, some among the senior leadership of the association don’t even have skin in textile (they are now primarily real estate developers).

History indicates that in the past APTMA complained more and delivered less on its promises. Exports are being promoted due to favorable currency parity, raw material (cotton) prices, concessionary finance, and smooth refund processing. The incumbent government has been one of the biggest cheerleaders of the textile industry. But just like in the case of zero rating, it should turn a blind eye and deaf ears to supplying gas for inefficient and inappropriate use. And the government should work out a way to supply gas (at $9/MMBtu) to Cogen units, especially those that are not party to litigation against latest price revision.

Let the rent seekers fizzle out and help nourish the serious and clean players that have skin beyond spinning.

Copyright Business Recorder, 2021